AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 1998
FILE NO. 333-10635
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 5
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
APPLE RESIDENTIAL INCOME TRUST, INC.
(Exact name of registrant as specified in governing instruments)
306 East Main Street, Richmond, Virginia 23219 (Address of
principal executive offices)
Glade M. Knight
306 East Main Street
Richmond, Virginia 23219
(Name and address of agent for service)
Copy to:
Leslie A. Grandis
McGuire, Woods, Battle & Boothe, L.L.P.
One James Center, Richmond, Virginia 23219
--------------
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of the Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.[X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[ ]_______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]_______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]
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<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CROSS REFERENCE SHEET
<TABLE>
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ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
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<S> <C> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus.......... Forepart of Registration Statement and Outside
Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus ........................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges ............ Summary of the Offering; Risk Factors; Summary
of Organizational Documents -- Shareholder Lia-
bility
4. Determination of Offering Price ............... Risk Factors -- Arbitrary Share Offering Prices
5. Dilution ....................................... Risk Factors -- Potential Dilution; Summary of Or-
ganizational Documents -- Issuance of Securities
6. Selling Security Holders ..................... Not Applicable
7. Plan of Distribution ........................... Plan of Distribution
8. Use of Proceeds .............................. Estimated Use of Proceeds
9. Selected Financial Data ........................ Not Applicable
10. Management's Discussion and Analysis of
Financial Condition and Results of Oper-
ations ....................................... Management's Discussion and Analysis of Financial
Condition; Supplement No. 7
11. General Information as to Registrant ......... Summary of the Offering; Business and Properties;
Management
12. Policy with Respect to Certain Activities ..... Summary of the Offering; Investment Objectives
and Policies; Summary of Organizational Docu-
ments; Reports to Shareholders
13. Investment Policies of Registrant ............ Summary of the Offering; Investment Objectives
and Policies
14. Description of Real Estate ..................... Business and Properties; Supplement No. 7
15. Operating Data ................................. Business and Properties; Supplement No. 7
16. Tax Treatment of Registrant and its
Security Holders .............................. Summary of the Offering; Federal Income Tax Con-
siderations; Investment by Tax-Exempt Entities
17. Market Price of and Dividends on the Reg-
istrant's Common Equity and Related Stock-
holder Matters ................................. Distribution Policy
18. Description of Registrant's Securities ......... Summary of the Offering; Description of Capital Stock
19. Legal Proceedings .............................. Business and Properties -- Legal Proceedings
20. Security Ownership of Certain Beneficial
Owners and Management ........................ Principal and Management Stockholders; Supplement
No. 7
</TABLE>
<PAGE>
<TABLE>
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ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
--------------------------------------------- -----------------------------------------------------
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21. Directors and Executive Officers ............ Management; Supplement No. 7
22. Executive Compensation ..................... Compensation; Management
23. Certain Relationships and Related Trans-
actions .................................... Summary of the Offering; Compensation; Conflicts
of Interest; Management; The Advisor and Affili-
ates; Supplement No. 7
24. Selection, Management and Custody of
Registrant's Investments .................. Summary of the Offering; Compensation; Conflicts
of Interest; Investment Objectives and Policies;
Management; The Advisor and Affiliates
25. Policies with Respect to Certain Transac-
tions ....................................... Investment Objectives and Policies; Conflicts of In-
terest
26. Limitation of Liability ..................... Risk Factors; Summary of Organizational Docu-
ments
27. Financial Statements and Information ...... Index to Financial Statements; Supplement No. 7
28. Interests of Named Experts and Counsel ...... Legal Opinions
29. Disclosure of Commission Position on In-
demnification for Securities Act Liabilities. Risk Factors; Summary of Organizational Docu-
ments
</TABLE>
<PAGE>
SUMMARY OF SUPPLEMENT TO PROSPECTUS
(SEE THE SUPPLEMENT FOR ADDITIONAL INFORMATION):
Supplement No. 7 dated February 2, 1998 (incorporating Supplements No. 1, No. 2,
No. 3, No. 4, No. 5 and No. 6):
(1) Reports on the acquisition by the Company of twelve apartment
complexes.
(2) Reports on the granting to Cornerstone Realty Income Trust, Inc. of a
right to acquire up to 9.8% of the Company's outstanding Shares, and
on certain other relationships with Cornerstone Realty Income Trust,
Inc.
(3) Reports on the transfer of all of the Company's properties to a
limited partnership subsidiary indirectly wholly-owned by the Company
(the "Reorganization") and the adoption of certain amendments to the
Company's Bylaws related to the Reorganization.
(4) Reports on the Company obtaining an unsecured line of credit to
facilitate property acquisitions.
(5) Provides certain other updated information concerning the Company and
its properties.
As of December 31, 1997 the Company had closed the sale of 2,084,444 Shares
at $9 per Share, and 10,287,373 Shares at $10 per Share, representing aggregate
gross proceeds to the Company of $121,633,726, and proceeds net of selling
commissions and marketing expenses of $109,846,358. The Company endeavors
continually to invest proceeds in the acquisition of additional apartment
communities as promptly as practicable after the receipt of such proceeds. As of
December 31, 1997, substantially all of the proceeds of the offering available
for investment in properties had been so invested.
Cornerstone Realty Income Trust, Inc. will receive fees and expense
reimbursements in connection with the Company's acquisitions and the management
of the properties and the Company. In connection with the property acquisitions
described in the Supplement, Apply Realty Group, Inc., an Affiliate of the
Advisor, or Cornerstone Realty Income Trust, Inc., as successor-in-interest to
Apple Realty Group, Inc., received property acquisition fees totaling
$1,657,917.
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
COMMON SHARES (THE "SHARES")
$9 PER SHARE
($10 PER SHARE AFTER MINIMUM OFFERING OF $15,000,000 IS ACHIEVED)
MINIMUM INVESTMENT--$5,000
Apple Residential Income Trust, Inc. (the "Company") is a Virginia
corporation which will elect to be treated as a real estate investment trust
("REIT") for federal income tax purposes. The Company will invest primarily in
existing residential apartment communities in Texas and the southwestern region
of the United States. The Company intends to hold its properties on an all-cash
(unleveraged) basis, and to hold its properties for an indefinite length of
time. Apple Residential Advisors, Inc. (the "Advisor") and Apple Residential
Management Group, Inc., will provide the day-to-day management for the Company
and its properties, respectively. Glade M. Knight, the sole holder of common
shares of the Advisor and Apple Residential Management Group, Inc., is the
Chairman of the Board and President of the Company. Accordingly, the Advisor and
Apple Residential Management Group, Inc. may be deemed to be Affiliates of the
Company. A minimum offering of $15,000,000 in Shares must be sold no later than
one year after the date of this Prospectus, or the offering will terminate and
investors' subscription payments, with interest, will be promptly refunded to
investors. Pending sale of such minimum offering amount, investors' subscription
payments will be placed in an escrow account with First Union National Bank of
North Carolina as escrow agent. See "Plan of Distribution."
THESE ARE SPECULATIVE SECURITIES. The offering involves certain risks and
investment considerations (see "Risk Factors" beginning on page 10), including:
o There will be no public trading market for the Shares for an indefinite
period of time, if ever. Thus, investors may be unable to resell their Shares,
or may be able to resell them only at a substantial discount from the purchase
price.
o Because the Company has no obligation and no specific plan to list the
Shares or sell its properties at any particular time, investors may not receive
a return of their investment for an indefinite period, if ever.
o Another company originally organized by Glade M. Knight will have a right
of first refusal to acquire Company assets, which may decrease the return the
Company is able to obtain upon sales of its properties.
o The Advisor and persons related to it will receive substantial compensation
from the Company. The payment of such compensation may tend to reduce investment
return by reducing funds available for investment and reducing cash flow from
operations. The compensation is generally payable before distributions to
Shareholders and regardless of Company profitability.
See "Compensation."
o The Advisor and persons related to it will be subject to various conflicts
of interest with the Company, including non-arms-length transactions and
competition for management services. See "Conflicts of Interest." As a result,
such persons could have an incentive to favor their interests to those of the
Company.
o Certain private partnerships sponsored by persons related to the Advisor
have experienced adverse business developments, including bankruptcy
reorganizations. See "The Advisor -- Prior Performance of Programs Sponsored by
Affiliates of the Advisor."
o Shareholders' interests are subject to dilution through the conversion of
Class B Convertible Shares held by Glade M. Knight.
o The Company's success depends upon maximizing revenues (primarily rent
payments) while minimizing Company and property operating expenses, which in
turn will be affected by property selection, property and Company management,
property location and local and general economic conditions. The Company may not
operate profitably.
o There can be no assurance that the Company will generate sufficient cash
from operations to make distributions at any particular rate.
o Neither the Company nor the Advisor has any operating history, and there is
no assurance that the Company will operate successfully or achieve its
objectives.
o The Company has not identified any properties to be acquired with the
proceeds of this offering, and prospective investors may receive no information
regarding property acquisitions before buying Shares. Furthermore, the Company
may not achieve diversification in its property holdings.
o Company borrowing is permitted within limits set forth in the Company's
Bylaws, and would entail additional risks such as reduction of cash available
for distribution and risk of default. See "Risk Factors -- Possible Borrowing;
Debt Financing May Reduce Cash Flow and Increase Risk of Default."
All of the Shares offered hereby are being sold by the Company. It is
expected that approximately 84.5% of the gross offering proceeds will be
available for investment in properties and 0.5% allocated to a working capital
reserve. The balance of proceeds will pay expenses and fees of the Advisor and
others. See "Estimated Use of Proceeds."
THE OFFERING WILL TERMINATE WHEN ALL SHARES HAVE BEEN SOLD OR ONE YEAR FROM
THE DATE HEREOF, UNLESS SOONER TERMINATED BY THE COMPANY OR EXTENDED FOR UP TO
AN ADDITIONAL YEAR. SEE "SUMMARY OF THE OFFERING -- THE OFFERING" AND "PLAN OF
DISTRIBUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
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Price to Selling Proceeds to
the Public Commissions(1)(2) the Company(3)
- --------------------------------------------------------------------------------
Per Share (4)............. $ 9 $ 0.675 $ 8.325
Total Minimum Offering ... $ 15,000,000 $ 1,125,000 $ 13,875,000
Total Maximum Offering(5). $250,000,000 $ 18,750,000 $231,250,000
================================================================================
(1) The Shares are being offered on a "best-efforts" basis exclusively through
David Lerner Associates, Inc. (the "Managing Dealer") pursuant to an Agency
Agreement. Under the Agency Agreement, the Managing Dealer may engage other
broker-dealers. The Company has agreed to indemnify the Managing Dealer and
such other broker-dealers against certain liabilities, including
liabilities under the Securities Act of 1933.
(2) Payable to David Lerner Associates, Inc., the Managing Dealer, which will
also receive a Marketing Expense Allowance equal to 2.5% of the purchase
price of the Shares.
(3) Before deducting other expenses payable by the Company in connection with
the offering. Such expenses are estimated at $825,000 for the minimum
offering and $7,250,000 for the maximum offering (including the Marketing
Expense Allowance referred to in (2)). See "Estimated Use of Proceeds."
(4) At such time as the Minimum Offering of $15,000,000 is achieved, the per
Share offering price will become $10. At $10 per Share, the Selling
Commission per Share will be $0.75 and the Proceeds to the Company per
Share (before deducting other expenses) will be $9.25.
(5) The Company estimates that approximately 400,000 Shares ($4,000,000 at $10
per Share) will be purchased through Shareholders' reinvestment of
distributions during the offering period. See "Plan of Distribution."
DAVID LERNER ASSOCIATES, INC.
477 JERICHO TURNPIKE, SYOSSET, NEW YORK 11791
The date of this Prospectus is November 19, 1996
<PAGE>
Each purchaser of Shares must certify that he has either (i) a minimum annual
gross income of $50,000 and a net worth of at least $50,000 (exclusive of equity
in home, home furnishings and personal automobiles), or (ii) a net worth
(similarly defined) of at least $100,000, or $150,000 in the case of Kentucky
and North Carolina purchasers. No purchaser of Shares may purchase Shares
costing more than 10% of the purchaser's net worth (similarly defined).
Until February 17, 1997, all dealers effecting transactions in the Shares,
whether or not participating in this distribution, may be required to deliver a
copy of this Prospectus. This is in addition to the obligations of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offering made by this Prospectus, and, if
given or made, such other information or representations must not be relied
upon. This Prospectus does not constitute an offer in any state in which such
offer may not legally be made. The delivery of this Prospectus at any time does
not imply that information herein has not changed as of any time subsequent to
its date.
AVAILABLE INFORMATION
A registration statement under the Securities Act has been filed with the
Securities and Exchange Commission, Washington, D.C., with respect to the
Shares. This Prospectus does not contain all the information set forth in the
registration statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information pertaining
to the Company and the Shares, reference is made to the registration statement,
including the exhibits filed as part thereof.
Apple Residential Income Trust, Inc., with principal executive offices at 306
East Main Street, Richmond, Virginia 23219, telephone number (804) 643-1761, is
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and, in accordance therewith, files
reports, proxy and information statements and other information with the
Commission. The reports, proxy and information statements and other information
and the Registration Statement and the exhibits and financial statement
schedules thereto filed by the Company with the Commission can be inspected and
copied at the Public Reference Section of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at 13th Floor, 7 World Trade Center, New York,
New York 10048, and at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of the material can be obtained from the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Company files reports, proxy and
information statements and other information with the Commission electronically.
The Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the Web site is http.//www.sec.gov.
i
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TABLE OF CONTENTS
PAGE
----
AVAILABLE INFORMATION .............................................. i
SUMMARY OF THE OFFERING ............................................ 1
RISK FACTORS ....................................................... 10
Absence of Public Trading Market ................................... 10
Uncertainty Regarding Return of Investment ......................... 11
Right of Refusal May Affect Sales .................................. 11
Compensation to Affiliates is Payable Before
Distributions and Will Reduce Investors' Return .................... 11
Acquisition, Management and Other Fees and
Expenses Will Reduce Return ....................................... 11
Conflicts of Interest .............................................. 12
Prior Performance Difficulties of Certain
Affiliates ........................................................ 12
Potential Dilution of Shareholders' Interests ...................... 13
Uncertainty Regarding Revenues and Expenses ........................ 13
Environmental Problems and Liabilities ............................. 14
Competition for Properties and Tenants ............................. 14
Uninsured Losses ................................................... 15
Risk of Insufficient Cash Available for
Distribution ...................................................... 15
Lack of Operating History; No Assurance of
Success ........................................................... 15
Size of Offering -- Possible Lack of
Diversification and Lower Return .................................. 15
Delay in Investment in Real Property ............................... 15
No Specified Properties ............................................ 15
Possible Borrowing; Debt Financing May Reduce Cash
Flow and Increase Risk of Default ................................. 16
Federal Income Tax Risks ........................................... 17
Failure to Achieve or Maintain REIT Status ....................... 17
Uncertainties in and Possible Changes to the Tax
Law ............................................................. 17
Required Reliance on Management .................................... 18
Possible Changes in Investment Objectives and
Policies May Not Serve the Interests of Certain
Shareholders ...................................................... 18
Responsibilities of Directors, Advisor and
Affiliates -- Possible Inadequacy of Remedies;
Directors, Advisor and Affiliates benefit from
Exculpation and Indemnification Provisions ........................ 18
Arbitrary Share Offering Prices .................................... 19
Advisor and Affiliates May Purchase and Vote
Shares ............................................................ 19
Accumulation Restrictions .......................................... 19
Joint Venture Investments -- Risks of Conflicting
Interests and Impasse ............................................. 19
ESTIMATED USE OF PROCEEDS .......................................... 20
COMPENSATION ....................................................... 21
CONFLICTS OF INTEREST .............................................. 24
General ........................................................... 24
Transactions with Affiliates and Related Parties .................. 25
Competition by the Company with Affiliates ........................ 25
Competition for Management Services ............................... 25
Lack of Separate Representation ................................... 26
INVESTMENT OBJECTIVES AND POLICIES ................................. 26
General ........................................................... 26
Investment Criteria ............................................... 28
Types of Investments .............................................. 28
Diversification ................................................... 29
Joint Venture Investments ......................................... 29
Borrowing Policies ................................................ 30
Management of Properties .......................................... 31
Reserves .......................................................... 31
Sale and Refinancing Policies ..................................... 31
Changes in Objectives and Policies ................................ 33
DISTRIBUTION POLICY ................................................ 34
BUSINESS AND PROPERTIES ............................................ 34
Business .......................................................... 35
Legal Proceedings ................................................. 36
Regulation ........................................................ 36
Properties Owned by The Company ................................... 36
Property Acquisition and Management
Compensation ..................................................... 37
MANAGEMENT ......................................................... 37
Directors and Officers ............................................ 37
Committees of Directors ........................................... 39
Director Compensation ............................................. 39
Indemnification and Insurance ..................................... 40
Officer Compensation .............................................. 40
Stock Incentive Plans ............................................. 40
The Incentive Plan ................................................ 40
Directors' Plan ................................................... 41
Stock Option Grants ............................................... 42
THE ADVISOR AND AFFILIATES ......................................... 43
General ........................................................... 43
The Advisory Agreement ............................................ 43
Apple Realty Group, Inc. .......................................... 44
Apple Residential Management Group, Inc. .......................... 45
Price Performance of Programs Sponsored by
Affiliates of the Advisor ........................................ 45
ii
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PAGE
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PRINCIPAL AND MANAGEMENT STOCKHOLDERS ............................... 47
FEDERAL INCOME TAX
CONSEQUENCES ....................................................... 48
Federal Income Taxation of the
Company ........................................................... 48
Requirements for Qualification as a REIT ........................... 49
Organizational Requirements ....................................... 49
Income Tests ...................................................... 49
Asset Tests ....................................................... 51
Annual Distribution Requirement ................................... 51
Failure to Qualify as a REIT ...................................... 52
Federal Income Taxation of the Shareholders ........................ 52
Investment by Tax-Exempt Entities .................................. 53
Foreign Investors .................................................. 54
Foreign Shareholders .............................................. 54
Backup Withholding ................................................ 55
State and Local Taxes .............................................. 55
INVESTMENT BY TAX-EXEMPT ENTITIES ................................... 55
Unrelated Business Taxable Income .................................. 55
ERISA Considerations ............................................... 55
CAPITALIZATION ...................................................... 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION .......................................................... 57
PLAN OF DISTRIBUTION ................................................ 57
DESCRIPTION OF CAPITAL STOCK ........................................ 59
General ............................................................ 59
Repurchase of Shares and Restrictions on
Transfer .......................................................... 59
Facilities for Transferring Shares ................................. 61
Transfer Agent and Registrar ....................................... 61
SUMMARY OF ORGANIZATIONAL DOCUMENTS ................................. 61
Board of Directors ................................................. 61
Responsibility of Board of Directors, Advisor,
Officers and Employees ............................................ 62
Issuance of Securities ............................................. 63
Redemption and Restrictions on Transfer ............................ 63
Amendment .......................................................... 64
Shareholder Liability .............................................. 64
SALES LITERATURE .................................................... 64
REPORTS TO SHAREHOLDERS ............................................. 64
LEGAL OPINIONS ...................................................... 65
EXPERTS ............................................................. 65
EXPERIENCE OF PRIOR PROGRAMS ........................................ 66
GLOSSARY ............................................................ 71
INDEX TO FINANCIAL STATEMENTS OF
THE COMPANY ........................................................ F-1
SUBSCRIPTION AGREEMENT ........................................ Exhibit A
iii
<PAGE>
SUMMARY OF THE OFFERING
The following is a summary of important information contained in this
Prospectus, but is not complete and is qualified in its entirety by reference to
the entire Prospectus. Certain capitalized terms used in this Prospectus are
defined, or are defined with more particularity, under "Glossary."
The Company. Apple Residential Income Trust, Inc. (the "Company") is a
Virginia corporation which will elect to be treated for federal income tax
purposes, and intends to qualify on a continuing basis, as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). The principal executive offices of the Company are located at 306
East Main Street, Richmond, Virginia 23219 (telephone: 804-643-1761). The
Company is newly-organized and has no significant assets.
The Advisor and Affiliates. Apple Residential Advisors, Inc. (the "Advisor")
is the advisor to the Company and will provide its day-to-day management under
an agreement (the "Advisory Agreement") between the Company and the Advisor. The
advisor is newly organized and has no significant assets. The property manager
for the Company will be Apple Residential Management Group, Inc. ("ARM").
Property acquisition and disposition services will be provided to the Company by
Apple Realty Group, Inc. ("ARG"). ARM and ARG are also newly-organized and have
no significant assets.
All of the common stock of the Advisor, ARM and ARG is owned by Glade M.
Knight. However, each of the Advisor and ARM has a class of preferred stock, all
of which will be owned by Cornerstone Realty Income Trust, Inc. ("Cornerstone").
Cornerstone is a real estate investment trust, originally organized by Mr.
Knight and certain of his Affiliates, engaged in the business of acquisition and
ownership of apartment communities in the mid-Atlantic and southeastern regions
of the United States.
Each of the Advisor, ARM and ARG will have its own officers and/or employees
to provide some of the services agreed to be provided by such companies to the
Company. In addition, however, Cornerstone has agreed to make available to the
Advisor and ARM its officers and employees to consult with and assist the
officers and employees of the Advisor and ARM in providing services to the
Company.
In addition to the foregoing, and as discussed under "Investment Objectives
and Policies -- Sale and Refinancing Policies," the Company has granted to
Cornerstone a right of first refusal to purchase properties owned by the Company
and proposed for sale, and a right of first refusal to become the acquiring
party if the Company proposes any disposition or transfer of the Company or
substantially all of its assets, stock or business (whether through sale,
exchange, merger, consolidation, lease, share exchange or otherwise).
Risk Factors. An investment in Shares involves certain risks (described more
fully under "Risk Factors"), including the following:
o There will be no public trading market for the Shares for an indefinite
period of time, if ever. Accordingly, Shareholders may be required to hold their
Shares for an indefinite length of time. Shareholders may be unable to resell
their shares at all, or may be able to resell them only at a substantial
discount from the purchase price.
o Because the Company has no obligation and no specific plan to list the
Shares or sell its properties at any particular time, investors may not receive
a return of their investment for an indefinite period, if ever.
o Cornerstone's right of first refusal to purchase properties or other assets
of the Company may tend to decrease the price the Company is able to obtain for
its assets, since third parties may be reluctant to negotiate a purchase
transaction knowing that Cornerstone can substitute itself as purchaser. The
presence of the right of first refusal may, as a practical matter, result in the
Company selling assets to Cornerstone at a price below that which it could
obtain in a freely-negotiated sale to a third party.
1
<PAGE>
o The Advisor and its Affiliates will receive substantial compensation from
the Company. Such compensation has been established without the benefit of
arm's-length negotiation. See "Compensation." The payment of compensation to the
Advisor, its Affiliates and others from proceeds of the offering and property
revenues will reduce the amount of proceeds available for investment in
properties, or the cash available for distributions, and will therefore tend to
reduce the return on Shareholders' investments. In particular, the payment of
such compensation means that the investment return to Shareholders from the
Company will likely be less than could be obtained by a Shareholder's direct
acquisition and ownership of the same properties. The compensation is generally
payable regardless of Company profitability, and is generally payable prior to,
and without regard to whether the Company has sufficient cash for,
distributions.
o The Advisor and its Affiliates will be subject to various conflicts of
interest in their dealings with the Company. Generally, such conflicts arise
because certain Directors and officers of the Company (i) are also principals in
or have relationships with other companies which will enter into contracts with
the Company, and (ii) are, and will in the future be, principals in other
programs which may compete with the Company. While certain policies and
procedures, described under "Conflicts of Interest," will be implemented to
ameliorate potential conflicts of interest, certain conflicts of interest cannot
be completely ameliorated. To the extent there are conflicts of interest, the
Advisor or its Affiliates may be inclined to favor there own interests over
those of the Company. The principal conflict of interest currently involving the
Company is that Glade M. Knight, who is a Director, Chairman of the Board and
the President of the Company, also owns the Advisor, Apple Residential
Management Group, Inc. and Apple Realty Group, Inc., all of which provide
services to the Company in exchange for compensation. The business and affairs
of the Company are controlled by the Company's Board of Directors, a majority of
whom are not Affiliated with the Advisor and its Affiliates. Prospective
Shareholders must rely upon the Board of Directors to supervise the relationship
between the Company, on the one hand, and the Advisor and its Affiliates, on the
other hand, to ensure that any adverse effect of any potential conflict of
interest is minimized. Prospective Shareholders should note, however, that Mr.
Knight could have influence on the Board of Directors disproportionate to his
voting power because he is engaged on a full-time basis in the operation of the
Company and its properties.
o Certain private partnerships sponsored by Affiliates of the Advisor have
experienced certain adverse business developments (bankruptcy reorganizations
and/or property foreclosures). See "The Advisor -- Prior Performance of Programs
Sponsored by Affiliates of the Advisor."
o Purchasers of the Shares offered hereby may experience dilution in the net
tangible book value of the Shares from the public offering price. In particular,
Shareholders will experience dilution if Glade M. Knight converts his Class B
Convertible Shares into Common Shares. See "Principal and Management
Stockholders."
o The investment in residential apartment communities (and other real
property, if any) involves many potential risks, including high vacancy rates,
competition for tenants, expenses (including those related to taxes, insurance
and property maintenance) exceeding income (which could necessitate borrowing to
fund deficits), on-site environmental problems, and possible uninsurable losses.
There can be no assurance that the Company's properties will operate profitably,
appreciate in value or generate cash for distribution.
o If the Company were to incur significant unanticipated cash expenditures,
the amount of cash available for distribution would decline. There can be no
assurance that the Company will maintain any specific level of distributions to
Shareholders.
o Neither the Company nor the Advisor has any operating history. The Company
may not operate successfully or achieve its objectives.
o There can be no assurance the Company will achieve significant
diversification in the properties it acquires. The fewer properties purchased,
the greater the risk that the Company's profitability will be affected by a
single unproductive property.
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o The Company may experience delays in finding suitable properties to
acquire, which could adversely impact the Company's profitability.
o The Company has not identified any properties to be acquired with the
proceeds from this offering of the Shares. Accordingly, prospective investors
may not have the opportunity to evaluate the assets to be acquired with the
proceeds of the offering before purchasing Shares.
o Although not anticipated, except on the limited interim basis described
under "Business and Properties-Properties Owned by the Company," borrowing by
the Company is permitted, subject to certain limitations. Company borrowing
would entail additional risks, including the risks that required principal and
interest payments would reduce distributions to Shareholders, and that the
Company could lose properties securing borrowings through foreclosure.
o The ability of the Company to operate as planned will depend upon its
continuing to qualify as a "real estate investment trust" for federal income tax
purposes. If the Internal Revenue Service (the "Service") were to determine that
the Company failed to meet the requirements for REIT status or if the Company
fails to maintain REIT status on a continuing basis, it will not be able to
achieve its investment objectives.
o Shareholders will not have any active participation in the management of
the Company and must rely on the management expertise provided by the Board of
Directors, the Advisor and its Affiliates. In such regard, the Board of
Directors has significant discretion to modify the investment objectives and
policies of the Company. Further, the Directors and officers of the Company and
the Advisor will benefit from certain provisions limiting their liability and
providing them with certain rights to indemnification with respect to actions
taken by them on behalf of the Company.
o The per-Share offering prices have been established arbitrarily and may
bear no relation to the actual value of the Company or the Shares.
o In order to help assure continued REIT qualification, the Company's Bylaws
generally prohibit ownership of more than 9.8% of the Company's outstanding
Shares by one investor. This provision may have the effect of precluding or
making more difficult changes in control of the Company, even if such changes
might otherwise be beneficial.
The Offering. The Shares are offered at $9 per Share until the Minimum
Offering of $15,000,000 in Shares is achieved. Thereafter, the Shares will be
offered at $10 per Share.
The offering made by this Prospectus will continue until all Common Shares of
the Company (the "Shares" or "Common Shares") offered under this Prospectus have
been sold or until one year from the date of this Prospectus, unless the Company
terminates the offering at an earlier date or extends it beyond such date for up
to an additional year. In some states, extension of the offering may not be
allowed or may be allowed only upon certain conditions. Closings will occur from
time to time during the offering period. The Shares are being offered through
David Lerner Associates, Inc. and other selected broker-dealers. All of the
Shares offered hereby are being sold by the Company.
If at least $15,000,000 in Shares (the "Minimum Offering") have not been sold
no later than one year after the date of this Prospectus, the offering will
terminate and all funds theretofore deposited by investors into the escrow
account (the "Escrow Account"), with First Union National Bank of North Carolina
as escrow agent, will be refunded promptly to investors, with any interest
earned thereon (less withholding of taxes in respect to payment of interest, if
applicable). A closing will occur after the Minimum Offering is achieved (the
"Initial Closing"). Thereafter, closings will occur from time to time during the
offering period. After the Minimum Offering amount is sold, there is no
requirement for an Escrow Account, and if there is an Escrow Account, there is
no limitation on the party which may act as escrow agent.
In no event is the Company required to accept the proffered subscription of
any prospective investor, and no such proffered subscription shall become
binding on the Company until a properly completed Subscription Agreement
prepared and executed by the prospective investor has been
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accepted by a duly authorized representative of the Company. The Company will
either accept or reject each subscription within four business days from the
receipt of the subscription by the Managing Dealer or a Selected Dealer. The
Company intends to cause to be paid from any escrow account each investor's
share of net interest on escrowed funds, whether or not the investor's
subscription for Shares is accepted. The Company reserves the right to adopt
reasonable simplifying conventions or assumptions in determining each investor's
share of such net interest. Investors' subscriptions will be revocable by
written notice delivered to the escrow agent at least five days before the
applicable closing. Subject to the foregoing, an investor's subscription funds
may remain in escrow for an indefinite period of time.
The minimum investment for investors is $5,000 (approximately 555.56 Shares
at $9 per Share, and 500 Shares at $10 per Share), except that Qualified Plans
(defined as qualified employee pension or profit-sharing trusts, Keogh Plan
trusts and IRAs) may purchase a minimum of $2,000 (approximately 222.22 Shares
at $9 per Share and 200 Shares at $10 per Share). The record holders of the
Company's Shares will be the "Shareholders" of the Company.
As described under "Plan of Distribution," it is expected that investors
purchasing Shares in this offering will be able to elect to reinvest any
distributions from the Company in additional Shares available in this offering,
for as long as this offering continues. This option is referred to as the
"Additional Share Option." The Company estimates that approximately 400,000
Shares ($4,000,000 at $10 per Share) offered through this Prospectus will be
purchased through Shareholders' reinvestment of distributions in Shares pursuant
to the Additional Share Option, but the number of Shares which will be so
purchased cannot be determined at this time. Shares purchased pursuant to the
Additional Share Option will be at the same price per Share and on the same
terms applicable generally to subscriptions in this offering effective at the
time of reinvestment. Shareholders electing the Additional Share Option will be
taxed as if they received the reinvested distributions. See "Plan of
Distribution."
The Board of Directors is authorized, without Shareholder approval, to issue
additional Shares or other equity or debt securities of the Company, on such
terms and for such consideration as it may deem advisable. Without limiting the
generality of the foregoing, the Board of Directors may, in its sole discretion,
issue Shares or other equity or debt securities of the Company, (1) to persons
from whom the Company purchases property, as part or all of the purchase price
of the property, or (2) to the Advisor or its Affiliates in lieu of cash
payments required under the Advisory Agreement or other contract or obligation.
The Board of Directors, in its sole discretion, may determine the value of any
Shares or other equity or debt securities issued in consideration of property or
services provided, or to be provided, to the Company, except that while Shares
are offered by the Company to the public, the public offering price of such
Shares shall be deemed to be their value. See "Summary of Organizational
Documents -- Issuance of Securities."
Affiliates of the Advisor. The term "Affiliate" used in this Prospectus,
which term is defined in the Glossary, refers generally to a person or entity
which is related to another specified person or entity through common control,
through significant (10% or more) equity ownership, or by serving as an officer
or director of (or in a similar capacity with) such specified entity. Affiliates
of the Advisor include Apple Realty Group, Inc., Apple Residential Management
Group, Inc. and Glade M. Knight, who owns all of the outstanding common stock of
the Advisor, Apple Realty Group, Inc. and Apple Residential Management Group,
Inc.
Glade M. Knight is a Director, Chairman of the Board and President of the
Company. Mr. Knight was also principally responsible for organizing Cornerstone
Realty Income Trust, Inc., and is a Director, Chairman of the Board, President
and shareholder of Cornerstone Realty Income Trust, Inc.
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The following diagram shows the relationship between the Company, on the one
hand, and the Advisor, certain Affiliates of the Advisor, and Cornerstorne
Realty Income Trust, Inc., on the other hand.
Shareholders
Common
Shares
The Company
(1) (2) (3)
Apple Residential Apple Residential Apple Realty
Advisors, Inc. Management Group, Inc. Group, Inc.
common preferred common preferred common
stock stock stock stock stock
Glade M. Cornerstone Glade M. Cornerstone Glade M.
Knight Realty Income Knight Realty Income Knight
Trust, Inc. Trust, Inc.
(1) Apple Residential Advisors, Inc. will be the Advisor to the Company under
an Advisory Agreement. See "The Advisor and Affiliates--The Advisory
Agreement."
(2) Apple Residential Management Group, Inc. will provide property management
services to the Company. See "Investment Objectives and
Policies--Management of Properties."
(3) Apple Realty Group, Inc. will provide to the Company services pertaining to
property acquisition and disposition. See "The Advisor and
Affiliates--Apple Realty Group, Inc."
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Estimated Use of Proceeds. The proceeds of the offering will be used (i) to
pay expenses and fees of selling the Shares; (ii) to invest in properties; (iii)
to pay expenses and fees associated with acquiring properties; and (iv) to
establish a working capital reserve. It is estimated that, if the Minimum
Offering is sold, the expenses and fees described in clauses (i) and (iii) of
the preceding sentence will aggregate 15% of the gross offering proceeds, that
the amount available to invest in properties will be 84.5% of the gross offering
proceeds, after establishing a working capital reserve equal to 0.5% of gross
offering proceeds. See "Estimated Use of Proceeds."
Compensation. The officers of the Company are not paid salaries by the
Company. Such officers are officers of the Advisor and its Affiliates, which
entities are entitled to certain fees for services rendered by them to the
Company. Thus, the officers of the Company are, in essence, compensated by the
Advisor or its Affiliates. Compensation and reimbursements payable to the
Advisor and its Affiliates are listed below. See "Compensation." Except as
indicated, the maximum dollar amount of such compensation and reimbursements is
not now determinable.
o The Advisor is entitled to receive an annual Asset Management Fee, based
upon the ratio of Funds from Operations to Total Contributions (such ratio is
called the "Return Ratio"), of between 0.1% and 0.25% of Total Contributions.
The percentage used to determine the Asset Management Fee will be 0.1% if the
Return Ratio for the preceding calendar quarter is 6% or less, 0.15% if the
Return Ratio for the preceding calendar quarter is more than 6% but not more
than 8%, and 0.25% if the Return Ratio for the preceding calendar quarter is
more than 8%. ("Funds from Operations" is defined as net income (computed in
accordance with generally accepted accounting principles) excluding gains (or
losses) from debt restructuring and sales of property, plus depreciation of real
property, and after adjustments for significant non-recurring items and
unconsolidated partnerships and joint ventures, if any. "Total Contributions" is
defined as the gross proceeds from the sale of the Shares.) See "The Advisor and
Affiliates -- The Advisory Agreement."
o Assuming the Minimum Offering amount ($15,000,000) is sold, the annual
Asset Management Fee would be between $15,000 and $37,500. Assuming the Maximum
Offering amount ($250,000,000) is sold, the annual Asset Management Fee would be
between $250,000 and $625,000. The Company believes that Funds from Operations
is an appropriate measure to use in determining the fees to be paid to the
Advisor because it ties compensation to an indicator of performance, namely an
industry-recognized measure of funds available from operations. "Funds from
Operations" is not the same as cash generated from operating activities in
accordance with generally accepted accounting principles, and, therefore, should
not be considered as an alternative to net income as an indication of the
Company's performance or to cash flows as a measure of liquidity.
o Apple Residential Management Group, Inc., an Affiliate of the Advisor, will
manage the Company's properties and will receive a property management fee equal
to 5% of the monthly gross revenues of the properties. In addition, the Company
will reimburse Apple Residential Management Group, Inc. for its expenses,
including salaries and related overhead expenses, associated with accounting and
financial reporting services rendered by Apple Residential Management Group,
Inc. under the property management agreements.
o Apple Realty Group, Inc., an Affiliate of the Advisor, will serve as the
real estate broker in connection with the Company's purchases and sales of
properties, and will receive fees from the Company of up to 2% of the gross
purchase price of each property and up to 2% of the gross sale prices. If the
person from whom the Company purchases or to whom the Company sells a property
pays any fee to Apple Realty Group, Inc., such amount will decrease the amount
of the Company's obligation to Apple Realty Group Inc. Apple Realty Group, Inc.
will not be entitled to any disposition fee in connection with a sale of a
property by the Company to Cornerstone Realty Income Trust, Inc. or any
Affiliate of Apple Realty Group, Inc., but will be reimbursed for its costs in
marketing such property. See "Investment Objectives and Policies - Sale and
Refinancing Policies" for a discussion of the possibility that properties will
be sold by the Company to Cornerstone Realty Income Trust, Inc.
o The Advisor and its Affiliates will be entitled to reimbursement for actual
costs incurred by them in connection with the offering of the Shares and the
operation of the Company.
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o The Advisor and its Affiliates may provide other services or property to
the Company under certain conditions, and will be entitled to payment therefor.
Such conditions generally include the requirement that the transaction be
approved by the affirmative vote of a majority of the "Independent Directors,"
who are those Directors who are not Affiliated with the Advisor. There are
currently no plans for the providing of material services or property of the
type described in this paragraph.
Investment Objectives and Policies; Liquidity. The principal investment
objectives of the Company are to: (i) preserve and protect the capital of the
Company; (ii) provide quarterly distributions to the Shareholders, a portion of
which may constitute a nontaxable return of capital (rather than current taxable
income); and (iii) provide long-term capital appreciation in the value of the
Company's investments. The Company does not intend to make distributions from
borrowings or refinancings.
The Company anticipates that achievement of these objectives will enable it
to provide Shareholders with appreciation in the value of their Shares. There
can be no assurance that the Company will achieve these objectives. Attainment
of the objectives is contingent in part upon the Company's ability to acquire
suitable properties. See "Investment Objectives and Policies -- General."
The Company plans to invest in existing residential apartment communities
in Texas and the southwestern region of the United States. Diversity in
geographic location will be a consideration for investment. See "Investment
Objectives and Policies -- Diversification."
The Company's management believes there is substantial opportunity for growth
from acquisitions of multi-family properties in Texas and the southwestern
region of the United States. Management believes that the current real estate
environment is conducive to advantageous acquisitions of existing multi-family
properties that meet the Company's investment criteria. In many instances, such
acquisitions may be made for less than the cost of new construction.
Prior to this offering there has been no public market for the Shares, and
initially such a market is not expected to develop. The Company does not plan to
cause the Shares to be listed on any securities exchange or quoted on any system
or in any established market either immediately or at any definite time in the
future. While the Company, acting through its Board of Directors, may cause the
Shares to be so listed or quoted if the Board of Directors determines such
action to be prudent, there can be no assurance that such event will ever occur.
Prospective Shareholders should view the Shares as illiquid and must be prepared
to hold their investment for an indefinite length of time. Currently, the
Company expects that within approximately three (3) years from Initial Closing,
it will use its best efforts either (i) to cause the Shares to be listed on a
national securities exchange or quoted on the NASDAQ National Market System or
(ii) to cause the Company to dispose of substantially all of its properties in a
manner which will permit distributions to Shareholders of cash or marketable
securities. The taking of either type of action would be conditioned on the
Board of Directors determining such action to be prudent and in the best
interests of the Shareholders, and would be intended to provide Shareholders
with liquidity either by initiating the development of a market for the Shares
or by disposing of properties and distributing to Shareholders cash or other
securities then being actively traded. However, the Company is under no
obligation to take any of the foregoing actions, and any such action, if taken,
might be taken after the referenced three-year period. See " Risk Factors --
Absence of Public Trading Market."
The Company intends to purchase its properties either on an all-cash basis or
using the limited interim borrowing described under "Business and Properties -
Properties Owned by the Company." The Company will endeavor to repay any interim
borrowing with proceeds from the sale of Shares and thereafter to hold its
properties on an unleveraged basis. However, for the purpose of flexibility in
operations, the Company has the right, subject to the approval of the Board of
Directors, to borrow. See "Investment Objectives and Policies -- Borrowing
Policies." Subject to this limitation, the investment policies of the Company do
not restrict the Company to any one method
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of financing its operations. Therefore, it may purchase investment properties
subject to financing or mortgages existing before the date of purchase, use
either seller or new institutional financing or borrow from the Advisor or its
Affiliates. The Company's Bylaws prohibit the Company from incurring debt
(secured or unsecured) if such debt would result in aggregate debt exceeding
100% of "Net Assets" (defined generally to mean assets at cost), before
subtracting liabilities, unless the excess borrowing is approved by a majority
of the Independent Directors and disclosed to the Shareholders as required by
the Bylaws. The Bylaws also prohibit the Company from allowing aggregate
borrowings to exceed 50% of the Company's "Adjusted Net Asset Value" (defined
generally to mean assets at fair market value), before subtracting liabilities,
subject to the same exception. In addition, the Bylaws provide that the
aggregate borrowings of the Company must be reasonable in relation to the Net
Assets of the Company and must be reviewed quarterly by the Directors.
The investment return to Shareholders from the Company will likely be less
than could be obtained by a Shareholder's direct acquisition and ownership of
the same properties because (i) the Company will pay, partly to Affiliates of
Directors, substantial "front-end" fees (that is, fees paid directly from funds
received from sales of the Shares) to sell the Shares and acquire properties,
which will reduce the net proceeds available for investment in properties; and
(ii) the Company will likely pay, principally to the Advisor and its Affiliates,
substantial management and related compensation (which might be greater than the
fees for property management which a direct owner would incur), which will
reduce funds available for distribution to Shareholders. Thus, for example, if
only 84.5% of the gross proceeds of the offering are available for investment in
properties, revenues may be reduced by 15.5% compared to revenues in the absence
of such front-end fees. Similarly, any profit from appreciation in values of
properties could be commensurately reduced to the extent gross offering proceeds
are used to pay front-end fees.
Distribution Policy. The Company's policy and objective will be to pay to
Shareholders regular distributions. The timing and amounts of distributions will
be determined by the Board of Directors, acting in its sole discretion.
Business and Properties. The Company has been established to provide
Shareholders with a professionally managed portfolio of real estate equity
interests consisting primarily of existing residential apartment communities in
Texas and the southwestern region of the United States which have the potential
for current cash flow and capital appreciation.
Federal Income Tax Consequences. The Company will elect to be treated, and
intends to qualify on a continuing basis, as a REIT. The Company anticipates
that it will qualify as a REIT throughout its existence, but there can be no
assurance that the Company will so qualify. As a REIT, the Company will be
allowed a deduction for the amount of distributions paid to its Shareholders,
thereby subjecting the distributed net income of the Company to taxation only at
the Shareholder level. The Company's continued qualification as a REIT will
depend upon its compliance with numerous requirements, including requirements as
to the nature of its income. For a discussion of the risk that the Company may
fail to meet one or more of the requirements for REIT status, see "Risk Factors
- -- Federal Income Tax Risks." Each year, the Company will send to each
Shareholder a Form 1099 that will report the amount of income taxable to such
Shareholder for the preceding year.
As a REIT, the Company will deduct from its taxable income amounts
distributed to Shareholders and, therefore, will pay no tax on amounts
distributed to Shareholders. Distributions generally will be considered taxable
dividends to Shareholders to the extent of the Company's earnings and profits,
and, to such extent, will be considered portfolio rather than passive income for
purposes of Shareholders' use of investment expense deductions and passive
losses. Any distributions in excess of the Company's earnings and profits will
first reduce a Shareholder's basis in his or her Shares and, to the extent of
such reduction, will not be taxable to such Shareholder. Any distributions in
excess of both the Company's earnings and profits and the Shareholder's basis
will generally be treated as capital gain. Shareholders who are corporations
will not be eligible to claim the dividends-received deduction with respect to
any distributions paid by the Company. See "Federal Income Tax Consequences."
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Description of Capital Stock. The authorized capital stock of the Company
consists of 50,000,000 Common Shares, no par value and 200,000 Class B
Convertible Shares, no par value. As of the date of this Prospectus, there were
10 Common Shares of the Company issued and outstanding. All 200,000 authorized
Class B Convertible Shares are held by Glade M. Knight. See "Principal and
Management Stockholders."
The Common Shares will have the sole voting power to elect Directors. Holders
of the outstanding Common Shares will be entitled to one vote per Share on all
matters submitted to a vote of the Shareholders. In addition, the holders of the
Common Shares will be entitled to participate equally in distributions paid in
respect of the Shares if, when and as declared by the Board of Directors and in
distributions of the net assets of the Company upon its liquidation, dissolution
or winding up.
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RISK FACTORS
Investment in the Shares involves various risks. No assurance can be given
that the investment objectives of the Company will be achieved. In addition to
the information set forth elsewhere in this Prospectus, investors should
consider the following risks before making a decision to purchase the Shares.
ABSENCE OF PUBLIC TRADING MARKET
Prior to this offering, there has been no public market for the Shares, and
initially such a market is not expected to develop. The Company does not plan to
cause the Shares to be listed on any securities exchange or quoted on any system
or in any established market either immediately or at any definite time in the
future. While the Company, acting through its Board of Directors, may cause the
Shares to be so listed or quoted if the Board of Directors determines such
action to be prudent, there can be no assurance that such event will ever occur.
Prospective Shareholders should view the Shares as illiquid and must be prepared
to hold their investment for an indefinite length of time. Shareholders may be
unable to resell their Shares at all, or may be able to resell them only at a
substantial discount from the purchase price. Thus, the purchase of Shares
should be considered a long-term investment.
Currently, the Company expects that within approximately three (3) years from
Initial Closing, it will use its best efforts either (i) to cause the Shares to
be listed on a national securities exchange or quoted on the NASDAQ National
Market System or (ii) to cause the Company to dispose of substantially all of
its properties in a manner which will permit distributions to Shareholders of
cash or marketable securities. The taking of either type of action would be
conditioned on the Board of Directors determining such action to be prudent and
in the best interests of the Shareholders, and would be intended to provide
Shareholders with liquidity either by initiating the development of a market for
the Shares or by disposing of properties and distributing to Shareholders cash
or other securities then being actively traded. However, the Company is under no
obligation to take any of the foregoing actions, and any such action, if taken,
might be taken after the referenced three-year period.
Many factors will bear on whether any such actions are prudent and feasible.
The feasibility of causing the Shares to be listed or quoted will depend upon
many factors, many of which are not presently determinable or are not within the
control of the Company. Such factors would include general economic and market
conditions, the Company's satisfaction of the legal listing or quotation
requirements in effect at such time, the economic performance of the Company
during the interim period, and the Company's financial condition at the time
listing or quotation is considered. In addition, the size of the Company (in
terms of its total assets and the diversification of its property portfolio),
which will reflect the number of Shares sold in this offering, will bear upon
the feasibility of listing or quoting the Shares for trading. In general, a
smaller Company size may make it less feasible to cause the listing or quotation
of the Shares.
Cornerstone Realty Income Trust, Inc., a REIT organized by Affiliates of the
Advisor, completed the initial closing of the public sale of its common shares
in May, 1993. As of October 1, 1996, such common shares had not been listed or
quoted on any national securities exchange, NASDAQ, or on any other established
market, although it is expected that such common shares will be listed on an
exchange by the end of 1996.
The feasibility of disposing of the Company's properties will also depend on
many factors, many of which are not presently determinable or are not within
control of the Company. General economic and market conditions will affect the
demand, if any, for the Company's properties and the prices which might be
offered for them. Adverse developments affecting a market or a Company property
after the Company's acquisition of a property may materially affect its market
value. Even if some properties are attractive to prospective purchasers, the
Company may determine that it is imprudent to dispose of only a portion of its
portfolio. Conversely, the larger the Company is, the less likely it is that it
will be able to dispose of substantially all of its properties within a
relatively short period of time. If the Company receives marketable securities
or other property, rather than cash, for the sale of its properties, it and any
subsequent holders of such property will bear the risk of decrease in the value
of such property.
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UNCERTAINTY REGARDING RETURN OF INVESTMENT
The Company is under no obligation and has no specific plans to list the
Shares on any exchange or in any market or to sell its properties at any
particular time. Since a Shareholder would generally recoup his original
investment, if at all, only through a sale of his Shares or receipt of
distributions from the Company's sale of its properties, a Shareholder may not
receive a return of his investment for an indefinite period, if ever.
As discussed below, under "Risk of Insufficient Cash Available for
Distribution," there is also no assurance that the Company will maintain any
specific level of distributions from operations to Shareholders.
RIGHT OF REFUSAL MAY AFFECT SALES
The Company has granted to Cornerstone Realty Income Trust, Inc. a right of
first refusal to purchase any property proposed for sale by the Company and a
right of first refusal to become the acquiring party in any transaction proposed
by the Company which would involve the sale or disposition of the Company or
substantially all of its assets, business or stock (whether such transaction is
structured as a sale, exchange, merger, consolidation, lease, share exchange or
otherwise). See "Investment Objectives and Policies -- Sale and Refinancing
Policies." Further, under its agreement with Cornerstone Realty Income Trust,
Inc., if the Company defaults on its obligation to grant to Cornerstone Realty
Income Trust, Inc. its right of first refusal to acquire a property or to become
the acquiring party in any such proposed transaction, the Company will be
obligated to pay to Cornerstone Realty Income Trust, Inc. as liquidated and
agreed-upon damages cash in the amount of 3% of the aggregate consideration
agreed to be paid for the property, assets, stock or business by any third party
in the transaction with respect to which there is a breach. The presence of this
liquidated damages provision is intended, in part, to cause the Company to
comply with its agreements with Cornerstone Realty Income Trust, Inc. rather
than breach such agreements in an effort to conclude a transaction with a third
party at a higher price.
The presence of the right of first refusal held by Cornerstone Realty Income
Trust, Inc. with respect to various sale or disposition transactions which may
be sought or proposed by the Company may materially hamper the Company's ability
to obtain the highest possible price for its properties, assets, stock or
business from a third party. A third party may be reluctant to engage in
negotiations and due diligence with respect to a possible purchase or
acquisition transaction knowing that Cornerstone Realty Income Trust, Inc. can
substitute itself as purchaser or acquiror at the same purchase or acquisition
price simply by exercising its right of first refusal. Thus the presence of the
right of first refusal may make it difficult for the Company to sell its assets
to anyone other than Cornerstone Realty Income Trust, Inc. The absence of
competing prospective purchasers could tend to decrease the price the Company is
able to obtain for its assets. Although any sale of assets by the Company to
Cornerstone Realty Income Trust, Inc. will require the approval of a majority of
the Independent Directors of the Company, and such requirement is intended to
overcome any potential conflict of interest which might be involved in any such
transaction, there can be no assurance that a sale by the Company to Cornerstone
Realty Income Trust, Inc. would be on terms as favorable as a sale by the
Company to a third party, since there may be no alternative to selling assets to
Cornerstone Realty Income Trust, Inc.
COMPENSATION TO AFFILIATES IS PAYABLE BEFORE DISTRIBUTIONS AND WILL REDUCE
INVESTORS' RETURN
The Advisor and its Affiliates will receive substantial compensation from the
Company in exchange for various services they have agreed to render to the
Company. See "Compensation." This compensation has been established without the
benefit of arms-length negotiation, and the payment of such compensation from
proceeds of the offering and property revenues will reduce the amount of
proceeds available for investment in properties, or the cash available for
distribution, and will therefore tend to reduce the return on Shareholders'
investments. In addition, the compensation is generally payable regardless of
Company profitability, and is generally payable prior to, and without regard to
whether the Company has sufficient cash for distributions.
ACQUISITION, MANAGEMENT AND OTHER FEES AND EXPENSES WILL REDUCE RETURN
The investment return to Shareholders likely will be less than could be
obtained by a Shareholder's direct acquisition and ownership of the same
properties because (i) the Company will pay, principally to Affiliates of
Directors, substantial "front-end" fees and expenses to sell the Shares, and
acquire properties,
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which will reduce the net proceeds available for investment in properties; and
(ii) the Company will pay, principally to the Advisor and its Affiliates,
substantial management and related compensation (which might be greater than the
fees for property management that a direct owner would incur), which will reduce
cash available for distribution to Shareholder. Thus, for example, if only 84.5%
of the gross proceeds of the offering are available for investment in properties
revenues may be reduced by 15.5% compared to revenues in the absence of such
front-end fees. Similarly, any profit from appreciation in values of properties
could be commensurately reduced to the extent gross offering proceeds are used
to pay front-end fees.
CONFLICTS OF INTEREST
The Advisor and its Affiliates will be subject to various conflicts of
interest in their dealings with the Company. See "Conflicts of Interest."
Generally, such conflicts of interest arise because certain Directors and
officers of the Company (i) are also principals in other companies which will
enter into contracts with the Company (principally for asset management and
property management, acquisition and disposition services), and (ii) are, and
will in the future be, principals in other real estate investment transactions
or programs which may compete with the Company. Other possible transactions
involving conflicts of interest would include the Company's acquisition of
properties from the Advisor or an Affiliate (which is permitted under the
conditions summarized in "Investment Objectives and Policies -- Investment
Criteria"), and the Company borrowing from the Advisor or an Affiliate (which is
permitted under the conditions summarized in "Investment Objectives and Policies
- -- Borrowing Policies").
The differing types of compensation payable to the Advisor and its Affiliates
present different potential conflicts of interest for such entities. Apple
Realty Group, Inc. is paid an acquisition fee in connection with each
acquisition of a property by the Company, and a disposition fee in connection
with certain property dispositions. As a consequence, Apple Realty Group, Inc.
may have an incentive to recommend the purchase or disposition of a property, in
order to receive a fee, rather than based upon the best interests of the
Company. Apple Residential Management Group, Inc. receives a property management
fee which is a percentage of gross revenues from each property owned by the
Company. This entity could, therefore, have an incentive to recommend that the
Company retain a property, rather than dispose of it, so that Apple Residential
Management Group, Inc. can continue to receive its property management
compensation. Apple Residential Advisors, Inc. receives a fee which is a
percentage of the total consideration received by the company with sale of
Shares and therefore could have an incentive, from a compensation standpoint, to
close the sales of Shares as rapidly as possible.
As discussed under "Conflicts of Interest," the Company has implemented
certain policies and procedures designed to eliminate or ameliorate the effects
of potential conflicts of interest. For example, the business and affairs of the
Company, including, without limitation, all of the relationships between the
Company, on the one hand, and the Advisor and its Affiliates, on the other hand,
are under the supervision and control of the Company's Board of Directors, a
majority of whom is not Affiliated with the Advisor or its Affiliates. In
evaluating the significance of a majority of the Board of Directors being
unaffiliated, prospective Shareholders should bear in mind that Mr. Knight may
have an influence on the Board of Directors disproportionate in relation to his
voting power, since he is engaged day-to-day in the management of the Company
and its properties. In general, if a person with responsibilities both to the
Company and to an entity contracting with the Company, or both to the Company
and to a program in competition with the Company, were to resolve a potential
conflict of interest in such dual capacity against the interest of the Company,
the operation of the Company could be adversely affected. However, in light of
the policies and procedures implemented to ameliorate the effects of potential
conflicts of interest, the Advisor and its Affiliates do not believe that the
potential conflicts of interest will have a material adverse effect upon the
Company's ability to realize its investment objectives, although there can be no
assurance to this effect.
PRIOR PERFORMANCE DIFFICULTIES OF CERTAIN AFFILIATES
Certain private partnerships previously organized by Affiliates of the
Advisor have experienced certain operating difficulties. These operating
difficulties led to (i) filings by certain partnerships for reorganization under
Chapter 11 of the United States Bankruptcy Code, some of which filings ended in
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foreclosures on partnership property, and (ii) certain other partnerships
consenting to negotiated foreclosures on their properties. Each such partnership
owned a single property, and the adverse business development affecting the
partnership therefore resulted in such partnership ceasing all cash
distributions to investors. See "The Advisor and Affiliates -- Prior Performance
of Programs Sponsored by Affiliates of the Advisor." The Advisor believes that
all of the investment vehicles experiencing such difficulties had investment
objectives and policies dissimilar to those of the Company, and that their
difficulties are attributable to a combination of factors (principally high
leverage, changes in tax laws, a general downturn in economic conditions and the
unavailability of favorable financing) which are not expected to be applicable
to the Company. In particular, the Company expects to acquire its properties on
an all-cash basis. However, prospective investors should consider the experience
of the Advisor and its Affiliates in evaluating an investment in the Company.
POTENTIAL DILUTION OF SHAREHOLDERS' INTERESTS
Glade M. Knight, who is a Director, Chairman of the Board and President of
the Company, holds certain Class B Convertible Shares which are convertible into
Common Shares, as described under "Principal and Management Stockholders." The
conversion by Mr. Knight of such Class B Convertible Shares into Common Shares
will result in dilution of the Shareholders' interests.
The Board of Directors is authorized, without Shareholder approval, to issue
additional Shares or to raise capital through the issuance of options, warrants
and other rights, on such terms and for such consideration as the Board of
Directors in its sole discretion may determine. See "Summary of Organizational
Documents -- Issuance of Securities." Any such issuance could result in dilution
of the equity of the Shareholders. Without limiting the generality of the
foregoing, the Board of Directors may, in its sole discretion, issue Shares or
other equity or debt securities of the Company, (1) to persons from whom the
Company purchases property, as part or all of the purchase price of the
property, or (2) to the Advisor or its Affiliates in lieu of cash payments
required under the Advisory Agreement or other contract or obligation. The Board
of Directors, in its sole discretion, may determine the value of any Shares or
other equity or debt securities issued in consideration of property or services
provided, or to be provided, to the Company, except that while Shares are
offered by the Company to the public, the public offering price of such Shares
shall be deemed their value.
The Company has adopted two stock incentive plans for the benefit of the
Directors of the Company and certain employees of the Company and of the Advisor
and its Affiliates. See "Management -- Stock Incentive Plans." The effect of the
exercise of such options could be to dilute the value of the Shareholders'
investments to the extent of any difference between the exercise price of an
option and the value of the Shares purchased at the time of the exercise of the
option.
In addition, the Company expressly reserves the right to implement a dividend
reinvestment plan involving the issuance of additional Shares by the Company, at
an issue price determined by the Board of Directors.
UNCERTAINTY REGARDING REVENUES AND EXPENSES
The Company's success depends upon maximizing revenues (primarily rent
payments) while minimizing Company and property operating expenses, which in
turn will be affected by property selection, property and Company management,
property location, and local and general economic conditions. The Company's
investment in residential apartment communities involves many potential risks
bearing on potential revenues and expenses, including high vacancy rates,
competition for tenants, expenses (including those related to taxes, insurance
and property maintenance) exceeding income (which could necessitate borrowing to
fund deficits), on-site environmental problems, and possible uninsurable losses.
Although the Company and the Advisor and its Affiliates will seek to minimize
the effect of factors such as these, some of such factors are beyond the control
of such persons. In addition, to the extent such factors are within the control
of such persons, the skill and ability of such persons to select, maintain and
operate such properties will largely determine whether the Company will operate
profitably. There can be no assurance that the Company's properties will operate
profitably, appreciate in value or generate cash for distribution.
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Equity real estate investments tend to limit the ability of the Company to
vary its portfolio promptly in response to changing economic, financial and
investment conditions. These investments will be subject to risks such as
adverse changes in general economic conditions or local conditions (for example,
excessive building resulting in an oversupply of available space, or a decrease
in employment, reducing the demand for real estate) as well as other factors
affecting real estate values (for example, increasing labor, materials and
energy costs, the attractiveness of the properties to tenants and the
attractiveness of the surrounding area). Investments will also be subject to
such risks as the inability of the Company to provide for adequate maintenance
of its properties. If the Company found it necessary to borrow, its operations
could be affected adversely by factors such as increased interest rates and
reduced availability of debt financing. However, to the extent that the
Company's investments are made on an all-cash basis, the risks relating to
interest rates and availability of long-term financing are not present.
The Company's investments will be primarily in existing residential apartment
communities. Some of the proceeds may be allocated to the repair and renovation
of such apartment communities. The Company's real estate equity investments will
be subject to the risk of inability to attract or retain tenants, and to the
risk of a decline in rental income as a result of adverse changes in economic
conditions, local real estate markets, or other factors. Also, certain
expenditures associated with equity investments (such as real estate taxes, the
costs of maintenance, renovations or improvements, insurance and utility costs)
are not necessarily decreased by events adversely affecting the Company's income
from those investments. Should any such events occur, the Company's cash
distributions to Shareholders may be impaired.
While it is the policy of the Company primarily to buy income-producing
properties at a price equal to or below their appraised values and below the
replacement cost of similar structures, there is no assurance that any Company
properties will operate at a profit, will appreciate in value, or will ever be
sold at a profit, or that distributions will be paid by the Company. The
marketability and value of any such properties will depend upon many factors
beyond the control of the Board of Directors and the Advisor.
If the Company does not operate profitably and exhausts its reserves, it
might be required to borrow funds or liquidate some of its investments to pay
fixed expenses of the Company which are not reduced by events which reduce
income.
ENVIRONMENTAL PROBLEMS AND LIABILITIES
While the Company intends to exercise due diligence by securing a report from
a qualified environmental engineer prior to the acquisition of any property,
there can be no assurance that hazardous substances or wastes will not be
discovered on investment properties subsequent to acquisition by the Company.
Federal law imposes liability on any owner of property or predecessor in title
for the presence on the premises of improperly disposed hazardous substances.
This liability is without regard to fault for or knowledge of the presence of
such substances and may be imposed jointly and severally upon all succeeding
landowners from the date of the first improper disposal. The laws of the states
in which the Company may acquire properties may have additional requirements. If
it is ever determined that hazardous substances are present on a property, the
Company could be required to pay all costs of any necessary cleanup work,
although under certain circumstances claims against other responsible parties
could be made by the Company.
COMPETITION FOR PROPERTIES AND TENANTS
The results of operations of the Company will depend upon the availability of
suitable opportunities for investment of its funds, which in turn depends to a
large extent on the type of investment involved, the condition of the financial
markets, the nature and geographical location of the property, and other
factors, none of which can be predicted with certainty. The Company will be
competing for acceptable investments with other financial institutions,
including insurance companies, pension funds and other institutions, real estate
investment trusts, and limited partnerships that have investment objectives
similar to those of the Company. Many of these competitors have greater
resources than the Company, and may have greater experience than the Board of
Directors, the Advisor and its Affiliates.
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In addition, when the Company owns a particular property it will be competing
for tenants with many other properties in the same market. Various competing
properties may be newer than the Company's property, or may offer superior
amenities, a superior location, perceived superior management or other
advantages over the Company's property. The adverse impact of competition may be
greater during times of local or general economic downturns. The general effect
of such competition may be a decrease in the occupancy rate at Company
properties, a decrease in rental rates at Company properties, or both, which in
turn will mean a decrease in Company income and lower, if any, distributions by
the Company to Shareholders.
UNINSURED LOSSES
The Advisor will arrange for comprehensive insurance, including fire,
liability, and extended coverage on all investment properties. However, there
are certain types of losses (generally of a catastrophic nature) which may be
either uninsurable or not economically insurable. These losses generally include
those resulting from war, earthquakes and floods, as well as punitive damages.
If any such loss occurs and is not covered by insurance, the Company might
suffer a loss of capital invested and any profits which might be anticipated
from the property in question. The Company from time to time will consider
whether to obtain earthquake and flood insurance for its properties to the
extent that it is economically available.
RISK OF INSUFFICIENT CASH AVAILABLE FOR DISTRIBUTION
If the Company were to incur significant unanticipated cash expenditures, the
amount of cash available for distribution would be affected. Furthermore, there
can be no assurance that the Company will in the future be able to acquire
properties that will generate sufficient cash from operations to enable the
Company to maintain distributions at a specific or any particular rate. See the
other risk factors in this section entitled "Risk Factors" for a discussion of
factors which could result in unanticipated cash expenditures, or which could
otherwise affect the Company's ability to make cash distributions to
Shareholders. There can be no assurance that the Company will maintain any
specific level of distributions to Shareholders.
LACK OF OPERATING HISTORY; NO ASSURANCE OF SUCCESS
Neither the Company nor the Advisor has any operating history. There is no
assurance that the Company will operate successfully or achieve its objectives.
SIZE OF OFFERING -- POSSIBLE LACK OF DIVERSIFICATION AND LOWER RETURN
The Company initially will be funded with contributions of not less than
$15,000,000. The profitability of the Company could be affected by the number of
Shares sold. In the event the Company receives only the Minimum Offering, it
will invest in fewer properties. The fewer properties purchased, the greater the
potential adverse effect of a single unproductive property upon the Company's
profitability since a reduced degree of diversification will exist among the
Company's properties. In addition, the returns on those Shares sold will be
reduced as a result of allocating all Company expenses among the smaller number
of Shares. There is no limit on the amount or percentage of net proceeds from
the sale of Shares which may be invested in any single property.
DELAY IN INVESTMENT IN REAL PROPERTY
The Company may experience delays in finding suitable properties to acquire.
Pending investment of the proceeds of this offering in real estate, and to the
extent such proceeds are not invested in real estate as described herein, the
proceeds may be invested in certain permitted temporary investments. See
"Investment Objectives and Policies -- General." The rate of return on such
investments has fluctuated in recent years and may be different from the return
obtainable from real property.
NO SPECIFIED PROPERTIES
The specific properties in which the proceeds of this offering are to be
invested have not been identified as of the date of this Prospectus. A
prospective Shareholder will, therefore, have no information as to the
identification or location of specific properties to be purchased by the
Company, or as to
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the financing terms (if any) or other relevant economic and financial date
affecting those properties. However, when at any time during the offering period
the Company believes that there is a reasonable probability that any specific
property will be acquired, this Prospectus will be supplemented to provide a
description of the property and the anticipated terms of its purchase, financing
and management.
POSSIBLE BORROWING; DEBT FINANCING MAY REDUCE CASH FLOW AND INCREASE RISK OF
DEFAULT.
The Company intends to purchase its properties either on an all-cash basis or
using the limited interim borrowing described under "Business and Properties -
Properties Owned by the Company." The Company will endeavor to repay any interim
borrowing with proceeds from the sale of Shares and thereafter to hold its
properties on an unleveraged basis. However, for the purpose of flexibility in
operations, the Company will have the right, subject to the approval of the
Board of Directors, to borrow. See "Investment Objectives and Policies --
Borrowing Policies."
One purpose of borrowing could be to permit the Company's acquisition of
additional properties through the "leveraging" of Shareholders' equity
contributions. Alternatively, the Company might find it necessary to borrow to
permit the payment of operating deficits of properties already owned. There can
be no assurance that the Company would be able to borrow on favorable terms, if
at all, if borrowing became necessary or desirable. Furthermore, the incurrence
of debt would entail certain additional risks for the Company, some of which are
summarized below. If the Company defaulted on secured indebtedness, the lender
could foreclose, and the Company could lose its investment in the property or
properties used as collateral.
The Company might obtain financing with variable rates and varying
maturities. Such rates normally provide cash flow benefits in an environment of
relatively low or declining interest rates, and a corresponding cash flow
detriment when interest rate increase. Alternatively, financings obtained by the
Company could have fixed rates and prepayment penalties.
The Company might obtain financing with "due-on-encumbrance" or "due-on-sale"
clauses in which future refinancing or sale of the properties could cause the
maturity dates of the mortgages to be accelerated and the financing to become
due immediately. Thus, the Company could be required to sell its properties on
an all-cash basis or the purchaser might be required to obtain new financing in
connection with the sale. It cannot be predicted whether the holders of
mortgages encumbering the Company's investment properties will require such
acceleration, or whether other mortgage financing will be available. The
resolution of this issue would depend on the mortgage market, and on financial
and economic conditions existing at the time of the sale or refinancing. The
Company might obtain mortgages that involve balloon payments. Such mortgages
involve greater risks than mortgages with principal amounts amortized over the
term of the loan since the ability of the Company to repay the outstanding
principal amount at maturity may depend on the Company's ability to obtain
adequate refinancing or to sell the property, which will in turn depend on
economic conditions in general and the value of the underlying properties in
particular. There can be no assurance that the Company would be able to
refinance or repay any such mortgages at maturity. Further, a significant
decline in the value of the underlying property could result in a loss of the
property by the Company through foreclosure.
The Company does not intend to make distributions from borrowings or
refinancings. However, it is possible that the Company might, under certain
circumstances, find it necessary to borrow and distribute the borrowed funds to
comply with the distribution requirements for REITs under the Code. However, the
obligation to make principal payments on any such borrowings might adversely
affect the Company's ability to make the required distributions to maintain its
REIT status. See "Federal Income Tax Consequences -- Requirements for
Qualification as a REIT -- Annual Distribution Requirement." Since the REIT
distribution requirement is based on the Company's taxable income (with various
adjustments) rather than cash flow, the Company expects to be able to satisfy
the requirement without any borrowing. However, if such a borrowing were
necessary, the resulting distribution would not reflect a return on the
Shareholders' investments.
The Company's Bylaws prohibit the Company from incurring debt (secured or
unsecured) if such debt would result in aggregate debt exceeding 100% of "Net
Assets" (defined generally to mean assets at cost), before subtracting
liabilities, unless the excess borrowing is approved by a majority of the
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Independent Directors and disclosed to the Shareholders as required by the
Bylaws. The Bylaws also prohibit the Company from allowing aggregate borrowings
to exceed 50% of the Company's "Adjusted Net Asset Value" (defined generally to
mean assets at fair market value), before subtracting liabilities, subject to
the same exception. In addition, the Bylaws provide that the aggregate
borrowings of the Company must be reasonable in relation to the Net Assets of
the Company and must be reviewed quarterly by the Directors. Except as set forth
in this paragraph, the Company is not limited in the amount of debt it can
incur.
Subject to the foregoing limitations on the permitted maximum amount of debt,
there is no limitation on the number of mortgages or deeds of trust which may be
placed against any particular property.
FEDERAL INCOME TAX RISKS
Failure to Achieve or Maintain REIT Status. The Company intends to conduct
its operations in a manner that will permit it to qualify as a REIT for federal
income tax purposes. Although the Company has not requested, and does not expect
to request, a ruling from the Internal Revenue Service (the "Service") that it
will qualify as a REIT, it has received an opinion of its counsel, McGuire,
Woods, Battle & Boothe, L.L.P., that, based upon certain representations made by
the Company and assumptions described in "Federal Income Tax Consequences," it
will so qualify. However, investors should be aware that opinions of counsel are
not binding upon the Service. Furthermore, both the validity of the opinion and
the continued qualification of the Company for treatment as a REIT will depend
on its continuing ability to meet various requirements concerning, among other
things, the ownership of its Shares, the nature of i
ts assets, the sources of
its income and the amount of its distributions to Shareholders. Failure to meet
any of such requirements with respect to a particular taxable year could result
in termination of the Company's election to be a REIT, effective for the year of
such failure and the four succeeding taxable years.
To qualify as a REIT, the Company must distribute to the Shareholders an
amount equal to at least 95% of its "REIT taxable income" (plus certain other
items). In the event any Company expenditure, including a fee paid to the
Advisor, is disallowed for any reason, the asserted deductions could be
deferred, reduced or eliminated. Any retroactive increase in the Company's
taxable income resulting from the disallowance of a Company deduction could
result in (i) a failure of the Company to meet the income distribution
requirement, (ii) the imposition of Company-level taxation on additional amounts
of undistributed REIT income, or (iii) an increase in the amount of REIT income
on which an excise tax is imposed. However, if the Company makes distributions
in accordance with its stated policy, it does not expect that a
recharacterization of its expenses would have the effects described. See
"Federal Income Tax Consequences -- Requirements for Qualification as a REIT --
Annual Distribution Requirements."
In any year for which the Company failed to qualify as a REIT, it generally
would be subject to federal income taxation in the same manner as a regular
corporation. In such event, the Company would not be allowed a deduction for
earnings distributed to the Shareholders, thereby subjecting such earnings
(including gains from sales of properties) to taxation at both the Company and
Shareholder levels. The resulting tax liability to the Company would reduce
substantially the amount of Company cash available for distribution to the
Shareholders. Although the Company would be eligible to re-elect REIT status
after five years, the burden of double taxation might cause the Company to
liquidate before that time. See "Federal Income Tax Consequences -- Federal
Income Taxation of the Company," "-- Requirements for Qualification as a REIT"
and "-- Federal Income Taxation of the Shareholders."
Uncertainties in and Possible Changes to the Tax Law. The absence of Treasury
Regulations and other administrative interpretations with respect to many
provisions of the Code, combined with the highly technical and complex nature of
the rules governing REITs, gives rise to uncertainty concerning various tax
aspects of REITs generally and the tax consequences of an investment in the
Company in particular. Furthermore, the Company cannot predict whether or what
legislative, administrative, or judicial changes or developments may take place
in the future, any of which might impact the Company adversely, and perhaps
retroactively. Potential investors should consult their tax advisors concerning
the potential impact of any such changes or developments.
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REQUIRED RELIANCE ON MANAGEMENT
Shareholders will not have any active participation in management of the
Company or the investment of offering proceeds; rather, they must rely on the
management and acquisition expertise provided by the Board of Directors, the
Advisor and its Affiliates. Thus, no person should purchase any of the Shares
offered hereby unless he is willing to entrust all aspects of the management of
the Company to the Board of Directors, the Advisor and its Affiliates.
POSSIBLE CHANGES IN INVESTMENT OBJECTIVES AND POLICIES MAY NOT SERVE THE
INTERESTS OF CERTAIN SHAREHOLDERS
Subject to limited restrictions in the Company's Bylaws, the Articles of
Incorporation and applicable law, the Board of Directors has significant
discretion to modify the investment objectives and policies of the Company, as
stated in this Prospectus. See "Investment Objectives and Policies -- Changes in
Objectives and Policies." The Advisor believes that, since any such action by
the Board of Directors would be based upon the perceived best interests of the
Company and the Shareholders, the existence of such discretion to modify the
investment objectives and policies would generally be beneficial to the
Shareholders. However, the exercise of such discretion could result in the
Company adopting new investment objectives and policies which differ materially
from those described in this Prospectus.
RESPONSIBILITIES OF DIRECTORS, ADVISOR AND AFFILIATES -- POSSIBLE INADEQUACY
OF REMEDIES; DIRECTORS, ADVISOR AND AFFILIATES BENEFIT FROM EXCULPATION AND
INDEMNIFICATION PROVISIONS
The Advisor and the Directors are accountable to the Company and its
Shareholders as fiduciaries and consequently must exercise good faith and
integrity in handling the Company's affairs. This is a rapidly developing and
changing area of the law, and Shareholders who have questions concerning the
duties of the Directors and the Advisor should consult with their own counsel.
The Articles of Incorporation of the Company exculpate each Director and officer
in certain actions by or in the right of the Company from liability unless the
Director or officer has engaged in willful misconduct or a knowing violation of
the criminal law or of any federal or state securities laws. Further, the
Advisory Agreement exculpates the Advisor from liability unless the Advisor has
engaged in gross negligence or willful misconduct. The Articles of Incorporation
and the Advisory Agreement, respectively, also provide that the Company shall
indemnify a present or former Director or officer and the Advisor (and certain
Affiliates) against expense or liability in an action if the Directors (other
than the indemnified party) determine in good faith that the person to be
indemnified was acting in good faith within what he or it reasonably believed to
be the scope of his or its authority and for a purpose which he or it reasonably
believed to be in the best interests of the Company or its Shareholders and that
such liability was not the result of willful misconduct, bad faith, reckless
disregard of duties or knowing violation of the criminal law on the part of the
person to be indemnified. See "Summary of Organizational Documents."
As a result of the exculpation and indemnification provisions of the
Company's Articles of Incorporation and the Advisory Agreement, a Shareholder
may have a more limited right of action than such Shareholder would otherwise
have had in the absence of such provisions. The exculpation and indemnification
provisions in the Articles of Incorporation and the Advisory Agreement have been
adopted to help induce the beneficiaries of such provisions to agree to serve on
behalf of the Company or the Advisor by providing a degree of protection from
liability for alleged mistakes in making decisions and taking actions. Such
exculpation and indemnification provisions have been adopted, in part, in
response to a perceived increase generally in shareholders' litigation alleging
director and officer misconduct.
In the opinion of the Securities and Exchange Commission, indemnification for
liabilities arising out of the Securities Act is against public policy and,
therefore, unenforceable.
The Company intends to purchase insurance policies under which Directors,
officers and (if feasible) other agents of the Company will be insured against
liability or loss arising out of actual or asserted misfeasance or nonfeasance
in the performance of their duties, to the extent such insurance is available at
reasonable rates.
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ARBITRARY SHARE OFFERING PRICES
The per-Share offering prices ($9 until the Minimum Offering is achieved and
thereafter $10) have been established arbitrarily by the Company. Neither
prospective investors nor Shareholders should assume that the per-Share prices
reflect the intrinsic or realizable value of the Shares or otherwise reflects
the Company's value, earnings or other objective measures of worth. The increase
in the per- Share offering price from $9 to $10 once the Minimum Offering is
achieved is also not based upon or reflective of any objective indicia of
increased Company or Share value.
ADVISOR AND AFFILIATES MAY PURCHASE AND VOTE SHARES
The Advisor and Affiliates of the Advisor may purchase in this offering up to
2.5% of the total number of Shares of the Company sold in this offering, subject
to the restrictions on accumulation of Shares contained in the Company's Bylaws,
which generally prohibit accumulation by any person or entity of more than 9.8%
of all the Company's outstanding Shares. Any purchase of Shares in this offering
by the Advisor or its Affiliates must be for investment, and not for resale or
distribution.
In addition to the foregoing, the Company has adopted two stock incentive
plans for the benefit of the Directors of the Company and certain employees of
the Company and of the Advisor and Affiliates of the Advisor. See "Management --
Stock Incentive Plans."
Any such purchaser would possess the same voting power per Share as any other
purchaser. While it is not expected that the Advisor and its Affiliates will
purchase a substantial number of Shares, they will be permitted to vote any
Shares purchased by them in the same manner as other Shareholders.
ACCUMULATION RESTRICTIONS
The Company's Bylaws generally prohibit ownership of more than 9.8% of the
Company's outstanding Shares by one investor. See "Summary of Organizational
Documents -- Redemption and Restrictions on Transfer." That restriction is
designed to ensure that the Company does not violate certain share accumulation
restrictions imposed by the Code on REITs. The provisions restricting
concentrations of Share ownership also may have the effect of deterring the
acquisition of, or a change in, control of the Company. In addition, certain
states may impose investor suitability standards on the transfer of Shares.
JOINT VENTURE INVESTMENTS -- RISKS OF CONFLICTING INTERESTS AND IMPASSE
Under certain circumstances, the Company might participate with an entity
(including Affiliates of the Advisor) in jointly acquiring an investment
property. Any joint venture investment of the Company would be subject to the
same conditions, limitations and restrictions applicable to a Company investment
not undertaken as a joint venture, and the use of a joint venture structure
would not itself be designed to alter or expand the investment objectives and
policies of the Company. Investment through a joint venture could, for example,
permit the Company to invest in a property which is too large for the Company to
acquire by itself.
The investment by the Company through a joint venture could subject the
Company to risks not otherwise present, although the Company will endeavor to
structure any joint venture investment so as to minimize the number and
magnitude of risks not generally associated with a Company investment. Risks not
otherwise present could, however, include the possibility that the joint venture
participant will have economic interests different from the Company and that the
participant might be in a position to take actions contrary to the instructions
of the Company or contrary to the interests of the Company. In addition, in
joint venture investments there is a potential risk of impasse on decisions if
neither joint venture participant controls the venture. Conversely, if the
Company has a right of first refusal to purchase a joint venture participant's
interest, there is a potential risk that it may not have the resources to do so.
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<PAGE>
ESTIMATED USE OF PROCEEDS
The Company intends to invest the net proceeds of this offering in equity
ownership interests in existing residential apartment communities in Texas and
the southwestern region of the United States. Pending such investment and to the
extent the proceeds are not invested in real estate as described herein, the
proceeds may be invested in certain permitted types of temporary investments.
See "Investment Objectives and Policies -- General." All proceeds of this
offering received by the Company must be invested or committed for investment in
properties or allocated to working capital reserves or used for other proper
Company purposes within the later of two years after commencement of the
offering or one year after termination of the offering; any proceeds not
invested or committed for investment or allocated to working capital reserves or
used for other proper Company purposes by the end of such time period shall be
returned to investors within 30 days after the expiration of such period, but
the Company may elect to return such proceeds earlier if, and to the extent,
required by applicable law (including to the extent necessary to avoid
characterization as an "investment company"). The proceeds of this offering will
be received and held in trust for the benefit of investors in compliance with
applicable securities laws, to be used only for the purposes set forth herein.
As described under "Compensation," the Company's Bylaws prohibit total
Organizational and Offering Expenses from exceeding 15% of Total Contributions.
"Organizational and Offering Expenses" means, generally, all expenses incurred
in organizing the Company and offering and selling the Shares, including selling
commissions and fees, legal fees and accounting fees, and federal, state and
other regulatory filing fees. The Bylaws also prohibit the total of all
Acquisition Fees (defined generally as all fees and commissions paid by any
party in connection with the Company's purchase of real property) and
Acquisition Expenses (defined generally as all expenses related to the selection
or acquisition of properties by the Company) paid in connection with an
acquisition of a property from exceeding 6% of the contract price for the
property (unless such excess is approved by the Board of Directors, as described
therein). Any Organizational and Offering Expenses or Acquisition Fees and
Acquisition Expenses incurred by the Company in excess of the permitted limits
shall be payable by the Advisor immediately upon demand of the Company.
As indicated below, if the Minimum Offering is sold, the Company expects that
84.5% of the gross offering proceeds will be available for investment in
properties and 0.5% will be allocated to the Company's working capital reserve.
As indicated below, the Company expects that Organizational and Offering
Expenses will increase in dollar amount if more than the Minimum Offering amount
is sold. This reflects the Company's belief that the sale of Shares in excess of
the Minimum Offering amount will correspond to a relatively longer offering
period. The Company expects a relatively longer offering period to result in the
need for additional supplements and amendments to this Prospectus (including
possibly also post-effective amendments to the Company's registration statement)
and additional closings on the sale of Shares, which will result in increased
legal, accounting, printing and other fees and costs associated with the
offering of the Shares. However, the Company expects that the percentage which
Organizational and Offering Expenses comprise of gross proceeds will decrease if
and when more than the Minimum Offering amount is sold. The Advisor will pay
(without the right of reimbursement from the Company) any Organizational and
Offering Expenses which, exclusive of the Selling Commissions and Marketing
Expense Allowance, exceed 3% of gross offering proceeds.
As discussed under "Compensation," the Advisor and its Affiliates will be
entitled to reimbursement for expenses incurred by them in the operation of the
Company as well as, among other fees, a Real Estate Commission equal to 2% of
the proceeds of the offering used to pay each property's gross purchase price
(which does not include amounts budgeted for repairs and improvements), which
constitutes an "Acquisition Fee."
20
<PAGE>
The following table reflects the intended application of the proceeds from
the sale of the Common Shares.
<TABLE>
<CAPTION>
MINIMUM OFFERING MAXIMUM OFFERING
---------------------------- -----------------------------
% OF GROSS % OF GROSS
AMOUNT PROCEEDS AMOUNT PROCEEDS
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Gross Proceeds (1)................................... $15,000,000 100.00% $250,000,000 100.00%
Less: ...............................................
Organizational and Offering Expenses (2)............ 450,000 3.00% 1,000,000 0.40%
Selling Commissions (3)............................. 1,125,000 7.50% 18,750,000 7.50%
Marketing Expense Allowance (3) .................... 375,000 2.50% 6,250,000 2.50%
-------------- ------------- --------------- -------------
Net Proceeds after Offering Costs.................... $13,000,000 87.00% $224,000,000 89.60%
Less Acquisition Fees and Expenses (4) .............. 300,000 2.00% 5,000,000 2.00%
-------------- ------------- --------------- -------------
Proceeds Available for Investment and Working
Capital............................................. $12,750,000 85.00% $219,000,000 87.60%
Less Working Capital Reserve (5) .................... 75,000 0.50% 1,250,000 0.50%
-------------- ------------- --------------- -------------
Net Amount Available for Investment in Properties
(6)................................................. $12,675,000 84.50% $217,750,000 87.10%
-------------- ------------- --------------- -------------
- ----------
</TABLE>
(1) The Shares are being offered on a "best-efforts" basis.
(2) These amounts reflect the Company's estimate of Organizational and Offering
Expenses, exclusive of the Selling Commissions and the Marketing Expense
Allowance payable to the Managing Dealer or the Selected Dealers. If such
expenses are greater than 3% of gross offering proceeds, the excess over 3%
will be paid by the Advisor (without the right of reimbursement from the
Company).
(3) Payable to the Managing Dealer or the Selected Dealers.
(4) These amounts include a Real Estate Commission payable to an Affiliate of
the Advisor in an amount equal to 2% of the proceeds of the offering used
to pay the purchase price of each property acquired (which does not include
amounts budgeted for repairs and improvements) plus the Company's estimates
of other expenses and fees which will be incurred in connection with
property acquisitions.
(5) Until used, amounts in the Company's working capital reserve, together with
any other proceeds not invested in properties or used for other Company
purposes, will be invested in certain permitted temporary investments, such
as U.S. Government securities or similar highly liquid instruments. See
"Investment Objectives and Policies -- General."
(6) The investment properties are expected to be existing residential apartment
communities in Texas and the southwestern regions of the United States. See
"Investment Objectives and Policies." In connection with each proposed
property acquisition, the Company expects to allocate a portion of proceeds
to repairs and improvements known to be needed at the property.
COMPENSATION
The table below describes the compensation and reimbursement which will be
paid to the Advisor and its Affiliates by the Company. The officers of the
Company are not paid salaries by the Company. Such officers are officers of the
Advisor and its Affiliates, which entities are entitled to certain fees for
services rendered by them to the Company. Thus, the officers of the Company are,
in essence, compensated by the Advisor or its Affiliates.
The Company will pay David Lerner Associates, Inc. Selling Commissions equal
to 7.5% of the purchase price of the Shares and a Marketing Expense Allowance
equal to 2.5% of the purchase price of the Shares. If the Minimum Offering is
sold, the Selling Commissions would be $1,125,000 and the Marketing Expense
Allowance would be $375,000. If the Maximum Offering is sold, the Selling
Commissions would be $18,750,000 and the Marketing Expense Allowance would be
$6,250,000. The Managing Dealer and the Advisor are not related and are not
Affiliates. See "Plan of Distribution."
21
<PAGE>
<TABLE>
<CAPTION>
PERSON
RECEIVING TYPE OF AMOUNT OF
COMPENSATION (1) COMPENSATION COMPENSATION (2)
---------------- ------------ ----------------
<S> <C> <C>
ACQUISITION PHASE
2% of the proceeds of the offering used to
Apple Realty Real Estate Commission for acquiring the pay the purchase prices of the properties
Group, Inc. ("ARG")............ Company's properties purchased by the Company. (3)
OPERATIONAL PHASE
The Advisor ................... Asset Management Fee for managing the Annual fee ranging from 0.1% of Total Contributions
Company's day-to-day operations to 0.25% of Total Contributions (payable quarterly)
-- a maximum of $37,500 per year if the Minimum
Offering is sold; a maximum of $625,000 per year if
the Maximum Offering is sold. (4)
Apple Residential Management Property Management Fee and expense 5% of the monthly gross revenues of the
Group, Inc. ("AMG") ........... reimbursement for managing the Company's properties plus expense reimbursement. (5)
properties
The Advisor, ARG and Reimbursement for costs and expenses Amount is indeterminate.
AMG ........................... incurred on behalf of the Company, as
described in Note (6)
DISPOSITION PHASE
ARG ........................... Real Estate Commission for selling the Up to 2% of the gross sales prices of the
Company's properties properties sold by the Company. (7)
ALL PHASES
The Advisor, ARG and
AMG............................ Payment for Services and Property (8) Amount is indeterminate.
</TABLE>
(1) As discussed in this Section and under "Conflicts of Interest," the Advisor
and its Affiliates will receive different types of compensation for
services rendered in connection with the acquisition, management and
disposition of properties, as well as the management of the day-to-day
operations of the Company. As discussed under "Conflicts of Interest," the
receipt of such fees could result in potential conflicts of interest for
persons who participate in decision making on behalf of both the Company
and such other entities.
(2) Except as otherwise indicated in this table (including these notes), the
specific amounts of compensation or reimbursement payable to the Advisor
and its Affiliates are not now known and generally will depend upon factors
determinable only at the time of payment. Compensation payable to the
Advisor and its Affiliates may be shared or reallocated among such
Affiliates in their sole discretion as they may agree. However,
compensation and reimbursements which would exceed specified limits or
ceilings cannot be recovered by the Advisor or its Affiliates through
reclassification into a different category.
(3) Under a Property Acquisition/Disposition Agreement with the Company, Apple
Realty Group, Inc. has agreed to serve as the real estate broker in
connection with both the Company's purchases and sales of properties. In
exchange for such services, such corporation will be entitled to a fee from
the Company of 2% of the gross purchase price (which does not include
amounts budgeted for repairs and improvements) of each property purchased
by the Company. If the person from whom the Company purchases or to whom
the Company sells a property pays any fee to Apple Realty Group, Inc., such
amount will decrease the amount of the Company's obligation to Apple Realty
Group, Inc. See "The Advisor and Affiliates -- Apple Realty Group, Inc."
(4) "Total Contributions" means the gross offering proceeds which have been
received from time to time from the sale of the Shares. Under its Advisory
Agreement with Apple Residential Advisors, Inc., the Company is obligated
to pay to the Advisor an Asset Management Fee which is a percentage of
Total Contributions. The applicable percentage used to calculate the Asset
Management Fee is based on the ratio of Funds from Oper-
22
<PAGE>
ations to Total Contributions (such ratio being referred to as the "Return
Ratio") for the preceding calendar quarter. The per annum Asset Management
Fee is initially equal to the following with respect to each calendar
quarter: 0.1% of Total Contributions if the Return Ratio for the preceding
calendar quarter is 6% or less; 0.15% of Total Contributions if the Return
Ratio for the preceding calendar quarter is more than 6% but not more than
8%; and 0.25% of Total Contributions if the Return Ratio for the preceding
calendar quarter is above 8%. Assuming the Minimum Offering ($15,000,000)
is sold, the annual Asset Management Fee would be between $15,000 and
$37,500. Assuming the Maximum Offering ($250,000,000) is sold, the annual
Asset Management Fee would be between $250,000 and $625,000. See "The
Advisor and Affiliates."
(5) Apple Residential Management Group, Inc., an Affiliate of the Advisor, is
expected to provide property management services for each of the Company's
properties and in exchange therefor will receive a monthly fee equal to 5%
of the monthly gross revenues of the properties. Apple Residential
Management Group, Inc. is also expected to be responsible for the
accounting and financial reporting responsibilities for each of the
separate properties acquired by the Company. The Company will reimburse
Apple Residential Management Group, Inc. for its expenses, including
salaries and related overhead expenses, associated with providing such
accounting and financial reporting services. See "Investment Objectives and
Policies -- Management of Properties."
(6) The Advisor and its Affiliates will be reimbursed for all direct costs of
acquiring and operating the properties and of goods and materials used for
or by the Company and obtained from entities that are not Affiliated with
the Advisor. These costs and expenses include, but are not limited to,
legal fees and expenses, travel and communication expenses, expenses
relating to Shareholder communications, costs of appraisals, nonrefundable
option payments on property not acquired, accounting fees and expenses,
title insurance, compensation of on-site management personnel and leasing
agents (including any incentive compensation), maintenance and repair
expenses, advertising and promotional expenses, and all other fees, costs
and expenses directly attributable to the acquisition, ownership and
operation of the properties. In addition, Apple Residential Management
Group, Inc. will be reimbursed for salaries and related expenses and
overhead expenses associated with bookkeeping, accounting and financial
reporting services related to the properties. Operating Expenses
reimbursable to the Advisor or its Affiliates are subject to the overall
limitation on Operating Expenses discussed under "The Advisor and
Affiliates -- The Advisory Agreement," but the amount of reimbursement is
not otherwise limited.
(7) Under the Property Acquisition/Disposition Agreement described in note (3),
Apple Realty Group, Inc. also will be entitled to a fee from the Company in
connection with the Company's sale of each property equal to 2% of the
gross sales price of the property if, and only if, the sales price exceeds
the sum of (1) the Company's cost basis in the property (consisting of the
original purchase price plus any and all capitalized costs and expenditures
connected with the property) plus (2) 10% of such cost basis. For purposes
of such calculation, the Company's cost basis will not be reduced by
depreciation. See "The Advisor and Affiliates -- Apple Realty Group, Inc."
(8) The Advisor and its Affiliates may provide other services or property to
the Company under certain conditions, and will be entitled to compensation
or payment therefor. The conditions, which are summarized under "Conflicts
of Interest -- Transactions with Affiliates and Related Parties," include
the requirement that each such transaction be approved by the affirmative
vote of a majority of the Independent Directors. Currently, there are no
arrangements or proposed arrangements between the Company, on the one hand,
and the Advisor or its Affiliates, on the other hand, for the provision of
such other services or property to the Company or the payment of
compensation or reimbursement therefor. If any such other arrangements
arise in the future, the terms of such arrangements, including the
compensation or reimbursement payable thereunder, will be subject to the
restrictions in the Company's Bylaws. Such compensation, reimbursement or
payment could take the form of cash or property, including Shares.
23
<PAGE>
CONFLICTS OF INTEREST
GENERAL
The Company may be subject to various conflicts of interest arising from its
relationship with the Advisor and its Affiliates and with certain Directors. The
Advisor and its Affiliates and the Directors are not restricted from engaging
for their own account in business activities of the type conducted by the
Company, and occasions may arise when the interests of the Company would be in
conflict with those of one or more of the Directors, the Advisor or their
Affiliates. The Advisor and the Directors are accountable to the Company and its
Shareholders as fiduciaries, and consequently must exercise good faith and
integrity in handling the Company's affairs.
The Advisor and its Affiliates will assist the Company in the acquisition,
organization, servicing, management and disposition of investments. At this
time, the Advisor will provide services exclusively to the Company, but the
Advisor may perform similar services for other parties, both affiliated and
unaffiliated, in the future.
The receipt of various fees from the Company by the Advisor and its
Affiliates may result in potential conflicts of interest for persons who
participate in decision making on behalf of both the Company and such other
entities. Thus, for example, because Apple Realty Group, Inc., an Affiliate of
the Advisor, will receive a 2% commission upon each purchase by the Company of a
property, and a commission of 2% upon each sale by the Company of a property if
certain conditions are met, its compensation will increase in proportion to the
number of properties purchased and sold by the Company and the properties'
purchase and sale prices. On the other hand, Apple Residential Management Group,
Inc., also an Affiliate of the Advisor, will receive a management fee equal to
5% of the monthly gross revenues of each property owned by the Company, plus an
expense reimbursement for accounting and financial reporting services rendered.
The management fee and expense reimbursement would cease to be payable if the
property being managed were sold. Since these entities receiving compensation
are Affiliates of the Advisor, which in turn will provide advice to the Company
concerning the acquisition, holding and disposition of properties, the Advisor
and its principals could have a conflict of interest in presenting investment
advice to the Company. The Advisor's Asset Management Fee is a percentage of
total Contributions (that is, total proceeds received from time to time by the
Company from the sales of its Shares). Accordingly, the Advisor has an incentive
to see that sales of Shares are closed as quickly as possible by the Company.
Affiliates of the Advisor who participate in decision making on behalf of the
Company will attempt to resolve or eliminate such conflicts of interest by
determining what is in the best interests of the Company and the Shareholders.
The Advisor and its Affiliates do not intend to take any action or make any
decision on behalf of the Company which is based, wholly or in part, upon a
consideration of the compensation payable to them as a consequence of such
action or decision. In addition, the presence on the Board of Directors of
Independent Directors is intended to ameliorate or eliminate the potential
impact of conflicts of interest for persons who participate in decision making
on behalf of both the Company and the Advisor or its Affiliates.
The Directors, the Advisor and its Affiliates will also be subject to the
various conflicts of interest described below. As described below, certain
policies and procedures will be implemented to eliminate or ameliorate the
effect of potential conflicts of interest. By way of illustration, the Bylaws
place certain limitations on the terms of contracts between the Company and the
Advisor or its Affiliates designed to ensure that such contracts are not less
favorable to the Company than would be available from an unaffiliated party.
However, certain potential conflicts of interest (such as the potential conflict
of interest experienced by an individual who has executive or management
responsibilities with respect to multiple entities) are not easily susceptible
to resolution. Prospective Shareholders are entitled to rely on the general
fiduciary duties of the Directors and the Advisor, as well as the specific
policies and procedures designed to eliminate or ameliorate potential conflicts
of interest described below. The Advisor and its Affiliates believe that general
legal principles dealing with fiduciary and similar duties of corporate officers
and directors, combined with specific contractual provisions in the agreements
between the Company, on the one hand, and the Advisor and its Affiliates, on the
other hand, will provide
24
<PAGE>
substantial protection for the interests of the Shareholders. Thus, the Advisor
and its Affiliates do not believe that the potential conflicts of interest
described herein will have a material adverse effect upon the Company's ability
to realize its investment objectives.
TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
At the time of Initial Closing, the Board of Directors will consist of five
members, three of whom are Independent Directors and two of whom are not
Independent Directors. At all times on and after Initial Closing, a majority of
the Board of Directors must be Independent Directors. The Directors who are not
Independent Directors are Affiliated with the Advisor. Under the Company's
Bylaws, any transaction (whether a sale or acquisition of assets, any borrowing
or lending, any agreement for the provision of property or services, or
otherwise) between the Company, on the one hand, and the Advisor or any
Affiliate of the Advisor, on the other hand (excluding only the entering into,
and the initial term under, the Advisory Agreement, the Property
Acquisition/Disposition Agreement, and the Property Management Agreement for
each property, each of which agreement is described in this Prospectus) is
permitted only if such transaction has been approved by the affirmative vote of
a majority in number of all of the Independent Directors. In addition, under the
Bylaws, any such transaction must meet certain conditions, including that the
transaction be in all respects fair and reasonable to the Shareholders of the
Company. If any such proposed transaction involves the purchase of property, the
purchase must be on terms not less favorable to the Company than those
prevailing for arm's-length transactions concerning comparable property, and at
a price to the Company no greater than the cost of the asset to the seller
unless a majority of the Independent Directors determines that substantial
justification for such excess exists. Examples of substantial justification
might include, without limitation, an extended holding period or capital
improvements by the seller which would support a higher purchase price.
The Advisor and its Affiliates will receive compensation from the Company for
providing many different services. The fees payable and expenses reimbursable
are subject to the general limitation on Operating Expenses. See "Compensation."
The Board of Directors will have oversight responsibility with respect to any
such relationships and will attempt to ensure that they are structured to be no
less favorable to the Company than the Company's relationships with unrelated
persons or entities and are consistent with the Company's objectives and
policies.
COMPETITION BY THE COMPANY WITH AFFILIATES
Affiliates of the Advisor may form additional REITs, limited partnerships and
other entities to engage in activities similar to those of the Company, although
the Advisor and its Affiliates have no present intention of organizing any
additional REITs. However, until such time as more than 95% of the proceeds of
this offering are invested, the Advisor and its Affiliates shall present to the
Company any suitable investment opportunity before offering it to any other
Affiliated entity. The competing activities of the Advisor and its Affiliates
may involve certain conflicts of interest. For example, Affiliates of the
Advisor are interested in the continuing success of previously formed ventures
because they have fiduciary responsibilities to investors in those ventures,
they may be personally liable on certain obligations of those ventures and they
have equity and incentive interests in those ventures. Conflicts of interest
would also exist if properties acquired by the Company compete with properties
owned or managed by Affiliates of the Advisor. Conflicts of interest may also
arise in the future if the Company and other ventures developed by Affiliates of
the Advisor seek to sell, finance or refinance properties at the same time.
COMPETITION FOR MANAGEMENT SERVICES
Certain officers and directors of the Advisor are also officers or directors
of one or more entities Affiliated with the Advisor which engage in the
brokerage, sale, operation, or management of real estate. Affiliates of the
Advisor presently are acting as general partners in a number of limited
partnerships engaged in real estate investments. Accordingly, certain Directors
and the officers and directors of
25
<PAGE>
the Advisor may have conflicts of interest in allocating management time and
services between the Company and other entities. Also, employees of Cornerstone
Realty Income Trust, Inc., some of whom may assist officers of the Advisor and
Apple Residential Management Group, Inc., may have conflicts in allocating their
time.
LACK OF SEPARATE REPRESENTATION
The Company may retain the same independent accountants as are retained by
the Advisor and Affiliates of the Advisor. The law firm of McGuire, Woods,
Battle & Boothe, L.L.P., which is passing on the legality of the Shares for the
Company and is advising it as to the Company's status as a REIT for federal
income tax purposes, may act as counsel to the Company in other matters.
McGuire, Woods, Battle & Boothe, L.L.P. also renders and may continue to render
legal services to the Advisor and its Affiliates; however, such counsel would
recommend the engagement of independent counsel for the Company, the Advisor or
such Affiliates in circumstances in which the applicable canons of ethics would
so require.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The Company intends to invest in existing residential apartment communities
in Texas and the southwestern region of the United States. Pending such
investment, the proceeds of this offering may be invested in U.S. Government
securities, certificates of deposit from banks located in the United States
having a net worth of at least $50,000,000, bank repurchase agreements covering
the securities of the U.S. Government or U.S. governmental agencies issued by
banks located in the U.S. having a net worth of at least $50,000,000, bankers'
acceptances, prime commercial paper or similar highly liquid investments (such
as money market funds selected by the Company) or evidences of indebtedness. In
addition, to the extent the proceeds are not invested in real estate as
described herein, the Company has the ability to invest in such securities. All
proceeds of this offering received by the Company must be invested or committed
for investment in properties or allocated to working capital reserves or used
for other proper Company purposes within the later of two years after
commencement of the offering or one year after termination of the offering; any
proceeds not invested or committed for investment or allocated to working
capital reserves or used for other proper Company purposes by the end of such
time period shall be returned to investors, within 30 days after the expiration
of such period, but the Company may elect to return such proceeds earlier if,
and to the extent, required by applicable law (including to the extent necessary
to avoid characterization as an "investment company").
The principal investment objectives of the Company are:
(i) to preserve and protect the capital of the Company;
(ii) to provide quarterly distributions to Shareholders, a portion of which
may constitute a nontaxable return of capital (rather than current taxable
income); and
(iii) to provide long-term capital appreciation in the value of the
Company's investments.
The Company anticipates that achievement of such objectives will enable it to
provide the Shareholders with appreciation in the value of their Shares. There
can be no assurance that the Company will achieve such objectives. Attainment of
the objectives is contingent in part upon the Company's ability to acquire
suitable properties. To the extent such objectives cannot simultaneously be
pursued or achieved, the Company plans to pursue the objective of regular
quarterly distributions to Shareholders in preference to the objective of
long-term capital appreciation in the value of Company investments and in the
value of Shares.
The Company's primary business objectives are to increase distributions per
Share and the value of its properties by:
(i) increasing occupancy rates and rental income at properties;
(ii) implementing expense controls; and
26
<PAGE>
(iii) emphasizing regular maintenance and periodic renovations, including
additions to amenities.
The Company may make acquisitions of established apartment communities
involved in foreclosure proceedings when the Advisor and the Company believe the
property may have below market-rate leases, correctable vacancy problems or
other cash flow growth potential. In suitable situations, the Company also may
make acquisitions of properties from over-leveraged owners of such properties
and from governmental regulatory authorities and lending institutions which have
taken control of such properties, as well as mortgagees-in-possession and,
possibly, through bankruptcy reorganization proceedings.
In connection with the acquisition of Properties, the Company sets aside an
amount determined by it to be necessary to fund repairs and improvements which
the Company believes should be made at the Property, to make it competitive in
its market and, where appropriate, to permit rental increases.
The Company will seek to assure that its Properties remain attractive
residences for their tenants and are desirable locations for prospective
tenants. The maintenance, custodial and groundskeeping staff of Apple
Residential Management Group, Inc. performs regular maintenance and upkeep on
the properties to preserve and enhance their practical and aesthetic attributes.
The physical appearance of, and tenant satisfaction with, each Property are
evaluated on a regular basis by the Company's executive officers.
The Company's management places strong emphasis on the marketing and
promotion of its Properties. Marketing plans focus on each Property's specific
needs for maximizing occupancy. Marketing programs include television, radio and
newspaper advertising, all designed to attract tenants in each market.
The Board of Directors may, in its sole discretion, issue Shares, or other
equity or debt securities of the Company, to sellers of properties, as part or
all of the purchase price of the property. Shares or such other equity or debt
securities of the Company may also be issued, at the election of the Board of
Directors, to the Advisor or its Affiliates in lieu of cash payments required
under the Advisory Agreement or other contract or obligation. See "Summary of
Organizational Documents -- Issuance of Securities."
The Company will not issue any equity securities senior to the Shares unless
the holders of a majority of the outstanding Shares authorize such issuance by
an appropriate amendment to the Company's Articles of Incorporation.
The Company has no present intention of making any loans to other persons or
investing in the securities of other issuers for the purpose of exercising
control of such issuers. As described below, under "Types of Investments," the
Company is subject to certain limitations on its ability to make mortgage loans
or invest its assets in the securities of other issuers. Such limitations can
only be changed with the consent of the holders of a majority of the outstanding
Shares. Within such limitations, however, the Board of Directors, acting without
Shareholder approval, may set and change the Company's policy regarding the
making of loans and the investment in securities of other issuers.
Except with respect to the permitted temporary investment of proceeds from
the sales of Shares pending investments in properties (see "General" above), the
Company has no present intention of investing in the securities of or interests
in other persons, or engaging in the purchase and sale (or turnover) of
investments other than its real property investments. The Company may engage in
certain joint venture investments (see "Joint Venture Investments" below) and
may invest up to 20% of its total assets in the equity securities of other
issuers, although the Company has no present intention to engage in any such
activities. The Company has no plans to invest in the securities of other
issuers for the purpose of exercising control.
Although the Company has no present intention to do so, the Board of
Directors might cause the Company to invest a portion of its assets (subject to
the limitations set forth in the By-Laws, as described below under "Types of
Investments") in common stock or other equity securities of other REITs or
limited partnerships holding real estate. Such an investment, if undertaken,
would be based on a determination by the Board of Directors that investment in
such common stock or equity securities furthered the overall investment
objectives and policies of the Company in a way not furthered by the Company's
direct investment in real property. For example, although not presently
anticipated, the Company could decide to further its diversification objective
by acquiring an equity interest in a REIT owning properties in other regions of
the United States, rather than seeking to invest directly in real
27
<PAGE>
properties located in such other region. Any such decision would be based upon
the perceived best interests of the Company and the Shareholders at the time.
Furthermore, any such investment would be based upon a determination by the
Board of Directors, based upon advice of counsel to the Company, that such
investment would not adversely impact the Company's continued qualification as a
REIT for Federal income tax purposes. If the Company undertook any such
investment, such investment could be made in listed or publicly-traded equity
securities or, alternatively, in securities of a private issuer.
If undertaken at all, the Company would expect to invest only in a Company
engaged principally in the ownership and operation of multi-family apartment
communities. Subject to that limitation, the Company would not necessarily limit
itself to investments in other companies of any specific size or with any
specific period of prior operations.
INVESTMENT CRITERIA
The Advisor is charged with identifying and recommending to the Company
suitable investments. The Advisor will make such recommendations based upon such
relevant factors as (i) the potential for realizing capital appreciation; (ii)
current and projected cash flow and the ability to increase rental income
through capable management; (iii) neighborhood location, condition and design of
the property; (iv) historical and projected occupancy rates; (v) prospects for
liquidity through sale, financing or refinancing; (vi) economic conditions in
the community; (vii) geographic location and type of property in light of the
Company's diversification objectives; and (viii) the purchase price of the
property as it relates to prices of comparable properties in comparable
locations.
The Company's management believes there is substantial opportunity for growth
from acquisitions of multi-family properties in Texas and the southwestern
region of the United States. Management believes that the current real estate
environment is conducive to advantageous acquisitions of existing multi-family
properties that meet the Company's investment criteria. In many instances, such
acquisitions may be made for less than the cost of new construction.
Generally, the Advisor is not required to, and will not, advise the Company
on investments in securities, i.e., the temporary investment of offering
proceeds pending investment of such proceeds in real property, as described in
"Investment Objectives and Policies -- General." It is expected that the Company
will make its own decisions with respect to such temporary securities
investments.
Apple Realty Group, Inc., an Affiliate of the Advisor, will receive a 2% real
estate commission upon each purchase by the Company of a property. See "The
Advisor and Affiliates -- Apple Realty Group, Inc."
Any property acquisition made with proceeds representing the Minimum Offering
amount ($15 million) will require the approval of the Executive Committee of the
Board of Directors. Otherwise the acquisition of any property with a contract
purchase price not greater than $15,000,000 may be undertaken by the President
acting alone (unless it is an acquisition from an Affiliate of the Advisor). Any
property acquisition with a contract purchase price exceeding $15,000,000 will
require the consent of the Executive Committee of the Board of Directors. Any
acquisition from an Affiliate of the Advisor will require the consent of a
majority of all Independent Directors and of the entire Board.
TYPES OF INVESTMENTS
The Company intends to invest in existing residential apartment communities
in Texas and the southwestern region of the United States. The Company does not
intend to invest in undeveloped land except in connection with the acquisition
of an existing apartment community. The Company does not intend to make or
invest in any mortgage loans (except that the Company may hold purchase money
obligations secured by mortgages on properties sold by it). Except in connection
with permitted joint venture investments (see "Joint Venture Investments,"
below) and except with respect to permitted temporary investments (see "General"
above), the Company will not invest more than 20 percent of its total assets in
equity securities of or interests in other issuers for a period in excess of 18
months. Within certain limitations, the Board of Directors can change the
investment objectives and policies of the Company. See "Changes in Objectives
and Policies," below.
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In addition, the Company's Bylaws prohibit it from engaging in certain
investment and other activities, including: (i) investing more than 10 percent
of the total assets of the Company in unimproved real property or mortgage loans
on unimproved real property; (ii) investing in commodities or commodity future
contracts or effecting short sales of commodities or securities, except when
done solely for hedging purposes; (iii) investing in or making mortgage loans on
property unless the Company obtains a mortgagee's or owner's title insurance
policy or commitment as to the priority of the mortgage or the condition of the
title; (iv) investing in contracts for the sale of real estate unless they are
recordable in the chain of title; (v) making or investing in mortgage loans,
including construction loans, on any property if the aggregate amount of all
mortgage loans outstanding on the property (at the time the Company makes or
invests in its mortgage loan), including the loans of the Company, would exceed
85 percent of the appraised value of the property; (vi) investing in junior
mortgage loans (provided that this and the foregoing limitations shall not apply
to the Company taking back secured debt in connection with the sale of any
property); (vii) issuing securities that are redeemable; (viii) issuing debt
securities unless the historical debt service coverage (in the most recently
completed fiscal year) as adjusted for known changes is sufficient properly to
service the higher level of debt or unless the cash flow of the Company (for the
last fiscal year) excluding extraordinary, nonrecurring items, is sufficient to
cover the debt service on all debt securities to be outstanding; (ix) investing
more than 20% of its total assets in the equity securities of any
non-governmental issuers, including other REITs or limited partnerships, for a
period in excess of 18 months; (x) issuing equity securities on a deferred
payment basis or other similar arrangement; (xi) incurring any indebtedness,
secured or unsecured, if such indebtedness would result in an aggregate amount
of indebtedness in excess of 100 percent of Net Assets, before subtracting
liabilities (unless the excess borrowing is approved by a majority of the
Independent Directors and disclosed to the Shareholders as required by the
Bylaws); (xii) allowing aggregate borrowings of the Company to exceed 50 percent
of the Adjusted Net Asset Value (before subtracting any liabilities) of the
Company unless the excess borrowing is similarly approved by the Independent
Directors and disclosed to the Shareholders; (xiii) engaging in any short sale
of or underwriting or distributing, as an agent, securities issued by others, or
engaging in trading, as compared with investment activities; and (xiv) acquiring
securities in any company engaging in activities or holding investments
prohibited by the above prohibitions, the Code or Virginia law.
DIVERSIFICATION
One of the Company's investment objectives is to own properties in various
geographic locations within Texas and the southwestern United States, thereby
minimizing the effects of changes in specific industries, local economic
conditions or similar risks. The extent of geographic diversification depends
upon the number of separate properties which can be purchased. There can be no
assurance that the Company will achieve significant diversification. There is no
limit on the amount or percentage of net proceeds from the sale of Shares which
may be invested in any single property.
JOINT VENTURE INVESTMENTS
Some of the Company's investments may be made through partnerships or joint
ventures. The Company's partner or joint venturer could be an Affiliate of the
Advisor. While each such partnership or joint venture agreement may vary in
form, depending on negotiations, in no case will the co-venturer have any legal
right to take action which would prevent the Company from carrying on its
business as described in this Prospectus. Any joint venture investment of the
Company would be subject to the same conditions, limitations and restrictions
applicable to a Company investment not undertaken as a joint venture, and the
use of a joint venture structure would not itself be designed to alter or expand
the investment objectives and policies of the Company. Investment through a
joint venture could, for example, permit the Company to invest in a property
which is too large for the Company to acquire by itself.
The Company anticipates that any joint venture investment it might undertake
would involve only the ownership and operation of apartment communities of the
same general type sought to be acquired directly by the Company. The Company
could, for example, use a joint venture investment to acquire one or more
apartment communities located outside of the regions in which the Company
normally operates with a view toward minimizing risks otherwise associated
entering new markets. Although the
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Board of Directors would seek to contract only with a joint venture partner
which is competent and financially secure, the Company has not set any other
specific criteria which it would follow in connection with the identification of
joint venturers.
Joint venture arrangements may under certain circumstances involve risks not
otherwise present in investments directly in properties themselves, including,
for example, the risk of impasse and risks associated with the possibility that
the co-venturer may at any time experience adverse business developments or have
economic or business interests or goals which are inconsistent with the economic
or business interests or goals of the Company.
There is no limitation on the percentage of the proceeds of the offering that
can be invested in joint ventures.
BORROWING POLICIES
To maximize potential cash flow and minimize risk to the Company, the Company
intends to purchase its properties either on an "all-cash" or unleveraged basis,
or using the limited interim borrowing described under "Business and
Properties-Properties Owned by the Company." The Company will endeavor to repay
any interim borrowings with proceeds from the sale of Shares and thereafter to
hold its properties on an unleveraged basis. However, for the purpose of
flexibility in operations, the Company will have the right, subject to the
approval of the Board of Directors, to borrow.
One purpose of borrowing could be to permit the Company's acquisition of
additional properties through the "leveraging" of Shareholders' equity
contributions. Alternatively, the Company might find it necessary to borrow to
permit the payment of operating deficits at properties already owned.
Furthermore, although not anticipated, properties may be financed or refinanced
if the Board of Directors deems it in the best interests of Shareholders
because, for example, indebtedness can be incurred on favorable terms and the
incurring of indebtedness is expected to improve the Shareholders' after-tax
cash return on invested capital. See "Sale and Refinancing Policies" below. See
"Risk Factors -- Real Property Investment Risks -- Possible Borrowing; Debt
Financing May Reduce Cash Flow and Increase Risk of Default."
Loans obtained by the Company may be evidenced by promissory notes secured by
mortgages on the Company's properties. In addition, the Company may grant other
forms of security to a lender, including a conditional assignment of leases and
rents of the Company's properties. As a general policy, the Company would seek
to obtain mortgages securing indebtedness which encumber only the particular
property to which the indebtedness relates, but recourse on such loans may
include all of the Company's assets. If recourse on any loan incurred by the
Company to acquire or refinance any particular property includes all of the
Company's assets, the equity of the Company in its other properties could be
reduced or eliminated through foreclosure on that loan.
Subject to the approval of the Board of Directors, the Company may borrow
from the Advisor or its Affiliates or establish a line of credit with a bank or
other lender. The Advisor and its Affiliates are under no obligation to make any
such loans, however. Any loans made by the Advisor or its Affiliates must be
approved by a majority of the Independent Directors as being fair, competitive
and commercially reasonable and no less favorable to the Company than loans
between unaffiliated lenders and borrowers under the same circumstances.
The Company's Bylaws prohibit the Company from incurring debt (secured or
unsecured) if such debt would result in aggregate debt exceeding 100% of "Net
Assets" (defined generally to mean assets at cost), before subtracting
liabilities, unless the excess borrowing is approved by a majority of the
Independent Directors and disclosed to the Shareholders as required by the
Bylaws. The Bylaws also prohibit the Company from allowing aggregate borrowings
to exceed 50% of the Company's "Adjusted Net Asset Value" (defined generally to
mean assets at fair market value), before subtracting liabilities, subject to
the same exception. In addition, the Bylaws provide that the aggregate
borrowings of the Company must be reasonable in relation to the Net Assets of
the Company and must be reviewed quarterly by the Directors. Subject to the
foregoing limitations on the permitted maximum amount of debt, there is no
limitation on the number of mortgages or deeds of trust which may be placed
against any particular property.
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MANAGEMENT OF PROPERTIES
Day-to-day property management services for the Company's residential
properties will be provided by Apple Residential Management Group, Inc., an
Affiliate of the Advisor, subject to review by the Board of Directors. For such
services, Apple Residential Management Group, Inc. will receive a monthly
Property Management Fee equal to 5% of the monthly gross revenues of the
properties. The Company intends that Apple Residential Management Group, Inc.
will also be responsible for the accounting and financial reporting
responsibilities for each of the properties the Company acquires. Apple
Residential Management Group, Inc. will be reimbursed for expenses, including
salaries and related overhead expenses, associated with such accounting and
financial reporting responsibilities. The Company believes that the monthly 5%
property management fee it pays to Apple Residential Management Group, Inc. is
commercially reasonable. However, such fee may represent an expense which is
greater than the management expenses of self-administered REITs, which do not
use an outside property management company.
The Company will enter into a property management agreement (the "Property
Management Agreement") with Apple Residential Management Group, Inc. with
respect to each of the Company's residential properties at the time the Company
acquires each such property. The agreement will have an initial term of two
years and thereafter will be renewed automatically for successive two-year terms
until terminated as provided therein or until the property is sold. A copy of
the form of that agreement has been filed as an exhibit to the registration
statement of which this Prospectus is a part; reference is made to the agreement
itself for a complete statement of its provisions. See "Conflicts of Interest"
and "Compensation."
Depending on the location of the Company's real property investments,
unaffiliated, independent property management companies may also render
day-to-day property management services pursuant to contracts with the Company.
Such contracts with the Company may provide for unaffiliated property managers
to receive either fixed or performance-based incentive fees for property
management services, subject to the condition that compensation to such property
managers must be fair, competitive and commercially reasonable. It is intended
that the management capabilities of the property managers will maximize rental
revenues of specific properties through renewing leases at higher market rates;
renovating and retenanting under-performing properties; and constructing
additional rental space on the sites of existing properties, where appropriate.
Apple Residential Management Group, Inc. currently manages no apartment
complexes.
RESERVES
A portion of the proceeds of this offering will be reserved to meet working
capital needs and contingencies associated with the Company's operations. The
Company will initially allocate to its working capital reserve not less than
0.5% of the proceeds of the offering. As long as the Company owns any
properties, the Company will retain as working capital reserves an amount equal
to at least 0.5% of the proceeds of the offering, subject to review and
re-evaluation by the Board of Directors. If such reserves and any other
available income of the Company become insufficient to cover the Company's
operating expenses and liabilities, it may be necessary to obtain additional
funds by borrowing, refinancing properties or liquidating the Company's
investment in one or more properties.
SALE AND REFINANCING POLICIES
The Company is under no obligation to sell its investment properties, and
currently anticipates that it will hold its investment properties for an
indefinite length of time. However, sale may occur at any time if the Advisor
deems it advisable for the Company based upon current economic considerations,
and the Board of Directors concurs with such decision. In deciding whether to
sell a property, the Advisor will also take into consideration such factors as
the amount of appreciation in value, if any, to be realized, federal, state and
local tax consequences, the possible risks of continued ownership and the
anticipated advantages to be gained for the Shareholders from sale of a property
versus continuing to hold such property.
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Currently, the Company expects that within approximately three (3) years from
Initial Closing, it will use its best efforts either (i) to cause the Shares to
be listed on a national securities exchange or quoted on the NASDAQ National
Market System or (ii) to cause the Company to dispose of substantially all of
its properties in a manner which will permit distributions to Shareholders of
cash or marketable securities. The taking of either type of action would be
conditioned on the Board of Directors determining such action to be prudent and
in the best interests of the Shareholders, and would be intended to provide
Shareholders with liquidity either by initiating the development of a market for
the Shares or by disposing of properties and distributing to Shareholders cash
or other securities then being actively traded. However, the Company is under no
obligation to take any of the foregoing actions, and any such action, if taken,
might be taken after the referenced three-year period.
At such time as the Company, acting through its Board of Directors,
determines that sale of a property is in the best interests of the Company, the
Company must first offer such property for sale to Cornerstone Realty Income
Trust, Inc. Cornerstone Realty Income Trust, Inc. is a Virginia corporation
which is a public real estate investment trust. Cornerstone Realty Income Trust,
Inc. was founded by Glade M. Knight, who currently serves as the Chairman of the
Board, President and a Director of that entity. Mr. Knight also serves as
Chairman of the Board, President and a Director of the Company. See
"Management-Directors and Officers." Any such sale of a property by the Company
to Cornerstone Realty Income Trust, Inc. would require the consent of a majority
of both the entire Board of Directors of the Company and a majority of the
Independent Directors of the Company.
The Company has also agreed with Cornerstone Realty Income Trust, Inc. that
if the Company proposes the sale or disposition of the Company or substantially
all of its assets, business or stock (whether such transaction is structured as
a sale, exchange, merger, consolidation, lease, share exchange or otherwise)
(any such transaction, a "Sale of the Company"), it will first offer Cornerstone
Realty Income Trust, Inc. the right to become the acquiring party in any such
proposed transaction before concluding the proposed Sale of the Company to a
third party. As in the case of a sale of an individual property by the Company
to Cornerstone Realty Income Trust, Inc., any such Sale of the Company to
Cornerstone Realty Income Trust, Inc. would require the consent of a majority of
both the entire Board of Directors of the Company and a majority of the
Independent Directors of the Company. Depending upon the form of any such
transaction, it might also require the consent of Shareholders owning a majority
of the outstanding Shares.
If the third party offers cash for the property, assets, stock or business of
the Company, Cornerstone Realty Income Trust, Inc. must offer cash if it wishes
to exercise its right of first refusal. If the third party offers property other
than cash, Cornerstone Realty Income Trust, Inc. will be permitted to offer
property of a like character with the same value. The value of the property
offered by the third party and Cornerstone Realty Income Trust, Inc. will be the
market value if the property has a readily ascertainable market value (such as
listed stock), and otherwise will be determined in good faith by agreement of
the boards of directors of the Company and Cornerstone Realty Income Trust,
Inc., or if such boards are unable to agree, by the average of two appraisals
undertaken by two qualified independent appraisers, one selected by each board
of directors.
If the Company defaults in its obligation to grant to Cornerstone Realty
Income Trust, Inc. a first right to acquire a property or to become the
acquiring party in a proposed Sale of the Company, the Company will be obligated
to pay Cornerstone Realty Income Trust, Inc. as liquidated and agreed-upon
damages cash in the amount of 3% of the aggregate consideration agreed to be
paid for the property, assets, stock or business by any third party in the
transaction with respect to which there is a breach. The presence of this
liquidated damages provision is intended, in part, to cause the Company to
comply with its agreements with Cornerstone Realty Income Trust, Inc. rather
than breach such agreements in an effort to conclude a transaction with a third
party at a higher price. However, the presence of the right of first refusal
held by Cornerstone Realty Income Trust, Inc. with respect to the various sale
or disposition transactions which may be sought or proposed by the Company may
materially hamper the Company's ability to obtain the highest possible price for
its properties, assets, stock or business from a third party. A third party may
be reluctant to engage in negotiations and due diligence with respect to a
possible purchase or acquisition transaction knowing that Cornerstone Realty
Income Trust, Inc. can
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substitute itself as purchaser or acquiror at the same purchase or acquisition
price simply by exercising its right of first refusal. Thus, the presence of the
right of first refusal may make it difficult for the Company to sell its assets
to anyone other than Cornerstone Realty Income Trust, Inc. The absence of
competing prospective purchasers could tend to decrease the price the Company is
able to obtain for its assets. Although the requirement for the approval of a
majority of the Independent Directors of the Company is intended to overcome any
potential conflict of interest which might be involved in any such sale to
Cornerstone Realty Income Trust, Inc., there can be no assurance that a sale by
the Company to Cornerstone Realty Income Trust, Inc. would be on terms as
favorable as a sale by the Company to a third party, since there may be no
alternative to selling assets to Cornerstone Realty Income Trust, Inc.
Unless required to maintain REIT status, the Company does not intend to
borrow or refinance to make distributions. Although not anticipated, in some
cases it might be advantageous for the Company to incur mortgage indebtedness
on, or finance or refinance, a property to further the Company's investment
objectives. If the original mortgage indebtedness, if any, on a property has
been significantly reduced and/or if a particular property has increased
substantially in value, then financing (or refinancing of existing
indebtedness), if achievable, may permit the Company to realize a portion of the
appreciation in value of the property and retain the property. See "Risk Factors
- -- Real Property Investment Risks -- Possible Borrowing; Debt Financing May
Reduce Cash Flow and Increase Risk of Default."
Under its Property Acquisition/Disposition Agreement with the Company, Apple
Realty Group, Inc., an Affiliate of the Advisor, may receive a 2% real estate
commission upon each sale by the Company of a property. Apple Realty Group, Inc.
will not be entitled to any disposition fee in connection with a sale of a
property by the Company to Cornerstone Realty Income Trust, Inc. or any
Affiliate of Apple Realty Group, Inc., but will be reimbursed for its costs in
marketing such property. See "Investment Objectives and Policies -- Sale and
Refinancing Policies" for a discussion of the possibility that properties will
be sold by the Company to Cornerstone Realty Income Trust, Inc.
It is also possible that Apple Realty Group, Inc., or an Affiliate, will
render services, and receive compensation, in connection with Company financings
and refinancings, although there are no specific agreements for such services as
of the date of this Prospectus. See "The Advisor and Affiliates -- Apple Realty
Group, Inc."
CHANGES IN OBJECTIVES AND POLICIES
Subject to the limitations in the Articles of Incorporation, the Bylaws and
the Virginia Stock Corporation Act, the powers of the Company will be exercised
by or under the authority of, and the business and affairs of the Company will
be controlled by, the Board of Directors. The Board of Directors also has the
right and power to establish policies concerning investments and the right,
power and obligation to monitor the procedures, investment operations and
performance of the Company.
In general, the Articles of Incorporation and the Bylaws can be amended only
with the affirmative vote of a majority of the outstanding Common Shares, except
that the Bylaws may be amended by the Directors if necessary to comply with the
REIT provisions of the Code or with other applicable laws and regulations. The
Bylaws contain certain restrictions on the activities of the Company and
prohibit the Company from engaging in certain activities. See "Types of
Investments."
Within the express restrictions and prohibitions of the Bylaws, the Articles
of Incorporation and applicable law, however, the Board of Directors has
significant discretion to modify the investment objectives and policies of the
Company, as stated in this Prospectus. The Company has no present intention to
modify any of such investment objectives and policies, and it is anticipated
that any such modification would occur only if business and economic factors
affecting the Company made the Company's stated investment objectives and
policies unworkable or imprudent. By way of illustration only, owing to a
significant change in economic conditions, the Board of Directors could elect to
acquire apartment communities outside of Texas and the southwestern region of
the United States, or to acquire one or more commercial properties in addition
to residential properties.
Thus, while this Prospectus accurately and fully discloses the current
investment objectives and policies of the Company, prospective Shareholders must
be aware that the Board of Directors, acting consistently
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with the Company's organizational documents, applicable law and their fiduciary
obligations, may elect to modify or expand such objectives and policies from
time to time. Any such action by the Board of Directors would be based upon the
perceived best interests of the Company and the Shareholders.
DISTRIBUTION POLICY
The Company intends to make regular quarterly distributions to its
Shareholders. Federal income tax law requires that a REIT distribute annually at
least ninety-five percent (95%) of its REIT taxable income (which does not
include net capital gains). Under certain circumstances, the Company may be
required to make distributions in excess of cash available for distribution to
meet such distribution requirements. See "Federal Income Tax Consequences --
Requirements for Qualification as a REIT -- Annual Distribution Requirements"
and "Risk Factors -- Possible Borrowing; Debt Financing May Reduce Cash Flow and
Increase Risk of Default."
The timing and amounts of distributions to Shareholders are within the
discretion of the Board of Directors, although the Company will use its best
efforts to meet the distribution requirements established by the Code for REITs.
The Company's actual results of operations, and therefore the amount of cash
available for distribution to Shareholders, will be affected by a number of
factors, including the revenues received from the Company's properties, the
operating expenses of the Company, and the Company's interest expense, if any.
The distribution policy of the Board of Directors from time to time will depend
on a number of factors, including the amount of cash available for distribution,
the Company's financial condition, any decision by the Board of Directors to
reinvest funds rather than to distribute them, the Company's capital and reserve
requirements, and such other factors as the Board of Directors deems relevant.
The Company expects to include within the acquisition budget for each
property it proposes to acquire amounts deemed necessary for repairs and
improvements required at the property. Such amounts are anticipated to be funded
with proceeds from the sale of Shares. Thus, the Company anticipates that all
net cash generated from operations of the properties will continue to be
available for distribution.
The Company does not intend to borrow in connection with the acquisition of
properties, or to incur debt in connection with the financing or refinancing of
properties. Therefore, the Company does not believe that its distributions will
be affected by financing activities. However, if the Company elects to incur
financing in conjunction with the acquisition of its properties, such financing
could have an adverse effect on the Company's ability to maintain its level of
distribution. See "Risk Factors -- Possible Borrowing; Debt Financing May Reduce
Cash Flow and Increase Risk of Default." The Company currently does not have any
debt financing nor does it have any current plans to incur debt.
The Company anticipates that cash available for distributions before capital
expenditures will exceed earnings and profits due to non-cash expenses,
primarily depreciation and amortization, to be incurred by the Company.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes will be taxable to
shareholders as ordinary dividend income. Distributions in excess of such
earnings and profits generally will be treated as a return of capital, resulting
in a non-taxable reduction of the Shareholder's basis in his Shares to the
extent thereof, and thereafter as taxable gain. Distributions that are treated
as non-taxable reduction in basis will have the effect of deferring taxation
until the sale of such Shareholder's Shares.
BUSINESS AND PROPERTIES
The Company was incorporated on August 7, 1996. Its principal executive
offices are located at 306 East Main Street, Richmond, Virginia 23219 and its
telephone number is (804) 643-1761. The Company does not have any employees.
Instead, services with respect to property acquisition, property management and
company administration will be provided by the Advisor and certain of its
Affiliates. See "The Advisor and Affiliates."
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BUSINESS
The Company has been established to provide both taxable and tax-exempt
investors with a professionally managed portfolio of real estate equity
interests consisting primarily of existing residential apartment communities
that have the potential for current cash flow and capital appreciation. The
Company may hold its investment properties for an indefinite length of time. The
Company does not plan to cause the Shares to be listed on any securities
exchange or quoted on any system or in any established market either immediately
or at any definite time in the future. While the Company, acting through its
Board of Directors, may cause the Shares to be so listed or quoted if the Board
of Directors determines such action to be prudent, there can be no assurance
that such event will ever occur. Prospective Shareholders should view the Shares
as illiquid and must be prepared to hold their investment for an indefinite
length of time.
Currently, the Company expects that within approximately three (3) years from
Initial Closing, it will use its best efforts either (i) to cause the Shares to
be listed on a national securities exchange or quoted on the NASDAQ National
Market System or (ii) to cause the Company to dispose of substantially all of
its properties in a manner which will permit distributions to Shareholders of
cash or marketable securities. The taking of either type of action would be
conditioned on the Board of Directors determining such action to be prudent and
in the best interests of the Shareholders, and would be intended to provide
Shareholders with liquidity either by initiating the development of a market for
the Shares or by disposing of properties and distributing to Shareholders cash
or other securities then being actively traded. However, the Company is under no
obligation to take any of the foregoing actions, and any such action, if taken,
might be taken after the referenced three-year period.
Many factors will bear on whether any such actions are prudent and feasible.
The feasibility of causing the Shares to be listed or quoted will depend upon
many factors, many of which are not presently determinable or are not within the
control of the Company. Such factors would include general economic and market
conditions, the Company's satisfaction of the legal listing or quotation
requirements in effect at such time, the economic performance of the Company
during the interim period, and the Company's financial condition at the time
listing or quotation is considered. In addition, the size of the Company (in
terms of its total assets and the diversification of its property portfolio),
which will reflect the number of Shares sold in this offering, will bear upon
the feasibility of listing or quoting the Shares for trading. In general, a
smaller Company size may make it less feasible to cause the listing or quotation
of the Shares.
The feasibility of disposing of the Company's properties will also depend on
many factors, many of which are not presently determinable or are not within
control of the Company. General economic and market conditions will affect the
demand, if any, for the Company's properties and the prices which might be
offered for them. Adverse developments affecting a market or a Company property
after the Company's acquisition of a property may materially affect its market
value. Even if some properties are attractive to prospective purchasers, the
Company may determine that it is imprudent to dispose of only a portion of its
portfolio. Conversely, the larger the Company is, the less likely its is that it
will be able to dispose of substantially all of its properties within a
relatively short period of time. If the Company receives marketable securities
or other property, rather than cash, for the sale of its properties, it and any
subsequent holders of such property will bear the risk of decrease in the value
of such property.
As described under "Investment Objectives and Policies -- Sale and
Refinancing Policies," the Company has granted to Cornerstone Realty Income
Trust, Inc. a right of first refusal to acquire assets proposed for sale by the
Company. As described therein, the presence of such right of first refusal may
hamper the ability of the Company to sell its properties to any party other than
Cornerstone Realty Income Trust, Inc. and may tend to decrease the price the
Company is able to obtain for its properties.
The Advisor continually reviews possible investment opportunities on behalf
of the Company. When at any time during the offering period the Company believes
that there is a reasonable probability that any specific property will be
acquired by the Company, this Prospectus will be supplemented to provide a
description of the property and the anticipated terms of its purchase, financing
and management. Such supplement will be filed pursuant to Rule 424(c) under the
Securities Act and all supplements will be
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consolidated into a post-effective amendment filed at least once every three
months, with the information contained in such amendment provided simultaneously
to the existing Shareholders. If any such expected investment relates to a
property that has an operating history, the Company will include in the
post-effective amendment the audited financial statements required by Rule 3-14
of Regulation S-X of the Securities and Exchange Commission, and, as required,
the Company will also provide the pro forma financial information required by
Rule 11-01(a)(5) of Regulation S-X.
The Company has elected to be taxed as a REIT under the Code and intends to
qualify as such on a continuing basis. However, no assurance can be given that
it will so qualify. For years in which the Company qualifies as a REIT, it will
not be subject to federal income tax on that portion of its taxable income that
is distributed annually to Shareholders. See "Risk Factors -- Federal Income Tax
Risks -- Failure to Achieve or Maintain REIT Status" and "Federal Income Tax
Consequences."
LEGAL PROCEEDINGS
The Company is not presently subject to any material litigation nor, to the
Company's knowledge, is any material litigation threatened against the Company,
other than routine litigation arising in the ordinary course of business and
which is expected to be covered by liability insurance.
REGULATION
General. Apartment community properties are subject to various laws,
ordinances and regulations, including regulations relating to recreational
facilities such as swimming pools, activity centers and other common areas.
Americans with Disabilities Act. The properties and any newly-acquired or
developed multi-family properties must comply with Title III of the Americans
with Disabilities Act ("ADA") to the extent that such properties are "public
accommodations" or "commercial facilities" as defined by the ADA. Compliance
with the ADA requirements could require removal of structural barriers to
handicapped access in certain public areas of the properties where such removal
is readily achievable. The ADA does not, however, consider residential
properties, such as multi-family properties, to be public accommodations or
commercial facilities, except to the extent portions of such facilities, such as
a leasing office, are open to the public. Although the Company intends to take
actions to ensure that its properties substantially comply with all requirements
under the ADA and applicable state laws, final regulations under the ADA have
not yet been promulgated. Noncompliance could result in imposition of fines or
an award of damages to private litigants. If required changes involve greater
expenditures than the Company currently anticipates, or if the changes must be
made on a more accelerated basis than it anticipates, the Company's ability to
make expected distributions could be adversely affected. The Company believes
that its competitors face similar costs to comply with the requirements of the
ADA.
Fair Housing Amendments Act of 1988. The Fair Housing Amendments Act of 1988
(the "FHA") requires multi-family properties first occupied after March 13, 1990
to be accessible to the handicapped. Noncompliance with the FHA could result in
the imposition of fines or an award of damages to private litigants. The Company
believes that it is in compliance with such law.
Rent Control Legislation. State and local rent control laws in certain
jurisdictions limit a property owner's ability to increase rents and to recover
from tenants increases in operating expenses and the costs of capital
improvements. Enactment of such laws has been considered from time to time in
other jurisdictions. The Company does not presently intend to develop or acquire
multi-family properties in markets that are either subject to rent control or in
which rent limiting legislation exists, although the Company is not precluded
from doing so.
PROPERTIES OWNED BY THE COMPANY
The Company owns no Properties as of the date of this Prospectus.
It is expected that the Company's Board of Directors will authorize the
Company's officers to cause the Company to borrow up to a specified principal
dollar amount (from time to time outstanding) on prevailing commercial terms
from suitable commercial lenders (and on either an unsecured or secured
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basis), to permit property acquisitions by the Company, as long as the offering
and sale of Shares is continuing and it is anticipated by the Company's officers
that proceeds from futures sales of Shares will be sufficient to repay the
amount of the borrowing. This borrowing authorization, if implemented, would be
in addition to any other borrowings authorized in the Company's Bylaws, and
should not be construed as limiting any of the Company's rights and powers
generally provided for in its Bylaws.
Such a line of credit would be designed to facilitate the timely acquisition
of properties by the Company and improve the regularity with which closings of
sales of Shares can be effected, without changing the Company's overall business
objective and policy of owning properties on an unleveraged or "debt-free"
basis. The rate at which Shares are sold is not necessarily consistent with the
manner in which prospective attractive property acquisitions become available to
the Company. The use of interim borrowings which are designed to be repaid with
subsequent sales of Shares could permit the Company to acquire properties
thought by management to be desirable, before Shares representing the full
purchase price of a particular property have been sold. Also the use of such
interim debt following sale of the Minimum Offering amount could have the effect
of reducing the period of time during which investors' funds are held in escrow
pending disbursement to the Company, since the Company would no longer be
required to match exactly proceeds from Share sales with property purchase
prices.
It is expected that the Company would utilize such interim borrowings only
if, and to the extent that, it is anticipated that future sales of Shares would
provide funds necessary to repay such borrowings. However, there would be no
assurance any such borrowings could, in fact, be repaid from future sales of
Shares. To the extent that Share sales are insufficient to repay any such
borrowings, the Company would have a remaining outstanding loan, which would
entail the types of risks and investment considerations described under "Risk
Factors-Possible Borrowing; Debt Financing May Reduce Cash Flow and Increase
Risk of Default" and "Investment Objectives and Policies-Borrowing Policies."
The Company would have a variety of potential means of addressing any such loan
remaining outstanding, including the repayment of such borrowing with cash from
operations or refinancing such borrowing with other debt, but such repayment
and/or refinancing would entail the types of effects on investors and the risks
described in such sections of this Prospectus.
PROPERTY ACQUISITION AND MANAGEMENT COMPENSATION
Each Property will be managed by Apple Residential Management Group, Inc.
under a property management agreement requiring payment by the Company of a
monthly management fee equal to five percent (5%) of the gross revenues of the
Property. In addition, the Company will reimburse Apple Residential Management
Group, Inc. for its expenses, including salaries and related overhead expenses,
associated with accounting and financial reporting services rendered by Apple
Residential Management Group, Inc. under the property management agreements.
Also, in consideration of services rendered to the Company in connection with
the selection and acquisition of each Property the Company will pay Apple Realty
Group, Inc. a property acquisition fee of two percent (2%) of the purchase
prices of the Properties. See "Compensation."
MANAGEMENT
DIRECTORS AND OFFICERS
The Directors of the Company have ultimate control over the management of the
Company and the conduct of its affairs, including the acquisition and
disposition of the Company's assets, but the Company has entered into an
Advisory Agreement with the Advisor to manage the Company's day-to-day affairs.
The Directors are charged with the responsibility of monitoring the relationship
between the Company and the Advisor. The Independent Directors are required to
make an annual determination that the Advisor's compensation is reasonable, that
total fees and expenses of the Company are reasonable and that the Company's
borrowings, if any, are appropriate.
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The Directors will spend such time on the affairs of the Company as their
duties may require. It is expected that the Directors will meet quarterly or
more frequently as required. Financial statements and various other financial
reports of the Company will be provided to the Directors quarterly to aid them
in the discharge of their duties. It is not contemplated that the Directors will
devote a substantial portion of their time to the discharge of their duties as
Directors.
At the time of Initial Closing, the Company will have a total of five
Directors, a majority of whom, as required by the Company's Bylaws, are
Independent Directors.
The current Directors of the Company, and the executive officers of the
Company, and their primary occupations during the last five years or more are
set forth below. The fifth Director, who will be an Independent Director, will
be selected before Initial Closing. The initial Directors will serve until the
first Annual Meeting of Shareholders, to be held in 1997.
NAME AGE POSITION
- -------------------------- -- ---------------------------------------------
Glade M. Knight .......... 52 Director, Chairman of the Board and President
Ted W. Smith ............. 40 Director
Penelope W. Kyle ......... 48 Director (Independent)
Bruce H. Matson .......... 39 Director (Independent)
Glade M. Knight. Mr. Knight is Chairman, Chief Executive Officer and sole
shareholder and Director of Apple Residential Advisors, Inc., the Advisor. He
also is the chief executive officer, sole Director and sole shareholder of Apple
Realty Group, Inc. and Apple Residential Management Group, Inc. Apple
Residential Advisors, Inc., Apple Realty Group, Inc. and Apple Residential
Management Group, Inc. were all organized in July, 1996.
Mr. Knight founded, and serves as the Chairman of the Board, President and a
Director of, Cornerstone Realty Income Trust, Inc., a Virginia corporation which
is a public real estate investment trust. Cornerstone Realty Income Trust, Inc.,
which began operations in 1993, acquires, owns and operates apartment complexes
in the mid-Atlantic and southeastern regions of the United States. During the
period December, 1992 through September, 1996, Cornerstone Realty Income Trust,
Inc. raised approximately $300 million from the sale of Shares in a best-efforts
offering, and the net proceeds from the Share sales were invested in apartment
complexes. As of October 1, 1996, Cornerstone Realty Income Trust, Inc. owned 37
apartment complexes.
Since 1972, Mr. Knight has held executive and/or ownership positions in
several corporations (including, beginning in 1978, Knight-Austin Corporation)
involved in the management of and investment in real estate. He has served,
directly or indirectly, as a general or limited partner of 71 limited
partnerships owning 80 properties comprising over 13,000 apartment units. See
The Advisor and Affiliates -- Prior Performance of Programs Sponsored by
Affiliates of the Advisor," for information on certain prior real estate
programs organized by Glade M. Knight.
Mr. Knight is the Chairman of the Board of Trustees of Southern Virginia
College in Buena Vista, Virginia. Mr. Knight is a member of the advisory board
to the Graduate School of Real Estate and Urban Land Development at Virginia
Commonwealth University and the Board of Directors of the Richmond Business
Workout Council, and is a former member of the National Housing Roundtable. An
alumnus of Brigham Young University, he has served on a National Advisory
Council for the University and is a founding member of and active lecturer for
the University's Entrepreneurial Department of the Graduate School of Business
Management.
Ted W. Smith. Ted Smith has been employed in various real estate acquisition
and management businesses since 1978. For approximately the last 12 years, he
has held executive positions with several Texas-based companies, including
Johnstown American, Balcor/American Express, Intergroup Proper-
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ties and Goldquest Properties. During his career, Mr. Smith has directed
apartment portfolios in excess of 13,000 units and has overseen the management
of over 250 apartment communities throughout theUnited States. He received his
Certified Property Manager (CPM) designation in 1983 and has remained actively
involved in the Institute of Real Estate Management (IREM) program. Mr. Smith
attended the University of Kansas from 1975 to 1978 where he majored in business
administration with a real estate minor. He remains an active alumnus of the
Delta Upsilon Fraternity.
Penelope W. Kyle. Ms. Kyle became Director of the Virginia Lottery on
September 1, 1994. Ms. Kyle had worked in various capacities for CSX Corporation
and its affiliated companies from 1981 until August, 1994. She served as Vice
President, Administration and Finance for CSX Realty, Inc. since 1991, as Vice
President, Administration for CSX Realty, Inc. from 1989 to 1991, and as
Assistant Vice President and Assistant to the President for CSX Realty, Inc.
from 1987 to 1989. She received a B.A. from Guilford College in 1969, an M.A.
from Southern Methodist University in 1971, a degree in law from the University
of Virginia in 1979 and an M.B.A. from The College of William and Mary in 1987.
Bruce H. Matson. Mr. Matson is a shareholder in the law firm of LeClair Ryan,
A Professional Corporation, in Richmond, Virginia. Mr. Matson has practiced law
since 1983. He received an A.B. from the College of William and Mary in 1979,
and a J.D. from Marshall-Wythe School of Law, College of William and Mary, in
1983.
COMMITTEES OF DIRECTORS
The Directors will establish an Executive Committee that has the authority of
the full Board except for the declaration of distributions and non-delegable
matters specified in Virginia law. A majority of the members of the Executive
Committee must be Independent Directors.
At this time, the Executive Committee is responsible for making all of the
Company's investment and acquisition decisions, including all decisions to
invest in or acquire real property. Depending on the circumstances, certain
transactions with the Advisor and its Affiliates will require the additional
approval of a majority of the Directors or a majority of the Directors who are
not parties to the transaction or Affiliates of any person (other than the
Company) who is a party to the transaction.
The Directors will also establish an Audit Committee which will be
responsible for overseeing the relationship between the Company and its
independent auditors, including the annual audit of the Company's financial
statements, and monitoring the reasonableness of the Company's expenses. A
majority of the members of the Audit Committee must be Independent Directors.
Any property acquisition made with proceeds representing the Minimum Offering
amount ($15 million) will require the approval of the Executive Committee of the
Board of Directors. Otherwise the acquisition of any property with a contract
purchase price not greater than $15,000,000 may be undertaken by the President
acting alone (unless it is an acquisition from an Affiliate of the Advisor). Any
property acquisition with a contract purchase price exceeding $15,000,000 will
require the consent of the Executive Committee of the Board of Directors. Any
acquisition from an Affiliate of the Advisor will require the consent of a
majority of all Independent Directors and of the entire Board.
DIRECTOR COMPENSATION
The Company will pay to each Director who is not an Affiliate of the Advisor
an annual fee of $5,000 plus $500 for each meeting of the full Board of
Directors attended by such person in person ($100 if any are attended by
telephonic means). There will be no additional compensation for serving on a
Committee or attending a Committee meeting. The Company will, however, reimburse
all Directors for their travel and other out-of-pocket expenses incurred in
connection with attending any meeting of the Board or any Committee, and for
carrying on the business of the Company, including reimbursement for expenses
for any on-site review of properties presented for acquisition or of new
markets. Directors who are Affiliates of the Advisor receive no compensation
from the Company for their service as Directors. These Directors, however, are
remunerated indirectly by their relationship to the Advisor and its Affiliated
companies and are reimbursed by the Company for their expenses in attending
meetings of the Directors or a Committee and in carrying on the business of the
Company.
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INDEMNIFICATION AND INSURANCE
See "Summary of Organizational Documents -- Responsibility of Board of
Directors, Advisor, Officers and Employees" for a description of the nature of
the Company's obligation to indemnify the Company's directors and officers and
certain others in certain situations.
The Company intends to obtain, and pay the cost of, directors' and officers'
liability insurance coverage which insures (i) the directors and officers of the
Company from any claim arising out of an alleged wrongful act by the directors
and officers of the Company in their respective capacities as directors and
officers of the Company, and (ii) the Company to the extent that the Company has
indemnified the directors and officers for such loss.
OFFICER COMPENSATION
The officers of the Company are not paid salaries by the Company. Such
officers are officers of the Advisor and its Affiliates, which entities are
entitled to certain fees for services rendered by them to the Company. Thus, the
officers of the Company are, in essence, compensated by the Advisor or its
Affiliates. See "Compensation" for a description of the fees payable to the
Advisor and its Affiliates.
STOCK INCENTIVE PLANS
The Company has adopted two stock incentive plans which are described below.
For purposes of the description below, the term "Offering" means the Initial
Offering plus all additional offerings and sales of Shares which may occur
during the five-year period beginning November 1, 1996 and ending October 31,
2001. The term "Initial Offering" means the offering of Shares made pursuant to
this Prospectus.
The aggregate number of Shares reserved for issuance under the two stock
incentive plans is (1) 80,000 Shares, plus (2) 6.425% of the number of Shares
sold in the Initial Offering in excess of the Minimum Offering, plus (3) 6.2% of
the number of Shares sold in the Offering above the Initial Offering.
THE INCENTIVE PLAN
Under one plan (the "Incentive Plan"), incentive awards may be granted to
certain employees (including officers and directors who are employees) of the
Company, or of Apple Residential Advisors, Inc., Apple Residential Management
Group, Inc. or Apple Realty Group, Inc. (the latter three companies being
sometimes referred to herein as the "Apple Companies"). Of the Directors of the
Company, initially Messrs. Knight and Smith will be participants in the
Incentive Plan. Such incentive awards may be in the form of stock options or
restricted stock (as described below). Under the Incentive Plan, the number of
Shares reserved for issuance is equal to an aggregate of (1) 35,000 Shares, plus
(2) 4.625% of the number of Shares sold in the Initial Offering in excess of the
Minimum Offering, plus (3) 4.4% of the number of the Shares sold in the Offering
above the Initial Offering. If an option is cancelled, terminates or lapses
unexercised, any unissued Shares allocable to such option may be subjected again
to an incentive award. The purpose of the Incentive Plan is to attract and
retain the services of experienced and qualified employees who are acting on
behalf of the Company, either directly or through the Apple Companies, in a way
that enhances the identification of such employees' interests with those of the
Shareholders.
The Incentive Plan will be administered by a Compensation Committee of the
Board of Directors of the Company (the "Committee"). Notwithstanding anything to
the contrary in this Prospectus (including the Company's organizational
documents referred to herein), the Committee must have a minimum of two members
who are not eligible to participate in the Incentive Plan or any similar plan of
the Company other than the Directors' Plan (described below). Subject to the
provisions of the Incentive Plan, the Committee has authority to determine (i)
when to grant incentive awards, (ii) which eligible employees will receive
incentive awards, (iii) whether the award will be an option or restricted stock,
and the number of Shares to be allocated to each incentive award. The Committee
may impose conditions on the exercise of options and upon the transfer of
restricted stock received under the Plan, and may impose such other restrictions
and requirements as it may deem appropriate.
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STOCK OPTIONS
An option granted under the Incentive Plan will not be transferrable by the
option holder except by will or by the laws of descent and distribution, and
will be exercisable only at such times as may be specified by the Committee.
During the lifetime of the option holder the option may be exercised only while
the option holder is in the employ of the Company or one of the Apple Companies,
or within 60 days after termination of employment. In the event the termination
is due to death or disability, the option will be exercisable for a 180-day
period thereafter.
The exercise price of the options will be not less than 100% of the fair
market value of the Shares as of the date of grant of the option.
The Committee has discretion to take such actions as it deems appropriate
with respect to outstanding options in the event of a sale of substantially all
of the stock or assets of the Company, a merger of the Apple Company by which an
option holder is employed, or the occurrence of similar events. Adjustments will
be made in the terms of options and the number of Shares which may be issued
under the Incentive Plan in the event of a future stock dividend, stock split or
similar pro rata change in the number of outstanding Shares or the future
creation or issuance to shareholders generally of rights, options or warrants
for the purchase of Shares.
Options granted under the Incentive Plan are non-qualified stock options, not
intended to qualify for favorable incentive stock option tax treatment under the
Code.
RESTRICTED STOCK
Restricted stock issued pursuant to the Incentive Plan is subject to the
following general restrictions: (i) none of such Shares may be sold,
transferred, pledged, or otherwise encumbered or disposed of until the
restrictions on such Shares shall have lapsed or been removed under the
provisions of the Incentive Plan, and (ii) if a holder of restricted stock
ceases to be employed by the Company or one of the Apple Companies, he will
forfeit any shares of restricted stock on which the restrictions have not lapsed
or been otherwise removed.
The Committee will establish as to each share of restricted stock issued
under the Incentive Plan the terms and conditions upon which the restrictions on
such Shares shall lapse. Such terms and conditions may include, without
limitation, the lapsing of such restrictions at the end of a specified period of
time, or as a result of the disability, death or retirement of the participant.
In addition, the Committee may, at any time, in its sole discretion, accelerate
the time at which any or all restrictions will lapse or remove any or all such
restrictions.
AMENDMENT OF THE INCENTIVE PLAN AND INCENTIVE AWARDS
The Board of Directors may amend the Incentive Plan in such respects as it
deems advisable; provided that the shareholders of the Company must approve any
amendment that would (i) materially increase the benefits accruing to
participants under the Incentive Plan, (ii) materially increase the number of
Shares that may be issued under the Incentive Plan, or (iii) materially modify
the requirements of eligibility for participation in the Incentive Plan.
Incentive awards granted under the Incentive Plan may be amended with the
consent of the recipient so long as the amended award is consistent with the
terms of the Plan.
DIRECTORS' PLAN
The Company has also adopted a stock option plan for Directors of the Company
who are not employees of the Company or the Apple Companies (the "Directors'
Plan"). Under the Directors' Plan, the number of Shares reserved for issuance is
equal to 45,000 Shares plus 1.8% of the number of Shares sold in the Offering in
excess of the Minimum Offering.
A Director is eligible to receive an option under the Directors' Plan if the
Director is not otherwise an employee of the Company or any Apple Company or any
subsidiary of the Company and was not an employee of any of such entities for a
period of at least one year before the date of grant of an option under the
Plan. Three members of the Board (all of the Directors except Messrs. Knight and
Smith) are expected initially to qualify to receive options under the Directors'
Plan.
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The Directors' Plan will be administered by the Board. Grants of stock
options to eligible Directors under the Plan will be automatic. However, the
Board has certain powers vested in it by the terms of the Plan, including,
without limitation, the authority (within the limitations described therein) to
prescribe the form of the agreement embodying awards of stock options under the
Plan, to construe the Plan, to determine all questions arising under the Plan,
and to adopt and amend rules and regulations for the administration of the Plan
as it may deem desirable. Any decision of the Board in the administration of the
Directors' Plan will be final and conclusive. The Board may act only by a
majority of its members in office, except members thereof may authorize any one
or more of their number, or any officer of the Company, to execute and deliver
documents on behalf of the Board.
The Directors' Plan provides for the following automatic option awards:
(1) As of the initial closing of the Shares, each eligible Director will
receive an option to purchase 5,500 Shares plus 0.0125% of the number of Shares
in excess of the Minimum Offering sold by the initial closing.
(2) As of each June 1 during the years 1997 through 2001 (inclusive), each
eligible Director shall automatically receive an option to purchase 0.02% of the
number of Shares issued and outstanding on that date.
(3) As of the election as a Director of any new person who qualifies as an
eligible Director, such eligible Director will automatically receive an option
to purchase 5,000 Shares.
The purpose of the Directors' Plan is to enhance the identification of the
participating Directors' interests with those of the Shareholders.
The exercise price for each option granted under the Directors' Plan will be
100% of the fair market value on the date of grant; no consideration will be
paid to the Company for the granting of the option. Options granted under the
Directors' Plan will have a term of 10 years and will be fully exercisable six
months after the date of grant. If an optionee ceases to serve as a Director of
the Company prior to the expiration of the six-month period following the date
of grant, the option will terminate on the date of such termination of service
as a Director. If an optionee ceases to serve as a Director of the Company after
the expiration of the six-month period following the date of grant, the option
will terminate three years after the date of termination of service, or on
expiration of the option, whichever is earlier.
Options granted under the Directors' Plan are non-transferable other than by
will or the laws of descent and distribution upon the death of the optionee and,
during the lifetime of the optionee, are exercisable only by him. Payment upon
exercise of an option under the Directors' Plan may be made in cash or with the
Company's Shares of equivalent value.
The Board may suspend or discontinue the Directors' Plan or revise or amend
the Plan in any respect; provided, however, that without approval of the
Company's shareholders no revision or amendment may increase the number of
Shares subject to the Plan or materially increase the benefits accruing under
the Plan. In addition, the Directors' Plan may not be amended more than once
every six months other than to comply with changes in the Code or ERISA.
STOCK OPTION GRANTS
As of the date of this Prospectus, there have been no grants under the
Incentive Plan or the Directors' Plan.
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THE ADVISOR AND AFFILIATES
GENERAL
Pursuant to the Advisory Agreement with the Company, the Advisor, among other
things, will seek to obtain, investigate, evaluate and recommend property
investment opportunities for the Company, serve as property investment advisor
and consultant in connection with investment policy decisions made by the
Directors and, subject to the direction of the Directors, supervise the
day-to-day operations of the Company. The Advisor is a Virginia corporation all
of the common stock of which is owned by Glade M. Knight. Cornerstone Realty
Income Trust, Inc., which might be deemed an Affiliate of the Advisor, will own
preferred stock in the Advisor. Glade M. Knight is the sole director of the
Advisor and also its sole officer (serving as its Chairman, Chief Executive
Officer, President and Secretary).
THE ADVISORY AGREEMENT
The current Advisory Agreement has a one-year term ending October 31, 1997,
and is renewable annually by the Directors. The Advisory Agreement provides that
it may be terminated at any time by a majority of the Independent Directors or
the Advisor upon 60 days' written notice. Under the Advisory Agreement, the
Advisor undertakes to use its best efforts (i) to supervise and arrange for the
day-to-day management of the Company and (ii) to assist the Company in
maintaining a continuing and suitable property investment program consistent
with the Company's investment policies and objectives. Under the Advisory
Agreement, generally the Advisor is not required to, and will not, advise the
Company on investments in securities, i.e., the temporary investment of offering
proceeds pending investment of such proceeds in real property, as described in
"Investment Objectives and Policies -- General." It is expected that the Company
generally will make its own decisions with respect to such temporary securities
investments.
Pursuant to the Advisory Agreement, the Advisor will be entitled to an annual
Asset Management Fee. The Asset Management Fee is payable quarterly in arrears.
The amount of the Asset Management Fee is a percentage of Total Contributions.
The applicable percentage used to calculate the Asset Management Fee is based on
the ratio of Funds from Operations to Total Contributions (such ratio being
referred to as the "Return Ratio" for the preceding calendar quarter. The per
annum Asset Management Fee is initially equal to the following with respect to
each calendar quarter: 0.1% of Total Contributions if the Return Ratio for the
preceding calendar quarter is 6% or less; 0.15% of Total Contributions if the
Return Ratio for the preceding calendar quarter is more than 6% but not more
than 8%; and 0.25% of Total Contributions if the Return Ratio for the preceding
calendar quarter is above 8%. See "Compensation." The Advisor or an Affiliate
thereof will also receive reimbursement for certain direct expenses and
allocable overhead incurred in connection with its provision of services to the
Company.
The Bylaws require the Independent Directors to monitor the Advisor's
performance of the Advisory Agreement and to determine at least annually that
the amount of compensation the Company pays the Advisor is reasonable, based on
such factors as they deem appropriate, including the amount of the Asset
Management Fee in relation to the size, composition and profitability of the
investments of the Company; the success of the Advisor in selecting
opportunities that meet the Company's investment objectives; the rates charged
by other investment advisors performing comparable services; the amount of
additional revenues realized by the Advisor and its Affiliates for other
services performed for the Company; the quality and extent of service and advice
furnished by the Advisor; the performance of the Company's investments and the
quality of the Company's investments in relation to any investments generated by
the Advisor for its own account.
The Company's Bylaws generally prohibit the Operating Expenses of the Company
(generally defined as all Company operating, general and administrative
expenses, but excluding depreciation and similar non-cash items and expenses of
raising capital, interest, taxes and costs related to asset acquisition,
operation and disposition) from exceeding in any year the greater of 2% of the
total Average Invested Assets of the Company (generally defined as the monthly
average of the aggregate book value of Company assets invested in real estate,
before deducting depreciation) or 25% of the Net Income of the Company
(generally defined as the revenues for any period, less expenses other than
depreciation or
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similar non-cash items) for such year. Unless the Independent Directors conclude
that a higher level of expenses is justified based upon unusual and nonrecurring
factors which they deem sufficient, the Advisor must reimburse the Company for
the amount of any such excess. The Advisor must make such reimbursement within
120 days from the end of the Company's fiscal year. The Advisor will be entitled
to be repaid such reimbursements in succeeding fiscal years to the extent actual
Operating Expenses are less than the permitted levels. In determining that
unusual and nonrecurring factors are present, the Independent Directors will be
entitled to consider all relevant factors pertaining to the Company's business
and operations, and will be required to explain their conclusion in written
disclosure to the Shareholders. The Advisor generally would expect to pay any
required reimbursement out of compensation received from the Company in the
current or prior years. However, there can be no assurance that the Advisor
would have the financial ability to fulfill its reimbursement obligations.
The Company's Bylaws further prohibit the total Organizational and Offering
Expenses (including Selling Commissions) from exceeding 15% of the Total
Contributions. Furthermore, the total of all Acquisition Fees and Acquisition
Expenses paid by the Company in connection with the purchase of a property by
the Company shall be reasonable and shall in no event exceed an amount equal to
6% of the contract price for the property, unless a majority of the Directors
(including a majority of the Independent Directors) not otherwise interested in
the transaction approves the transaction as being commercially competitive, fair
and reasonable to the Company. For purposes of the foregoing limitation, the
"contract price for the property" means the amount actually paid or allocated to
the purchase, development, construction or improvement of the property,
exclusive of Acquisition Fees and Acquisition Expenses. Any Organizational and
Offering Expenses or Acquisition Fees and Acquisition Expenses incurred by the
Company in excess of the permitted limits shall be payable by the Advisor
immediately upon demand of the Company.
The foregoing is only a summary of the Advisory Agreement. A copy of the form
of such agreement has been filed as an exhibit to the registration statement of
which this Prospectus is a part; reference is made to the agreement for a
complete statement of its provisions.
APPLE REALTY GROUP, INC.
Apple Realty Group, Inc. is a Virginia corporation which was organized on
August 5, 1996. Apple Realty Group, Inc. is engaged in the business of
management of real property and the solution of financial and marketing problems
related to investments in real property.
Apple Realty Group, Inc. and the Company have entered into a Property
Acquisition/Disposition Agreement under which Apple Realty Group, Inc. has
agreed to act as a real estate broker in connection with the Company's purchases
and sales of properties. Under such agreement, Apple Realty Group, Inc. is
entitled to a real estate commission equal to 2% of the gross purchase prices of
the Company's properties, payable by the Company in connection with each
purchase; provided that if indebtedness is assumed or incurred in connection
with the acquisition, the acquisition fee that would have been payable with
respect to the portion of the purchase price represented by such indebtedness
shall not be payable until such time, if ever, that such indebtedness is repaid
with the proceeds of this Offering or other equity financing. Under such
agreements, Apple Realty Group, Inc. is also entitled to a real estate
commission equal to 2% of the gross sales prices of the Company's properties,
payable by the Company in connection with each property sale if, but only if,
any such property is sold and the sales price exceeds the sum of (1) the
Company's cost basis in the property (consisting of the original purchase price
plus any and all capitalized costs and expenditures connected with the property)
plus (2) 10% of such cost basis. For purposes of such calculation, the Company's
cost basis will not be reduced by depreciation. If the sales price of a
particular property does not equal the required amount, no real estate
commission is payable, but Apple Realty Group, Inc. is still entitled to payment
by the Company of its "direct costs" incurred in marketing such property where
"direct costs" refers to a reasonable allocation of all costs, including
salaries of personnel, overhead and utilities, allocable to services in
marketing such property. If the person from whom the Company purchases or to
whom the Company sells a property pays any fee to Apple Realty Group, Inc., such
amount will decrease the amount of the Company's obligation to Apple Realty
Group, Inc. In addition, Apple Realty Group, Inc. will not be entitled to any
disposition
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fee in connection with a sale of a property by the Company to Cornerstone Realty
Income Trust, Inc. or any Affiliate of Apple Realty Group, Inc., but Apple
Realty Group, Inc. will, in such case, be entitled to payment by the Company of
its direct costs incurred in such regard. The agreement has an initial term of
five years ending October 31, 2001, and will renew automatically for successive
terms of five years unless either party to the agreement elects not to renew by
notice sent to the other party within 60 days before the end of any term.
A copy of the form of Property Acquisition/Disposition Agreement has been
filed as an exhibit to the registration statement of which this Prospectus is a
part, and reference is made to the agreement for a complete description of its
provisions.
Subject to the conditions applicable generally to transactions between the
Company and Affiliates of the Advisor (see "Conflicts of Interest --
Transactions with Affiliates and Related Parties"), Apple Realty Group, Inc. or
an Affiliate may render services to the Company in connection with Company
financings or refinancings, and would be entitled to compensation for such
services. As of the date of this Prospectus, there are no specific agreements
for any such services.
Glade M. Knight is the sole shareholder and Director of Apple Realty Group,
Inc., as well as its sole officer, serving as Chairman, Chief Executive Officer,
President and Secretary.
APPLE RESIDENTIAL MANAGEMENT GROUP, INC.
Property management services for the Company's properties generally will be
performed by Apple Residential Management Group, Inc., an Affiliate of the
Advisor. See "Investment Objectives and Policies -- Management of Properties."
Apple Residential Management Group, Inc. is a Virginia corporation which was
organized on August 5, 1996.
Apple Residential Management Group, Inc. currently manages no apartment
complexes.
All of the common stock of Apple Residential Management Group, Inc. is owned
by Glade M. Knight. Cornerstone Realty Income Trust, Inc., which might be deemed
on Affiliate of the Advisor, will own preferred stock in Apple Residential
Management Group, Inc. The sole Director of Apple Residential Management Group,
Inc. is Glade M. Knight, who also serves as its Chairman, Chief Executive
Officer, President and Secretary. Ted W. Smith (who is a Director of the
Company) is the President and Chief Operating Officer of Apple Residential
Management Group, Inc.
PRIOR PERFORMANCE OF PROGRAMS SPONSORED BY AFFILIATES OF THE ADVISOR
The following paragraphs contain information on certain prior programs, all
of which, except Cornerstone Realty Income Trust, Inc., were organized as
partnerships, sponsored by Affiliates of the Advisor to invest in real estate.
Except as otherwise indicated in this section, the information set forth is
current as of October 1, 1996. Such information should not be considered to be
indicative of the capitalization or operations of the Company. Purchasers of the
Shares will not have any interest in the entities referred to in this Section or
in any of the properties owned by such entities.
Affiliates of Apple Realty Group, Inc. or its predecessors previously
organized 40 partnerships for the purpose of investing in real estate. Interests
in 38 of these partnerships, in which Mr. Knight served as a general partner and
all but one of which were limited partnerships, were sold to investors in
privately offered transactions. The 38 privately offered partnerships
collectively owned and operated 40 apartment complexes with a total of 5,972
apartment units and one motel with 144 rooms. A total of 733 investors in these
partnerships contributed an aggregate of approximately $47,788,965 to the
capital of the partnerships. The aggregate cost of the 41 properties purchased
by these 38 privately offered partnerships was approximately $129,088,000. All
of the partnerships were formed before, and have investment objectives
dissimilar to those of, the Company.
Seven of the dissimilar partnerships filed for reorganization under Chapter
11 of the United States Bankruptcy Code. Five of these partnerships subsequently
reached agreements with their lenders to allow foreclosure on their properties
on terms which were more favorable to the partnerships than were available
before the filing of the petition for reorganization. Two of the partnerships
emerged from their
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Chapter 11 reorganizations and in one of those partnerships, an unaffiliated
entity became the new general partner as part of a partnership recapitalization.
Two other partnerships in which Mr. Knight formerly served as a general partner
filed for reorganization under Chapter 11 of the United States Bankruptcy Code
within two years after Mr. Knight ceased to serve as general partner. Six of the
dissimilar partnerships acquiesced to negotiated foreclosures on their
properties upon terms which were more favorable to the partners than would have
been available in the absence of negotiation. Each of the partnerships described
in this paragraph owned a single property, and the adverse business development
affecting the partnership therefore resulted in the partnership ceasing all cash
distributions to investors.
The dissimilar partnerships used leverage (debt) which varied from
substantial to 100% in the acquisition of their properties. In addition, a
significant objective of the dissimilar partnerships was the realization of tax
losses which could be used to offset some or all of investors' other sources of
income. In the opinion of the Advisor, the bankruptcy filings and foreclosures
described above which were experienced by various dissimilar partnerships were
attributable to a combination of high leverage, a downturn in economic
conditions generally and the real estate industry in particular, changes in tax
laws (which decreased the perceived value of real estate to potential buyers and
lenders) and the unavailability of favorable financing. The Advisor does not
expect that this combination of factors will be applicable to the operations of
the Company. In particular, the Company expects to acquire its properties on an
all-cash basis, or using interim borrowing planned to be repaid with proceeds
from the sale of Shares. See "Investment Objectives and Policies -- Borrowing
Policies."
As of October 1, 1996, Mr. Knight had ceased to hold an interest in all but
four of the partnerships described above.
Two partnerships sponsored by an Affiliate of Apple Realty Group, Inc. were
issuers in public offerings of assignee units of limited partnership interest.
These two publicly offered partnerships had investment objectives similar to
those of the Company. One publicly offered partnership, Southeastern Income
Properties Limited Partnership ("Southeastern I"), raised $25,000,000 from 2,714
investors. Southeastern I acquired four apartment complexes comprising 833
apartment units. The other publicly offered partnership, Southeastern Income
Properties II Limited Partnership ("Southeastern II"), raised $17,883,780 from
1,710 investors. Southeastern II acquired four apartment complexes comprising
794 apartment units. The aggregate cost of the eight properties purchased by
Southeastern I and Southeastern II (including capital improvements thereto) was
approximately $41,178,606. The Affiliates of Apple Realty Group, Inc. which
originally served as the general partners for these two partnerships transferred
management control over these partnerships to a third party in February, 1992 by
converting to limited partner status. Thus, Affiliates of Apple Realty Group,
Inc. ceased to serve as their general partners. The transfer of management
control was part of a transaction in which Cornerstone Realty Group, Inc. (which
had acted as manager of the two partnerships' properties) sold its property
management rights to an unaffiliated property management company.
Mr. Knight was also principally responsible for the organization of
Cornerstone Realty Income Trust, Inc. ("Cornerstone"), a real estate investment
trust organized to acquire and own apartment complexes in the mid-Atlantic and
southeastern regions of the country. The investment objectives of the Company
are generally the same as those of Cornerstone. Between December, 1992 and
October, 1996, Cornerstone sold approximately $300 million in common shares to
approximately 11,000 investors. The net proceeds of the Cornerstone public
offering were used to acquire 37 apartment communities in Virginia, North and
South Carolina, and Georgia. All but one of the apartment communities were built
and in service before acquisition by Cornerstone. The aggregate cost of the 37
properties (including capital improvements thereto) was approximately
$295,607,707. The purchase prices of all such properties were paid in cash using
the proceeds from the sale of the common shares or using the proceeds from an
unsecured line of credit which was subsequently repaid using proceeds from the
sale of common shares, except that at October 1, 1996, approximately $36.6
million remained unpaid on such line of credit. Cornerstone expects to repay
this outstanding balance within six months using proceeds from the sale of
additional common shares. None of these properties has been sold. The Advisor
will, upon request of any investor or prospective investor, provide at no cost a
copy of the most recent Report on
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Form 10-K filed by Cornerstone with the Securities and Exchange Commission. For
a reasonable fee, the Advisor will also provide copies of the exhibits to the
Report on Form 10-K.
Part II of the Company's Registration Statement (which is not a part of this
Prospectus) contains a more detailed summary of the 37 property acquisitions by
Cornerstone. The Advisor will provide a copy of such summary without charge upon
request of any investor or prospective investor.
Reference is also made to the additional information on prior performance
appearing under "Experience of Prior Programs" in this Prospectus.
PRINCIPAL AND MANAGEMENT STOCKHOLDERS
Beneficial ownership of Shares of the Company's common stock, and options to
purchase Shares of the Company's common stock (exercisable currently or within
60 days), held by directors and officers of the Company as of the date of this
Prospectus, are indicated in the table below. Each person named in the table has
sole voting and investment powers as to such Shares, or shares such powers with
his spouse and minor children, if any.
PERCENT OF
NUMBER OF SHARES AGGREGATE
BENEFICIALLY OUTSTANDING
NAME OWNED SHARES OWNED
- --------------------------------- ------------------ --------------
Apple Residential Advisors, Inc. 10 100%
In addition to the foregoing, Glade M. Knight, who is a Director, Chairman of
the Board and President of the Company, owns 200,000 "Class B Convertible
Shares." The Class B Convertible Shares are convertible into Common Shares
pursuant to the formula and on the terms and conditions set forth below. The
Class B Convertible Shares were issued by the Company to Mr. Knight on November
14, 1996, in exchange for the payment by Mr. Knight of $0.10 per Class B
Convertible Share, or an aggregate of $20,000.
There are no dividends payable on the Class B Convertible Shares. On
liquidation of the Company, the holder of the Class B Convertible Shares is
entitled to a liquidation payment of $0.10 per Class B Convertible Share before
any distribution of liquidation proceeds to the holders of the Common Shares.
Holders of more than two-thirds of the Class B Convertible Shares must approve
any proposed amendment to the Articles of Incorporation that would adversely
affect the Class B Convertible Shares or create a new class of stock senior to
or on a parity with the Class B Convertible Shares. The Class B Convertible
Shares are convertible into Common Shares upon and for 180 days following the
occurrence of either of the following events: (1) substantially all of the
Company's assets, stock or business is sold or otherwise transferred, whether
through sale, exchange, merger, consolidation, lease, share exchange or
otherwise, or (2) the Advisory Agreement with the Advisor is terminated or not
renewed, and the Company ceases to use Apple Residential Management Group, Inc.
to provide substantially all of its property management services (the events
described in this clause (2), a "Self-Administration Conversion"). Upon the
occurrence of either triggering event, each Class B Convertible Share is
convertible into a number of Common Shares based upon the gross proceeds raised
through the date of conversion in the offering made by this Prospectus according
to the following formula:
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NUMBER OF COMMON
SHARES
GROSS PROCEEDS RAISED FROM THROUGH CONVERSION
SALES OF COMMON SHARES THROUGH OF ONE CLASS B
DATE OF CONVERSION CONVERTIBLE SHARE
- ------------------------------- -----------------------
$50 million.................... 1.0
$100 million................... 2.4
$150 million................... 4.2
$200 million................... 6.4
$250 million................... 8.0
No additional consideration is due upon the conversion of the Class B
Convertible Shares.
The conversion into Common Shares of the Class B Convertible Shares will
result in dilution of the Shareholders' interests. However, if the Company
elects to issue Shares to the Advisor or Apple Residential Management Group,
Inc. in connection with a Self-Administration Conversion, the number of such
Shares otherwise issuable by the Company will be reduced by the number of Shares
which can then be acquired upon conversion of the Class B Convertible Shares.
FEDERAL INCOME TAX CONSEQUENCES
The following summary of all material United States federal income tax
consequences applicable to the Company and its shareholders is based upon
current law, which is subject to change. Any such change could be retroactively
applied and alter significantly the tax considerations described herein. The
following discussion is not exhaustive of all possible tax considerations and
does not give a detailed discussion of any state, local or foreign tax
considerations. Nor does it discuss all of the aspects of federal income
taxation that may be relevant to a prospective Shareholder in light of his or
her particular circumstances or to certain types of Shareholders (including
insurance companies, tax-exempt entities, financial institutions or
broker-dealers, foreign corporations, and persons who are not citizens or
residents of the United States) who are subject to special treatment under the
federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO SUCH PURCHASER OF THE
PURCHASE, OWNERSHIP, AND SALE OF SHARES OF THE COMPANY, INCLUDING THE FEDERAL,
STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP
AND SALE, AND WITH RESPECT TO POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
FEDERAL INCOME TAXATION OF THE COMPANY
The Company will elect to be treated for federal income tax purposes as a
REIT and intends to conduct its operations in a manner that will permit it to
continue so to qualify. While the Board of Directors and the Advisor intend to
cause the Company to operate in a manner that will enable it to comply with the
REIT requirements, there can be no certainty that such intention will be
realized. Moreover, relevant law may change so as to make compliance with one or
more of the REIT requirements difficult or impracticable. Failure to meet any of
the REIT requirements with respect to a particular taxable year could result in
termination of the Company's election to be a REIT, effective for the year of
such failure and all succeeding years.
The Company has not requested, and does not intend to request, a ruling from
the Service that it will qualify as a REIT. However, the Company has received an
opinion of its counsel, McGuire, Woods, Battle & Boothe, L.L.P., that, based
upon various assumptions and certain representations made by the Company as to
factual matters, the Company currently qualifies as a REIT, and will continue so
to qualify if it conducts its operations in the manner assumed therein. However,
investors should be aware that opinions of counsel are not binding upon the
Service. Furthermore, both the validity of the opinion and the continued
qualification of the Company for treatment as a REIT will depend on its
continuing to meet various requirements concerning, among other things, the
ownership of its Shares, the nature of its assets, the sources of its income and
the amount of its distributions to Shareholders. McGuire,
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Woods, Battle & Boothe, L.L.P. will not review the actual annual operating
results of the Company. Accordingly, no assurance can be given that the actual
results of the Company's operation for any one taxable year will satisfy the
REIT requirements.
As long as the Company qualifies as a REIT for federal income tax purposes,
it generally will not be subject to federal income tax on any income or gain
that is distributed currently to Shareholders. However, any undistributed income
or gain will be taxed to the Company at regular corporate rates. In addition,
the Company may be subject to (i) a 100% tax on certain income from any
"prohibited transactions" (i.e., sales or other dispositions of property (other
than certain real estate assets held not less than four years) that is stock in
trade, inventory, or held primarily for sale to customers in the ordinary course
of business), (ii) a 100% tax on the greater of the amount, if any, by which it
fails the 75% income test or the 95% income test described below, multiplied by
a fraction intended to reflect the REIT's profitability, (iii) a tax at the
highest corporate rate on any net income relating to "dealer" activities with
respect to foreclosure property, (iv) a 4% excise tax on a portion of any
undistributed income, and (v) a minimum tax on any items of tax preference.
REQUIREMENTS FOR QUALIFICATION AS A REIT
In order to qualify as a REIT, the Company must satisfy a variety of complex
tests relating to its organization, Share ownership, assets, income and
distributions. Those tests are summarized below.
Organizational Requirements. A REIT is defined in the Code as: (1) a
corporation, trust or association; (2) which is managed by one or more directors
or trustees; (3) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest; (4) which would
be taxable as a domestic corporation, but for Sections 856 through 860 of the
Code; (5) which is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (6) the beneficial ownership of which
is held by 100 or more persons; and (7) not more than 50% in value of the
outstanding stock of which is owned during the last half of each taxable year,
directly or indirectly, by or for five or fewer individuals (as defined in the
Code to include certain entities). In addition, the organization must meet
certain income and asset tests described below. Conditions (1) to (5),
inclusive, must be met during the entire taxable year and condition (6) must be
met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. However, conditions
(6) and (7) will not apply until after the first taxable year for which an
election is made to be taxed as a REIT.
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company's taxable year will be the calendar year.
As a Virginia corporation, the Company satisfies the first and fourth
requirements. The Company also will be managed by a board of directors. The
Company has transferable shares and does not intend to operate as a financial
institution or insurance company. Additionally, the Company has more than 100
shareholders. To assure continued compliance with the 50% diversity of ownership
requirement, the Company's Bylaws prohibit any individual investor from
acquiring, directly or indirectly, more than 9.8% (by value) of the outstanding
Shares and provide restrictions regarding the transfer of Shares. Treasury
Regulations require the Company to maintain records of the actual ownership of
its Shares. In accordance with those regulations, the Company must demand from
record Shareholders written statements which disclose information concerning the
actual ownership of the Shares. Any record Shareholder who does not provide the
Company with required information concerning actual ownership of the Shares is
required to include certain specified information relating thereto in his income
tax return.
Income Tests. To maintain qualification as a REIT for any taxable year, three
gross income requirements must be met annually: the "75% income test," the "95%
income test," and the "30% income test." The 75% income test requires that the
Company derive, directly or indirectly, at least 75% of its gross income
(excluding gross income from prohibited transactions) from certain real estate
related sources, which include, but are not limited to: (i) certain types of
"rents from real property," (ii) "interest" on obligations secured by mortgages
on real property or interests in real property, (iii) income or
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gain from real property acquired through foreclosure or similar proceedings,
(iv) gains from the sale or other disposition of certain real property or
interests in real property that are not "dealer property" (i.e., property that
is stock in trade, inventory, or held primarily for sale to customers in the
ordinary course of business), (v) commitment fees with respect to mortgage
loans, (vi) income from stock or debt instruments that were acquired as a
temporary investment of new capital, if such income is received or accrued
during the first year after the Company receives the new capital ("qualified
temporary investment income"), (vii) dividends or other dividends on shares of
other qualified REITs, (viii) abatements and refunds of taxes on real property,
and (ix) gains from the sale or disposition of real estate assets which are not
prohibited transactions solely by reason of Section 857(b)(6) of the Code. The
95% income test requires that at least an additional 20% of the Company's gross
income for the taxable year consist either of income that qualifies under the
75% income test or certain types of passive income, which include, but are not
limited to: (i) dividends from companies other than REITs, (ii) interest on
obligations that are not secured by interests in real property, and (iii) gains
from the sale or other disposition of stock, securities, or real property, if
such assets are not dealer property. The 30% income test, unlike the other
income tests, prescribes a ceiling for certain types of income. The Company may
not derive more than 30% of its gross income from the sale or other disposition
of (i) stock or securities held for less than one year, (ii) property in a
transaction which is a prohibited transaction, and (iii) real property
(including interests in real property and interests in real property mortgages)
held for less than four years other than property compulsorily or involuntarily
converted within the meaning of Section 1033 of the Code or foreclosure
property.
In the case of a REIT that is a partner in a partnership, the REIT will be
deemed to own its proportionate share of the assets of the partnership and will
be deemed to be entitled to the income of the partnership attributable to such
share. In addition, the assets and gross income of the partnership attributed to
the REIT retain the same character as in the hands of the partnership.
The Company expects that substantially all its gross income from its
properties will be considered "rents from real property." Rents received by the
Company will qualify as "rents from real property" for purposes of satisfying
the income tests described above only if several conditions are met. First, the
amount of rent must not be based in whole or in part on the income or profits of
any person although rents generally will not be excluded merely because they are
based on a fixed percentage or percentages of receipts or sales. None of the
rents from properties that will be held by the Company are based on income or
profits of a kind that would disqualify such rents from being treated as rents
from real property. Second, rents received from a tenant will not qualify as
rents from real property if the REIT, or an owner of 10% or more of the REIT,
also directly or constructively owns 10% or more of such tenant (a "Related
Party Tenant"). The Company does not anticipate receiving any rents from Related
Party Tenants. Third, if rent attributable to personal property that is leased
in connection with a lease of real property is greater than 15% of the total
rent received under the lease, then the portion of rent attributable to such
personal property will not qualify as rents from real property. The Company
anticipates that any rent attributable to personal property leased in connection
with a lease of real property will not be greater than 15% of the total rent
received under the lease. Finally, for rents to qualify as rents from real
property, the REIT generally must not operate or manage the property or furnish
or render services to the tenants of such property, other than through an
independent contractor from whom the REIT derives no income. However, the
Company may perform directly certain services customary in the geographic
markets in which it operates the property and customary to the type and class of
such property, provided that such services are not services which are considered
rendered to an occupant of the property. In this regard, the Company presently
intends to have Apple Residential Management Group, Inc., a corporation that
will qualify as an "independent contractor," manage and operate the Company's
real property assets.
The term "interest" generally does not include any amount determined, in
whole or in part, on the income or profits of any person, although an amount
generally will not be excluded from the term interest solely by reason of being
based on a fixed percentage or percentages of receipts or sales.
Any gross income derived from a prohibited transaction is taken into account
in applying the 30% income test necessary to qualify as a REIT (and the net
income from that transaction is subject to a 100% tax). The term "prohibited
transaction" generally includes a sale or other disposition of property
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(other than foreclosure property) that is held primarily for sale to customers
in the ordinary course of a trade or business. The Company believes that none of
its assets are held for sale to customers and that sale of any property will not
be in the ordinary course of business for the Company. Whether property is held
"primarily for sale to customers in the ordinary course of a trade or business"
depends, however, on the facts and circumstances in effect from time to time,
including those related to a particular property. Nevertheless, the Company will
attempt to comply with the terms of safe-harbor provisions in the Code
prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that the Company can
comply with the safe-harbor provisions of the Code or avoid owning property that
may be characterized as property held "primarily for sale to customers in the
ordinary course of business."
If the Company fails to satisfy one or both of the 75% or 95% income tests
for any taxable year, it may nevertheless qualify as a REIT for such year if it
is eligible for relief under certain provisions of the Code. These relief
provisions generally will be available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule is not due to fraud with intent to evade
tax. It is not now possible to determine the circumstances under which the
Company may be entitled to the benefit of these relief provisions. If these
provisions apply, a 100% tax is imposed on the net income attributable to the
greater of the amount by which the Company failed the 75% income test or the 95%
income test. No analogous relief is available should the Company fail to satisfy
the 30% income test.
Asset Tests. At the close of each quarter of its taxable year, the Company
also must satisfy several tests relating to the nature and diversification of
its assets. First, at least 75% of the value of the Company's total assets must
be represented by real estate assets, cash, cash items (including receivables
arising in the ordinary course of the Company's operations) and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those includible in the 75% asset class.
Third, of the investments included in the 25% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the Company's
total assets. Finally, of the investments included in the 25% asset class, the
Company may not own more than 10% of any one issuer's outstanding voting
securities. The property in which the Company proposes to invest generally will
qualify largely or entirely as real estate assets under the 75% requirement
described above.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Company intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests and to take such other
actions within 30 days after the close of any quarter as may be required to cure
any noncompliance.
Although not anticipated, the Company may organize and hold all of the stock
of one or more subsidiary corporations intended to qualify for treatment as a
"qualified REIT subsidiary." The Company's ownership of the stock of one or more
qualified REIT subsidiaries will not cause the Company to fail to satisfy the
asset tests described above. The Code provides that a corporation which is a
qualified REIT subsidiary will not be treated as a separate corporation, and,
for purposes of the asset and income tests, all assets, liabilities, and items
of income, deduction, and credit of a qualified REIT subsidiary will be treated
as assets, liabilities, and items of income, deduction and credit (as the case
may be) of the Company. Thus, in applying the income and asset tests described
above, the separate corporate existence of the Company's qualified REIT
subsidiary would be ignored in a manner analogous to an operating division of
the Company.
Annual Distribution Requirement. To qualify as a REIT, the Company is
required to make distributions (other than capital gain dividends) to its
Shareholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (ii) 95% of the after-tax net
income, if any, from foreclosure property, minus (B) the sum of certain items of
non-cash income. Such distributions must be
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paid in the taxable year to which they relate, or in the following taxable year
if declared before the Company timely files its tax return for such year and if
paid on or before the first regular distribution after such declaration. "REIT
taxable income" generally is computed in the same manner as taxable income of
ordinary corporations, with several adjustments, which include, but are not
limited to, the deduction allowed for dividends paid, but not for dividends
received. To the extent that the Company does not distribute all of its net
capital gain or distributes at least 95%, but less than 100%, of its REIT
taxable income, as adjusted, it will be subject to tax thereon at regular
corporate tax rates. Finally, as discussed above, the Company may be subject to
an excise tax if it fails to meet certain other distribution requirements.
The Company, from time to time, may not have sufficient cash or other liquid
assets to meet the 95% distribution requirement or to distribute such greater
amount as may be necessary to avoid income and excise taxation, due to timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at taxable income of the Company. Although not anticipated,
if such timing differences occur, the Company may find it necessary to arrange
for borrowings or, if possible, pay taxable stock dividends to meet the
distribution requirement.
The distribution requirement may be determined not to have been met by the
Company in a given year if the Service successfully challenges the deductibility
of a Company expenditure in an audit of that year. The Service also could
challenge the deductibility of the Asset Management Fee and other fees paid by
the Company. If a challenge by the Service were successful, the Company may be
able to rectify a resulting failure to meet the distribution requirement by
paying "deficiency dividends" to Shareholders in a later year, which may be
included in the Company's deduction for distributions paid for the earlier year.
Although the Company may be able, therefore, to avoid being taxed on amounts
distributed as deficiency dividends, it will be required to pay interest to the
Service based upon the amount of any deduction taken for deficiency dividends.
Failure to Qualify as a REIT. If the Company fails to qualify as a REIT for
any taxable year, and certain relief provisions do not apply, it will be subject
to federal income tax (including any applicable minimum tax) at regular
corporate rates and will not receive deductions for distributions paid to
Shareholders. As a result, the amount of after-tax earnings available for
distribution to Shareholders would decrease substantially. All distributions to
Shareholders would be taxable as ordinary income to the extent of current and
accumulated earnings and profits and distributions received by corporate
Shareholders may be eligible for a dividends-received deduction. In addition,
the Company would not be eligible to elect REIT status for the four subsequent
taxable years, unless its failure to qualify was due to reasonable cause and not
to willful neglect, and certain other requirements were satisfied. In order to
renew its REIT qualification at the end of such a four-year period, the Company
would be required to distribute all of its current and accumulated earnings and
profits before the end of the period. Any such distributions would be taxable as
ordinary income to Shareholders. In addition, the Company would be subjected to
taxation on any unrealized gain inherent in its assets at such time. If the
Company were to lose REIT status, however, it expects that it would liquidate
over the period and in the manner that the Board of Directors deems to be in the
best interest of the Shareholders, and such liquidation likely would be
completed before the Company would be eligible to re-elect REIT status.
FEDERAL INCOME TAXATION OF THE SHAREHOLDERS
While the Company qualifies for taxation as a REIT, distributions made to the
Company's Shareholders from current or accumulated earnings and profits (and not
designated as capital gain dividends) will be includible by the Shareholders as
ordinary income for federal income tax purposes. None of these distributions
will be eligible for the dividends-received deduction for corporate
Shareholders. Distributions that are designated as capital gain dividends will
be taxed as long-term capital gains (to the extent they do not exceed the
Company's actual net capital gain for the taxable year) without regard to the
period for which the Shareholder has held his or her Shares in the Company.
Corporate Shareholders, however, may be required to treat up to 20% of certain
capital gain dividends as ordinary income.
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Distributions in excess of current and accumulated earnings and profits will
not be taxable to a Shareholder to the extent that they do not exceed the
adjusted basis of the Shareholder's Shares. Shareholders will be required to
reduce the tax basis of their Shares by the amount of such distributions until
such basis has been reduced to zero, after which such distributions will be
taxable as capital gain (ordinary income in the case of a Shareholder who holds
its Shares as a dealer). The tax basis as so reduced will be used in computing
the capital gain or loss, if any, realized upon sale of the Shares. Any loss
upon a sale or exchange of Shares by a Shareholder who held such Shares for six
months or less (after applying certain holding period rules) generally will be
treated as a long-term capital loss to the extent that such Shareholder
previously received capital gain distributions with respect to such Shares. All
or a portion of any loss realized upon a taxable disposition of Shares of the
Company may be disallowed if other Shares of the Company are purchased (under a
dividend reinvestment plan or otherwise) within 30 days before or after the
disposition.
Shareholders may not include in their individual federal income tax returns
any net operating losses or capital losses of the Company. In addition, any
distribution declared by the Company in October, November, or December of any
year payable to a Shareholder of record on a specified date in any such month
shall be treated as both paid by the Company and received by the Shareholder on
December 31 of such year, provided that the distribution is actually paid by the
Company no later than January 31 of the following year. The Company may be
required to withhold a portion of capital gain distributions to any Shareholders
who fail to certify their non-foreign status to the Company.
Those Shareholders who avail themselves of the Additional Share Option
(described under "Plan of Distribution") or a dividend reinvestment plan, if
implemented, will be deemed for federal income tax purposes to have received the
gross amount distributed on their behalf notwithstanding its reinvestment in
Shares. Such Shareholders will thus be taxed as if they had received such
distributions despite the fact that their distributions have been reinvested
and, as a result, they will not receive any cash with which to pay the resulting
tax liability associated with the distribution. Shares received pursuant to the
Additional Share Option will have a holding period which begins on the day after
purchase of the Shares. The tax basis of such Shares will generally be the gross
amount of the deemed distribution.
INVESTMENT BY TAX-EXEMPT ENTITIES
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their unrelated business taxable income ("UBTI"). While many investments in
real estate generate UBTI, the Service has ruled that distributions by a REIT to
an exempt employee pension trust do not constitute UBTI. Based on such ruling
and assuming the Company conducts its activities as a REIT as described in this
Prospectus, amounts distributed by the Company to Exempt Organizations generally
should not constitute UBTI. However, if an Exempt Organization finances the
acquisition of its Shares, a portion of its income from the Company may
constitute UBTI pursuant to the "debt-financed property" rules under Section 514
of the Code.
For taxable years beginning after December 31, 1993, qualified trusts that
hold more than 10% (by value) of the shares of a REIT may be required to treat a
percentage of REIT distributions as UBTI. The requirement applies only if (i)
the qualification of the REIT depends upon the application of a "look-through"
exception to the restriction on the holding of REIT shares by five or fewer
individuals, including qualified trusts, (ii) the REIT is "predominantly held"
by qualified trusts, and (iii) the REIT assets would have generated significant
UBTI if the qualified trust held such assets directly. A REIT would be
predominantly held if either (i) a single qualified trust held more than 25% by
value of the interests in the REIT or (ii) one or more qualified trusts, each
owning more than 10% by value, held in the aggregate more than 50% of the
interests in the REIT. The percentage of any distribution paid (or treated as
paid) to the qualified trust that will be treated as UBTI is determined by the
amount of UBTI earned by the REIT (treating the REIT as if it were a qualified
trust, and therefore subject to tax on UBTI) as a percentage of the total gross
income of the REIT. A de minimis exception applies where the percentage is less
than 5%. For these purposes, a qualified trust is any trust defined under
Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code.
The Company does not anticipate that it will be predominantly held by qualified
trusts.
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FOREIGN INVESTORS
Foreign Shareholders. The rules governing United States federal income
taxation of nonresident alien individuals, foreign corporations, foreign
partnerships and other foreign Shareholders (collectively, "Non-U.S.
Shareholders") are complex. This discussion does not attempt to provide more
than a summary of such rules. Prospective Non-U.S. Shareholders should consult
with their own tax advisors to determine the impact of federal, state, and local
income tax laws with regard to an investment in the Shares, including any
reporting requirements, as well as the tax treatment of such an investment under
the laws in their country of residence.
Distributions that are not attributable to gain from sales or exchanges by
the Company of United States real property interests and not designated by the
Company as capital gain dividends will be treated as dividend distributions and
as ordinary income to the extent of current or accumulated earnings and profits
of the Company. Such distributions ordinarily will be subject to a withholding
tax equal to 30% of the gross amount of the distribution unless an applicable
tax treaty reduces or eliminates that tax. However, if income from the
investment in the Shares is treated as effectively connected with the Non-U.S.
Shareholder's conduct of a United States trade or business, the Non-U.S.
Shareholder generally will be subject to a tax at graduated rates, in the same
manner as U.S. Shareholders are taxed with respect to such distributions (and
may also be subject to the 30% branch profits tax in the case of a Shareholder
that is a foreign corporation). The Company expects to withhold United States
income tax at the rate of 30% on the gross amount of any such distributions paid
to a Non-U.S. Shareholder unless (i) a lower treaty rate applies and an
appropriate Form 1001 has been filed with the Company or (ii) the Non-U.S.
Shareholder files an Internal Revenue Service Form 4224 with the Company
claiming that the distribution is effectively connected income. Distributions in
excess of current and accumulated earnings and profits of the Company will not
be taxable to a Shareholder to the extent that they do not exceed the adjusted
basis of the Shareholder's Shares but rather will reduce the adjusted basis of
such Shares. To the extent that such distributions exceed the adjusted basis of
a Non-U.S. Shareholder's Shares, the excess will give rise to tax liability if
the Non-U.S. Shareholder otherwise would be subject to tax on any gain from the
sale or disposition of his or her Shares in the Company, as described below. If
it cannot be determined at the time a distribution is made whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distributions will be subject to withholding at the same rate as dividends.
However, amounts thus withheld are refundable if it is subsequently determined
that such distribution was, in fact, in excess of current and accumulated
earnings and profits of the Company.
For any year in which the Company qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, these distributions are taxed to a Non-U.S.
Shareholder as if such gain were effectively connected with a United States
business. Thus, Non-U.S. Shareholders would be taxed at the normal capital gain
rates applicable to U.S. Shareholders (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals). Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate Shareholder not entitled
to treaty exemption. The Company is required by applicable Treasury Regulations
to withhold 35% of any distribution that could be designated by the Company as a
capital gain dividend. This amount is not reduced by any U.S. tax treaty but is,
however, creditable against the Non-U.S.
Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of Shares generally
will not be taxed under FIRPTA if the Company is a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the stock was held directly or
indirectly by foreign persons. It currently is anticipated that the Company will
be a "domestically controlled REIT," and therefore the sale of Shares will not
be subject to taxation under FIRPTA. However, gain not subject to FIRPTA will be
taxable to a Non-U.S. Shareholder if (i) investment in the Shares is effectively
connected with the Non-U.S. Shareholder's United States trade or business, in
which case the Non-U.S. Shareholder will be subject to the same treatment as
U.S. Shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is
a nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States, in
which
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case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. If the gain on the sale of Shares were to be subject
to taxation under FIRPTA, the Non-U.S. Shareholder will be subject to the same
treatment as U.S. Shareholders with respect to such gain (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals), except that the purchaser of such Shares may be
required to withhold a portion of the proceeds against such tax liability. In
addition, distributions that are treated as gain from the disposition of Shares
and are subject to tax under FIRPTA may also be subject to a 30% branch profits
tax when made to a foreign corporate Shareholder that is not entitled to treaty
exemptions.
THE FOREGOING DISCUSSION DOES NOT PURPORT TO DESCRIBE ANY FOREIGN TAX
CONSEQUENCES OF AN INVESTMENT IN THE COMPANY. NON-U.S. SHAREHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO ALL TAX ASPECTS OF AN INVESTMENT
IN THE COMPANY.
Backup Withholding. The Company will report to its Shareholders and the
Service the amount of distributions paid during each calendar year and the
amount of tax withheld, if any. Under the backup withholding rules, a
Shareholder may be subject to backup withholding at the rate of 31% with respect
to distributions paid unless such holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(ii) has provided a correct taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A Shareholder that does
not provide the Company with a correct taxpayer identification number may also
be subject to penalties imposed by the Service. Any amount paid as backup
withholding will be creditable against the Shareholder's income tax liability.
STATE AND LOCAL TAXES
Even if the Company qualifies on a continuing basis as a REIT for federal
income tax purposes, the Company and its Shareholders may be subject to certain
state and local taxes. This Prospectus does not purport to describe any state or
local tax consequences of an investment in the Company. State and local tax
treatment of the Company and the Shareholders may differ substantially from the
federal income tax treatment described in this summary. CONSEQUENTLY, EACH
PROSPECTIVE SHAREHOLDER SHOULD CONSULT WITH HIS OR ITS OWN TAX ADVISOR WITH
REGARD TO THE STATE AND LOCAL TAX CONSEQUENCES OF AN INVESTMENT IN THE COMPANY.
INVESTMENT BY TAX-EXEMPT ENTITIES
UNRELATED BUSINESS TAXABLE INCOME
As discussed above, distributions from the Company will not constitute UBTI
to most tax-exempt investors, except to the extent such investors finance the
purchase of their Shares. See "Federal Income Tax Consequences -- Federal Income
Taxation of the Shareholders -- Investment By Tax-Exempt Entities."
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary responsibilities and other requirements regarding the
assets of an employee benefit plan ("Plan Assets"). For example, ERISA requires
that all Plan Assets shall be held in trust, that the plan shall avoid certain
prohibited transactions involving Plan Assets, and that investment management
responsibilities with respect to Plan Assets may be delegated only in certain
permitted manners. Although the matter is not entirely free from doubt, under
the relevant Department of Labor Regulations, the assets of the Company are not
expected to constitute Plan Assets because, subject to certain factual
determinations, the Shares should be treated as "publicly offered securities,"
i.e., securities that are widely held, freely transferable, and registered under
certain federal securities laws. In addition, the Company's assets would not
constitute Plan Assets to the extent that at least 75% of the Shares are held,
at all
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times, by investors other than "benefit plan investors." The term "benefit plan
investors" generally includes qualified employee pension or profit sharing
trusts and Keogh Plan trusts ("Employee Trusts"), individual retirement accounts
("IRAs"), and certain other entities.
The assets of the Company are expected to be exempt from the Plan Asset rules
for the reasons set forth above. However, this determination is based, in part,
on facts that cannot be ascertained at the present time. Consequently, there can
be no assurance that the Company's assets will not be treated as Plan Assets at
any given time. Nevertheless, the Advisor will use its best efforts to qualify
the Company's assets for exemption from the Plan Asset rules.
In considering the purchase of Shares and the number of Shares to be
purchased, a fiduciary with respect to an Employee Trust or other entity subject
to ERISA should consider, in addition to the foregoing, whether the investment
will satisfy: (i) the prudence requirement of Section 404(a)(1)(B) of ERISA,
considering the nature of an investment in, and the compensation structure of,
the Company, the fact that the Company has no history of operations and the fact
that the investments to be made by the Company have not been selected as of the
date of this Prospectus; (ii) the diversification requirement of Section
404(a)(1)(C) of ERISA; and (iii) the requirements that the fiduciary provide
benefits for the Plan participants and beneficiaries and value Plan Assets
annually.
In considering the purchase of Shares, a fiduciary with respect to an
Employee Trust should consider the trust requirement of ERISA. In addition, a
custodian or trustee of an IRA should consider the Code's prohibition against
the commingling of IRA assets with other property. Section 403(a) of ERISA
generally provides that the assets of employee benefit plans must be held in
trust. Section 408(a)(5) of the Code provides that an IRA must prohibit the
commingling of IRA assets with other property. The Department of the Treasury
and the Service have not issued any rulings or regulations that provide guidance
on the identification of the assets of an IRA for purposes of Section 408(a)(5)
of the Code.
If an IRA currently has insufficient funds to satisfy the minimum 200 Share
purchase requirement for an investment in the Company, it may be possible to
satisfy those requirements through contributions to the IRA by its owner
(concurrent with the investment in the Company) with respect to his prior and/or
current taxable year. In this regard, the owner of an IRA which is a prospective
investor should consult with his or her tax advisor.
Shares may not be purchased with Plan Assets by an Employee Trust or IRA with
respect to which the Board of Directors, the Advisor, or any of their Affiliates
(i) regularly gives investment advice, (ii) provides management services on a
discretionary basis, (iii) has an agreement, either written or unwritten, under
which information, recommendations, and advice used as a primary basis for
investment decisions is provided, (iv) has an agreement or understanding, either
written or unwritten, under which individualized investment advice is given, or
(v) is otherwise a fiduciary within the meaning of Section 3(21) of ERISA.
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CAPITALIZATION
The capitalization of the Company as of August 7, 1996, and as adjusted to
reflect the issuance and sale of the Shares offered hereby assuming the Minimum
Offering and Maximum Offering is as follows:
AS ADJUSTED
----------------------------
MINIMUM MAXIMUM
ACTUAL OFFERING OFFERING
-------- ------------- --------------
Common Shares; no par value; 10 shares
issued, 1,666,666.67 and 25,166,666.67
shares issued as adjusted,
respectively........................... $100 $15,000,100 $250,000,100
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The Company was organized on August 7, 1996 and has had no operations to
date. The Company intends to invest primarily in existing residential apartment
communities located in Texas and the southwestern United States and to qualify
as a REIT under the Code.
The proceeds of this offering and the cash flow generated from properties the
Company acquires and short-term investments will be the Company's principal
sources of liquidity. In addition, although the Company has no current intention
to borrow funds, it reserves the right to do so, subject to approval of the
Board of Directors. See "Investment Objectives and Policies -- Borrowing
Policies." The Company generally will be obligated to distribute annually at
least 95% of its taxable income to its Shareholders to qualify as a REIT under
the Code. The Company anticipates that its cash flow will be adequate to cover
Operating Expenses and to permit the Company to meet its anticipated liquidity
requirements, including distribution requirements.
The effects of future inflation on the Company's operations may increase the
Company's operating costs, including interest costs on bank borrowings, if any.
The Company intends to establish initial working capital reserves of at least
0.5% of the proceeds of this offering. The Company also intends to maintain
ongoing working capital reserves in an amount equal to at least 0.5% of the
proceeds of the offering, subject to review and re-evaluation by the Board of
Directors. Such funds, in combination with income from investment properties and
short-term investments, are anticipated to be sufficient to satisfy its
liquidity requirements.
PLAN OF DISTRIBUTION
The Company is offering to sell the Shares using the service of David Lerner
Associates, Inc. as the Managing Dealer, and other broker-dealers selected by
the Managing Dealer ("Selected Dealers"). The Shares are being offered on a
"best efforts" basis, meaning that the Managing Dealer and Selected Dealers are
not obligated to purchase any Shares. No Shares will be sold unless at least the
Minimum Offering of $15,000,000 in Shares has been sold no later than one year
after the date of this Prospectus. If the Minimum Offering of Shares is not sold
by that date, the offering will terminate and all funds theretofore deposited by
investors into the Escrow Account will be promptly refunded in full, together
with each investor's share of any interest earned thereon (less withholding of
taxes in respect to payment of interest, if applicable). First Union National
Bank of North Carolina will act as escrow agent for the Escrow Account until the
Minimum Offering of Shares is sold.
The Shares are offered at $9 per Share until the Minimum Offering of
$15,000,000 in Shares is achieved. Thereafter, the Shares will be offered at $10
per Share.
The offering of Shares is expected to terminate when all Shares offered
hereby have been sold or one year from the date hereof, unless extended by the
Company for up to an additional year. In some states, extension of the offering
may not be allowed, or may be allowed only upon certain conditions.
Purchasers will be sold Shares at one or more closings. Following the sale of
the Minimum Offering, additional closings will be held from time to time during
the offering period as orders are received. The final closing will be held
shortly after the termination of the offering period or, if earlier, upon the
sale
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of all the Shares. It is expected that after the closing of the sale of the
Minimum Offering, purchasers will be sold Shares no later than the last day of
the calendar month following the month in which their orders are received. Funds
received during the offering but after the initial disbursement of funds may be
held in escrow for the benefit of purchasers until the next closing, and then
disbursed to the Company.
In no event is the Company required to accept the proffered subscription of
any prospective investor, and no such proffered subscription shall become
binding on the Company until a properly completed Subscription Agreement
prepared and executed by the prospective investor has been accepted by a duly
authorized representative of the Company. The Company will either accept or
reject each subscription within four business days from the receipt of the
subscription by the Managing Dealer or a Selected Dealer. The Company intends to
cause to be paid from any escrow account each investor's share of net interest
on escrowed funds, whether or not the investor's subscription for Shares is
accepted. The Company reserves the right to adopt reasonable simplifying
conventions or assumptions in determining each investor's share of such net
interest. Investors' subscriptions will be revocable by written notice delivered
to the escrow agent at least five days before the applicable closing. Subject to
the foregoing, an investor's subscription funds may remain in escrow for an
indefinite period of time.
It is expected that Shareholders will be able to elect to reinvest any
distributions from the Company in additional Shares available in this offering,
for as long as this offering continues. This option is referred to herein as the
"Additional Share Option." Any purchase by reinvestment of distributions would
be at the same price per Share and on the same terms applicable generally to
subscriptions in this offering effective at the time of reinvestment. The
Company reserves the right to establish rules governing such reinvestment, as
well as the right to modify or terminate such Additional Share Option at any
time. The Company estimates that approximately 400,000 Shares ($4,000,000 at $10
per Share) offered through this Prospectus will be purchased through
Shareholders' reinvestment of distributions in Shares pursuant to the Additional
Share Option described in this paragraph, but the number of Shares which will be
so purchased cannot be determined at this time.
Subject to the Additional Share Option being available through the
broker-dealer which initially sells a Shareholder his Shares, a Shareholder will
be able to elect the option by directing, on his Subscription Agreement, that
cash distributions be reinvested in additional Shares. Distributions
attributable to any calendar quarter will then be used to purchase Shares in
this offering. As described under "Federal Income Tax Consequences -- Federal
Income Taxation of the Shareholders," a Shareholder who elects the Additional
Share Option will be taxed as if he had received his distributions which are
used to purchase additional Shares. A Shareholder may elect to terminate his
participation in the Additional Share Option at any time by written notice sent
to the Company or to the broker-dealer through which the Shareholder initially
purchased Shares. The notice will be effective with respect to distributions
attributable to any calendar quarter if it is sent at least 10 days before the
end of such calendar quarter.
Funds not invested in real properties may be invested by the Company in
United States Government securities, certificates of deposit of banks located in
the United States having a net worth of at least $50,000,000, bank repurchase
agreements covering the securities of the United States Government or United
States governmental agencies issued by banks located in the United States having
a net worth of at least $50,000,000, bankers' acceptances, prime commercial
paper or similar highly liquid investments (such as money market funds selected
by the Company) or evidences of indebtedness.
The Company will pay to the Managing Dealer Selling Commissions on all sales
made in an amount equal to 7.5% of the purchase price of the Shares ($0.675 per
Share purchased at $9 per Share and $0.75 per Share purchased at $10 per Share).
The Company will also pay to the Managing Dealer a Marketing Expense Allowance
equal to 2.5% of the purchase price of the Shares, as a non-accountable
reimbursement for expenses incurred by it in connection with the offer and sale
of the Shares. The Marketing Expense Allowance will equal $0.225 per Share
purchased at $9 per Share and $0.25 per Share purchased at $10 per Share. The
Selling Commissions and Marketing Expense Allowance are payable to the Managing
Dealer at the times of the issuance of Shares to purchasers.
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Prospective investors are advised that David Lerner Associates, Inc., and
other broker-dealers participating in this offering, reserve the right to
purchase Shares, on the same terms applicable generally to sales pursuant to
this Prospectus, for their own accounts, at any time and in any amounts, to the
extent not prohibited by relevant law.
The Agency Agreement among the Company, the Advisor, Apple Realty Group, Inc.
and the Managing Dealer permits the Managing Dealer to use the services of other
broker-dealers in offering and selling the Shares, subject to the Company's
approval. The Managing Dealer will pay the compensation owing to such
broker-dealers out of the Selling Commissions or Marketing Expense Allowance
payable to it. Sales by such broker-dealers would be carried on in accordance
with customary securities distribution procedures. The Managing Dealer may be
deemed to be an "underwriter" for purposes of the Securities Act in connection
with this offering. Purchasers' checks are to be made payable to "First Union
National Bank, Escrow Agent" or as otherwise directed by the Managing Dealer.
Purchasers are required to purchase a minimum of $5,000 in Shares ($2,000 in
Shares for Qualified Plans). The Advisor and Affiliates of the Advisor may
purchase in this offering up to 2.5% of the total number of Shares sold in the
offering, on the same terms and conditions as the public. If the Advisor or
Affiliates purchase any Shares, they will be permitted to vote on any matters
submitted to a vote of holders of the Shares. Any purchase of Shares in this
offering by the Advisor or Affiliates must be for investment, and not for resale
or distribution. The Shares described in this paragraph are exclusive of the
Shares which may be issued under the Company's stock incentive plans. See
"Management -- Stock Incentive Plans."
There has been no previous market for any of the Company's Shares. The
initial offering price for the Shares is arbitrary and was determined on the
basis of the proposed capitalization of the Company, market conditions and other
relevant factors.
The Company, the Advisor and Apple Realty Group, Inc. have agreed to
indemnify the Managing Dealer and other broker-dealers against certain
liabilities, including liabilities under the Securities Act. No indemnification
is provided for willful misfeasance, bad faith, gross negligence or reckless
disregard of duties under the Securities Act by any of such persons.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50,000,000 Common
Shares, no par value and 200,000 Class B Convertible Shares, no par value. Each
Common Share will be fully paid and nonassessable upon issuance and payment
therefor. As of the date of this Prospectus, there were 10 Common Shares of the
Company issued and outstanding. All 200,000 authorized Class B Convertible
Shares are held by Glade M. Knight. See "Principal and Management Stockholders."
The Common Shares will have the sole voting power to elect Directors and
holders of the outstanding Common Shares will be entitled to one vote per Share
on all matters submitted to a vote of the Shareholders. Common Shares of the
Company have no preference, conversion, exchange, preemptive or cumulative
voting rights. No equity securities of the Company shall have greater voting
rights per share than those attributable to the Common Shares that will be sold
in this offering. Holders of Common Shares will be entitled to participate on a
per-Share basis in distributions paid in respect of the Shares if, when and as
declared by the Board of Directors and in the distribution of net assets of the
Company upon its liquidation, dissolution or winding up.
REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER
Two of the requirements for qualification for the tax benefits accorded a
REIT under the Code are that (i) at no time during the last half of each taxable
year may more than 50% in value of the outstanding Shares be owned, directly or
indirectly, by or for five or fewer individuals, and (ii) there must be at least
100 Shareholders for at least 335 days in any taxable year, or proportionate
part of any shorter taxable year, after its first taxable year. See "Federal
Income Tax Consequences."
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In order that the Company may meet these requirements at all times, the
Bylaws prohibit any person from acquiring or holding, directly or indirectly,
ownership of a number of Shares in excess of 9.8% of all the outstanding Shares.
Shares owned by a person in excess of such amounts will be referred to in the
Bylaws and herein as "Excess Shares." For this purpose the term "ownership" is
defined in accordance with the constructive ownership provisions of Section 544
of the Code (as modified by Section 856(h) of the Code). Accordingly, Shares
owned or deemed to be owned by a person who individually owns less than 9.8% of
the Shares outstanding nevertheless may be Excess Shares.
Holders of Excess Shares are not entitled to voting rights, dividends or
distributions. If, after the purported transfer or other event resulting in an
exchange of Common Shares for Excess Shares and before discovery by the Company
of such exchange, dividends or distributions are paid with respect to Common
Shares that were exchanged for Excess Shares, then such dividends or
distributions are to be repaid to the Company upon demand.
The Bylaws also provide that in the event any person acquires Excess Shares,
such Excess Shares may be redeemed by the Company, at the discretion of the
Board of Directors. Except as set forth below, the redemption price for redeemed
Excess Shares shall be the lesser of (i) the price paid for the Excess Shares
(or if no notice of such purchase price is given, at a price to be determined by
the Board of Directors, in its sole discretion, but no lower than the lowest
market price for the Common Shares during the year prior to the date the Company
exercises its purchase option) and (ii) the fair market value of such Excess
Shares, which shall be the fair market value of the Shares as determined in good
faith by the Board of Directors or, if the Shares are listed on a national
securities exchange, the closing price (average of closing bid and asked prices
if the Shares are quoted on the NASDAQ National Market System) on the last
business day prior to the redemption date. To redeem Excess Shares, the Board of
Directors must give a notice of redemption to the holder of such Excess Shares
not less than one week prior to the date fixed by the Board of Directors for
redemption. The holder may sell such Excess Shares before the date fixed for
redemption. If he does not, the redemption price for such Excess Shares shall be
paid on the redemption date fixed by the Board of Directors and included in such
notice. From and after the date fixed for redemption of Excess Shares, such
Shares shall cease to be entitled to any distributions and other benefits, other
than the right to payment of the redemption price for such Shares. Under certain
circumstances, the proceeds of redemption might be taxed as a distribution to
the recipient.
The redemption of Excess Shares, at the discretion of the Board of Directors,
is the only established Company procedure for the repurchase of Shares. The
Company has no other right or intent to repurchase the Shares, nor do the
Shareholders have any right to "put" the Shares to, or require redemption of
their Shares by, the Company.
The constructive ownership provisions applicable under Section 544 of the
Code (as modified by Section 856(h) of the Code) attribute ownership of
securities by a corporation, partnership, estate or trust proportionately to its
shareholders, partners or beneficiaries, attribute ownership of securities owned
by family members to other members of the same family, treat securities with
respect to which a person has an option to purchase as actually owned by that
person, and set forth rules as to when securities constructively owned by a
person are considered to be actually owned for the application of such
attribution provisions (i.e., "reattribution"). Thus, for purposes of
determining whether a person holds Excess Shares, a person will be treated as
owning not only Shares actually or beneficially owned, but also any Shares
attributed to such person under the attribution rules described above. Ownership
of Shares through such attribution is generally referred to as constructive
ownership.
Under the Bylaws any acquisition of Shares of the Company that would result
in the disqualification of the Company as a REIT under the Code is void to the
fullest extent permitted by law, and the Board of Directors is authorized to
refuse to transfer Shares to a person if, as a result of the transfer, that
person would own Excess Shares. Prior to any transfer or transaction which, if
consummated, would cause a shareholder to own Excess Shares, and in any event
upon demand by the Board of Directors, a shareholder is required to file with
the Company an affidavit setting forth, as to that shareholder, the information
required to be reported in returns filed by shareholders under Treasury
Regulation Section
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1.857-9 and in reports filed under Section 13(d) of the Exchange Act.
Additionally, each proposed transferee of Common Shares, upon demand of the
Board of Directors, also may be required to file a statement or affidavit with
the Company setting forth the number of Shares already owned by the transferee
and any person to or from whom Shares may be attributed by or to the transferee.
The transfer or sale of Shares also will be subject to compliance with
applicable "Blue Sky" laws and federal securities laws.
FACILITIES FOR TRANSFERRING SHARES
The Managing Dealer may, but is not obligated to, assist Shareholders who
desire to transfer their Shares. In the event the Managing Dealer provides
assistance, it will be entitled to receive compensation as specified by the
Managing Dealer. Any assistance offered by the Managing Dealer may be terminated
or modified at any time without notice, and any fee charged for transfer
assistance may be modified or terminated at any time and without notice. The
Managing Dealer currently has no plans for rendering the type of assistance
referred to in this paragraph. Such assistance, if rendered, would likely
consist of informally matching isolated potential buyers and sellers, and would
not represent the creation of any "market" for the Shares.
No public market for the Shares currently exists. The Company does not plan
to cause the Shares to be listed on any securities exchange or quoted on any
system or in any established market either immediately or at any definite time
in the future. While the Company, acting through its Board of Directors, may
cause the Shares to be so listed or quoted if the Board of Directors determines
such action to be prudent, there can be no assurance that such event will ever
occur. Prospective Shareholders should view the Shares as illiquid and must be
prepared to hold their investment for an indefinite length of time. Currently,
the Company expects that within approximately three (3) years from Initial
Closing, it will use its best efforts either (i) to cause the Shares to be
listed on a national securities exchange or quoted on the NASDAQ National Market
System or (ii) to cause the Company to dispose of substantially all of its
properties in a manner which will permit distributions to Shareholders of cash
or marketable securities. The taking of either type of action would be
conditioned on the Board of Directors determining such action to be prudent and
in the best interests of the Shareholders, and would be intended to provide
Shareholders with liquidity either by initiating the development of a market for
the Shares or by disposing of properties and distributing to Shareholders cash
or other securities then being actively traded. However, the Company is under no
obligation to take any of the foregoing actions, and any such action, if taken,
might be taken after the referenced three-year period.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Shares will be selected by the Board
of Directors.
SUMMARY OF ORGANIZATIONAL DOCUMENTS
The following is a summary of the principal provisions of the Company's
Articles of Incorporation and Bylaws, some of which may be described or referred
to elsewhere in this Prospectus. Neither this summary nor such descriptions
appearing elsewhere in this Prospectus purport to be, or should be considered, a
complete statement of the terms and conditions of the Articles of Incorporation
or Bylaws or any specific provision thereof, and this summary and all such
descriptions are qualified in their entirety by reference to, and the provisions
of, the Articles of Incorporation and Bylaws, which have been filed as exhibits
to the registration statement of which this Prospectus is a part. The Company's
Articles of Incorporation have been reviewed and approved unanimously by the
Directors.
BOARD OF DIRECTORS
The Board of Directors, subject to specific limitations in the Articles of
Incorporation and those imposed by law, has full, exclusive, and absolute power,
control and authority over the property and business of the Company. The Board
of Directors, without approval of the Shareholders, may alter the Company's
investment policies in view of changes in economic circumstances and other
relevant factors, subject to the
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investment restrictions set forth in the Bylaws. The Board of Directors named
under "Management" will serve until the first annual meeting of Shareholders, to
be held in the calendar year 1997. The term of each Director elected by the
Shareholders shall continue until the next annual meeting of Shareholders.
A Director may be removed (i) for cause by the vote or written consent of
all Directors other than the Director whose removal is being considered, or (ii)
with or without cause at a special meeting of the Shareholders by vote of a
majority of the outstanding Shares. "For cause" is defined as willful violations
of the Articles of Incorporation or Bylaws, or gross negligence in the
performance of a Director's duties. Any vacancies in the office of Director may
be filled by a majority of the Directors continuing in office or at a special
meeting of Shareholders by vote of a majority of the Shares present at a meeting
at which there is a quorum. Any Director so elected shall hold office for the
remainder of his predecessor's term. The number of Directors shall not be less
than three nor more than 15. At the time of Initial Closing, there will be five
Directors, a majority of whom are Independent Directors. See "Management." The
holders of the Common Shares are entitled to vote on the election or removal of
the Board of Directors, with each Share entitled to one vote.
The Board of Directors is empowered to fix the compensation of all officers
and the Board of Directors. Under the Bylaws, Directors may receive reasonable
compensation for their services as Directors and officers of the Company and
reimbursement of their expenses, and the Company may pay a Director such
compensation for special services, including legal and accounting services, as
the Board of Directors deems reasonable. The Board of Directors may delegate
certain of its powers to an Executive Committee, which must be comprised of at
least three Directors, the majority of whom are Independent Directors. At all
times a majority of the Directors and a majority of the members of any Board
committee shall be Independent Directors, except that upon the death, removal,
or resignation of an Independent Director such requirement shall not be
applicable for 60 days.
RESPONSIBILITY OF BOARD OF DIRECTORS, ADVISOR, OFFICERS AND EMPLOYEES
The Articles of Incorporation of the Company provide that the Directors and
officers of the Company shall have no liability to the Company or its
Shareholders in actions by or in the right of the Company unless such officer or
Director has engaged in willful misconduct or a knowing violation of the
criminal law or of any federal or state securities laws. The Advisory Agreement
provides that the Advisor shall have no liability to the Company or its
Shareholders unless the Advisor has engaged in gross negligence or willful
misconduct. Generally, claimants must look solely to the Company's property for
satisfaction of claims arising in connection with the affairs of the Company.
The Articles of Incorporation and the Advisory Agreement, respectively, provide
that the Company shall indemnify any present or former Director, officer,
employee or agent and the Advisor against any expense or liability in an action
brought against such person if the Directors (excluding the indemnified party)
determine in good faith that the Director, officer, employee or agent or the
Advisor was acting in good faith within what he or it reasonably believed to be
the scope of his or its employment or authority and for a purpose which he or it
reasonably believed to be in the best interests of the Company or its
Shareholders, and that the liability was not the result of willful misconduct,
bad faith, reckless disregard of duties or violation of the criminal law.
Indemnification is not allowed for any liability imposed by judgment, and costs
associated therewith, including attorneys' fees, arising from or out of a
violation of federal or state securities laws associated with the public
offering of the Common Shares unless (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular indemnitee, or (ii) such claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction as
to the particular indemnitee, or (iii) a court of competent jurisdiction
approves a settlement of the claims against a particular indemnitee. To the
extent that the foregoing indemnification provisions purport to include
indemnification for liabilities arising under the Securities Act, in the opinion
of the Securities and Exchange Commission, such indemnification is contrary to
public policy and therefore unenforceable.
In the absence of the special exculpation and indemnification provisions in
the Company's Articles of Incorporation, the Directors and officers of the
Company would have greater accountability to the Company under Virginia
statutory law. In the absence of a special provision in the Articles of
Incorporation, a director or officer of a Virginia corporation would have
financial liability for misconduct equal to the greater of $100,000 or the
amount of cash compensation received by the director or officer from
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the corporation during the twelve preceding months. Virginia law permits, but
does not require, a corporation to indemnify a director if the director
conducted himself in good faith and believed that his conduct was in the best
interests (or in certain cases at least not opposed to the best interests) of
the corporation. As noted above, the Articles of Incorporation of the Company
require indemnification under the circumstances indicated, and therefore provide
rights more favorable to the Directors and officers than would be afforded by
Virginia law alone.
Although no Virginia court has passed upon the nature of the accountability
owed by an entity like the Advisor to an entity like the Company, it is almost
certain that the exculpation and indemnification provisions benefiting the
Advisor under the Advisory Agreement are more beneficial to the Advisor than
would be the result in the absence of such provisions. Since the Advisor has a
contractual relationship with the Company, in the absence of special exculpation
and indemnification provisions in the Advisory Agreement, a court would likely
hold that the Advisor is liable for ordinary negligence and ordinary misconduct,
in addition to the more egregious misconduct for which the Advisor is liable
under the Advisory Agreement.
The exculpation and indemnification provisions in the Articles of
Incorporation and the Advisory Agreement have been adopted to help induce the
beneficiaries of such provisions to agree to serve on behalf of the Company or
the Advisor by providing a degree of protection from liability for alleged
mistakes in making decisions and taking actions. Such exculpation and
indemnification provisions have been adopted, in part, in response to a
perceived increase generally in shareholders' litigation alleging director and
officer misconduct. The exculpation and indemnification provisions in the
Articles of Incorporation and the Advisory Agreement may result in a Shareholder
or the Company having a more limited right of action against a Director, the
Advisor or its Affiliates than he or it would otherwise have had in the absence
of such provisions. See "Risk Factors -- Responsibilities of Directors, Advisor
and Affiliates -- Possible Inadequacy of Remedies." Conversely, the presence of
such provisions may have the effect of conferring greater discretion upon the
Directors, the Advisor and its Affiliates in making decisions and taking actions
with respect to the Company. Subject to the exculpation and indemnification
provisions in the Articles of Incorporation, the Advisory Agreement, and as
otherwise provided by law, the Advisor and the Directors and officers are
accountable to the Company and its Shareholders as fiduciaries and must exercise
good faith and integrity in handling the Company's affairs. As noted above,
however, the exculpation and indemnification provisions in the Articles of
Incorporation and the Advisory Agreement represent a material change from the
accountability which would be imposed upon the Directors, officers, Advisor and
its Affiliates in the absence of such contractual provisions. Thus, such
fiduciary duties will be materially different from such fiduciary duties as they
would exist in the absence of the provisions of the Articles of Incorporation
and the Advisory Agreement.
ISSUANCE OF SECURITIES
The Board of Directors may in its discretion issue additional Shares or other
equity or debt securities of the Company, including options, warrants, and other
rights, on such terms and for such consideration as it may deem advisable. See
"Risk Factors -- Potential Dilution." Without limiting the generality of the
foregoing, the Board of Directors may, in its sole discretion, issue Shares or
other equity or debt securities of the Company, (1) to persons from whom the
Company purchases property, as part or all of the purchase price of the
property, or (2) to the Advisor or its Affiliates in lieu of cash payments
required under the Advisory Agreement or other contract or obligation. The Board
of Directors, in its sole discretion, may determine the value of any Shares or
other equity or debt securities issued in consideration of property or services
provided, or to be provided, to the Company, except that while Shares are
offered by the Company to the public, the public offering price of such Shares
shall be deemed their value.
The Company has adopted two stock incentive plans for the benefit of the
Directors of the Company and certain employees of the Company and of the Advisor
and its Affiliates. See "Management -- Stock Incentive Plans."
REDEMPTION AND RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, not more than 50% of its
outstanding Shares may be owned directly or indirectly by five or fewer
individuals during the last half of any year other than the first year, and
after the first year all Shares of the Company must be owned by 100 or
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more persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. As a means of attempting to ensure
compliance with these requirements, the Bylaws provide that the Company may
prohibit any person from directly or indirectly acquiring ownership (beneficial
or otherwise) of Excess Shares. See "Description of Capital Stock -- Repurchase
of Shares and Restrictions on Transfer."
AMENDMENT
The Articles of Incorporation and the Bylaws may be amended or altered or the
Company may be dissolved by the affirmative vote of the holders of a majority of
the outstanding Common Shares, with each Shareholder entitled to cast one vote
per Share held. The Company's Articles and Bylaws may not be amended unless
approved by the vote of the holders of a majority of the Common Shares of the
Company (except that the Directors may amend the Bylaws if they determine such
amendment to be necessary to comply with the REIT provisions of the Code or
other applicable laws and regulations or the requirements of any state
securities regulator or similar official). No amendment that would change any
rights with respect to any outstanding Common Shares of the Company, or diminish
or eliminate any voting rights pertaining thereto, may be made unless approved
by the vote of the holders of two-thirds of the outstanding Common Shares so
affected.
SHAREHOLDER LIABILITY
The holders of the Company's Shares shall not be liable personally on account
of any obligation of the Company.
SALES LITERATURE
The Company may use certain sales or marketing literature in connection with
the offering of the Shares. Sales or marketing materials which may be used
include a sales brochure highlighting the Company. The literature may also
include a brochure describing Affiliates of the Advisor, and a "tombstone"
advertisement, mailer and introductory letter. The Company may, from time to
time, also utilize brochures describing completed or proposed property
acquisitions, summaries of the Company or of the offering of the Shares, and
discussions of REIT investments generally.
The offering is, however, made only by means of this Prospectus. Except as
described herein, the Company has not authorized the use of other supplemental
literature in connection with the offering other than marketing bulletins to be
used internally by broker-dealers. Although the information contained in such
literature does not conflict with any of the information contained in this
Prospectus, such material does not purport to be complete, and should not be
considered as a part of this Prospectus or the registration statement of which
this Prospectus is a part, as incorporated in this Prospectus or the
registration statement by reference, or as forming the basis of the offering of
the Shares described herein.
REPORTS TO SHAREHOLDERS
Financial information contained in all reports to Shareholders will be
prepared in accordance with generally accepted accounting principles. The annual
report, which will contain financial statements audited by a nationally
recognized accounting firm, will be furnished within 120 days following the
close of each fiscal year. The annual report will contain a complete statement
of compensation and fees paid or accrued by the Company to the Advisor and its
Affiliates, together with a description of any new agreements with Affiliates.
Under the Bylaws, the Company is also obligated to send to the Shareholders
quarterly reports after the end of the first three calendar quarters of each
year. Such quarterly reports will include unaudited financial statements
prepared in accordance with generally accepted accounting principles, a
statement of fees paid during the quarter to the Advisor and its Affiliates, and
a reasonable summary of the activities of the Company during such quarter. The
Shareholders also have the right under applicable law to obtain other
information about the Company.
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The Company will file a report meeting the requirements of Form 8-K under the
Exchange Act if, after the termination of the offering, a commitment is made
involving the use of 10 percent or more of the net proceeds of the offering and
will provide the information contained in such report to the Shareholders at
least once each quarter after the termination of this offering.
LEGAL OPINIONS
Certain legal matters with respect to the legality of the Shares offered
hereby and certain federal income tax matters as set forth under "Risk
Factors--Federal Income Tax Risks" and "Federal Income Tax Consequences" will be
passed upon by McGuire, Woods, Battle & Boothe, L.L.P., Richmond, Virginia, as
counsel to the Company. McGuire, Woods, Battle & Boothe, L.L.P. also acts as
counsel to the Advisor and certain of its Affiliates.
EXPERTS
The balance sheet of Apple Residential Income Trust, Inc. at August 7, 1996,
appearing in this Prospectus and Registration Statement has been audited by
Ernst & Young, LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and is included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
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EXPERIENCE OF PRIOR PROGRAMS
The tables following this introduction set forth information with respect to
Cornerstone Realty Income Trust, Inc. ("Cornerstone"), a real estate investment
trust which was organized by Affiliates of the Advisor of Apple Residential
Income Trust, Inc. ("Apple"). These tables provide information for use in
evaluating Cornerstone, the results of the operations of Cornerstone, and
compensation paid by Cornerstone and certain other programs. In addition, Table
IV contains information on certain other programs organized by Affiliates of the
Advisor which completed operations in the last five years. Information in the
tables is current as of September 30, 1996. The tables are furnished solely to
provide prospective investors with information concerning the past performance
of entities formed by Affiliates of the Advisor. Regulatory filings and annual
reports of Cornerstone will be provided upon request for no cost (except for
exhibits thereto, for which there is a minimal charge). In addition, Part II of
Apple's Registration Statement contains detailed information on the property
acquisitions of Cornerstone and is available without charge upon request of any
investor or prospective investor. Please send all requests to Cornerstone Realty
Income Trust, Inc., 306 East Main Street, Richmond, VA 23219; telephone:
804-643-1761.
In the five years ending September 30, 1996, Affiliates of the Advisor of
Apple sponsored only Cornerstone, which has investment objectives similar to
those of Apple. Cornerstone was formed to invest in existing residential
properties on a substantially debt-free basis for the purpose of providing
regular quarterly distributions to shareholders and the possibility of long-term
appreciation in the value of properties and shares.
THE INFORMATION IN THE FOLLOWING TABLES SHOULD NOT BE CONSIDERED AS
INDICATIVE OF THE CAPITALIZATION OR OPERATIONS OF THE COMPANY. PURCHASERS OF
SHARES OFFERED BY THE OFFERING WILL NOT HAVE ANY INTEREST IN THE ENTITIES
REFERRED TO IN THE FOLLOWING TABLES OR IN ANY OF THE PROPERTIES OWNED BY THOSE
ENTITIES AS A RESULT OF THE ACQUISITION OF SHARES.
See "The Advisor and Affiliates -- Prior Performance of Programs Sponsored by
Affiliates of Advisor" in the Prospectus for additional information on certain
prior real estate programs sponsored by Affiliates of the Advisor and its
predecessors, including a description of the investment objectives which are
deemed by the Prior Program Sponsor to be similar and dissimilar to those of the
Company.
See the Glossary, beginning at page 71, for definitions of the following
terms used in this Section entitled "Experience of Prior Programs": Acquisition
Costs, Amount Remaining Invested in Properties at End of Year, Cash Generated
from Operations, GAAP, Percent Leverage, Recapture, Reserves, Return of Capital,
and Prior Program Sponsor.
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TABLE I: EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I presents a summary of the funds raised and the use of those funds by
Cornerstone, whose investment objectives are similar to those of the Company and
whose offering closed within three years ending September 30, 1996.
Dollar Amount Offered........................... 300,000,000
Dollar Amount Raised............................ 294,781,000
Less Offering Expenses:
Selling Commissions and Discounts ............. 7.50%
Organizational Expenses........................ 5.50%
Other.......................................... 0.00%
Reserves........................................ 3.00%
Percent Available for Investment................ 84.00%
Acquisition Costs:
Prepaid items and fees to purchase property.... 82.00%
Cash downpayment............................... 0.00%
Acquisition fees............................... 2.00%
Other.......................................... 0.00%
Total Acquisition Costs......................... 84.00%
Percent Leverage (excluding unsecured debt) .... 0.00%
Date offering began............................. May 1993
Length of offering (in months).................. 40
Months to invest amount available for
investment..................................... 40
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TABLE II: COMPENSATION TO SPONSOR AND ITS AFFILIATES
Table II summarizes the compensation paid to the Prior Program Sponsor and
its Affiliates (i) by programs organized by it and closed within three years
ended September 30, 1996, and (ii) by all other programs during the three years
ended September 30, 1996.
<TABLE>
<CAPTION>
OTHER
CORNERSTONE PROGRAMS
-------------- -------------
<S> <C> <C>
Date offering commenced ....................................... May 1993 Various
Dollar amount raised .......................................... $294,781,000 $ 35,483,175
Amounts paid to Prior Program Sponsor form proceeds of offering:
Acquisition fees
Real Estate commission ...................................... $ 4,241,237 $ 0
Advisory fees ............................................... $ 0 $ 0
Other ....................................................... $ 0 $ 0
Cash generated from operations before deducting payments
to Prior Program Sponsor...................................... $ 25,764,282 $ 7,521,808
Aggregate compensation to Prior Program Sponsor
Management fees .............................................. $ 3,063,590 $ 786,540
Accounting fees .............................................. $ 0 $ 161,496
Reimbursements ............................................... $ 2,717,655 $ 0
Leasing fees ................................................. $ 0 $ 0
Other fees ................................................... $ 659,930 $ 0
There have been no fees from property sales or refinancings
</TABLE>
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TABLE III: OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents a summary of the annual operating results for Cornerstone,
the only offering closed in the five years ending September 30, 1996. Table III
is shown on both an income tax basis as well as in accordance with generally
accepted accounting principles, the only significant difference being the
methods of calculating depreciation.
<TABLE>
<CAPTION>
NINE MONTHS
--------------
1996 1995 1994 1993
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Capital contributions by year......... $171,666,206 $71,771,027 $23,496,784 $27,846,983
Gross revenue......................... $ 26,714,877 $16,300,821 $ 8,177,576 $ 1,784,868
Operating expenses................... $ 13,001,236 $ 8,260,723 $ 4,690,941 $ 1,079,517
Interest income (expense)............ $ (316,997) $ (21,565) $ 110,486 $ 46,633
Depreciation......................... $ 4,056,108 $ 2,788,818 $ 1,210,818 $ 255,338
Net income (loss) GAAP basis.......... $ 9,340,536 $ 5,229,715 $ 2,386,303 $ 496,646
Taxable income........................ $ 0 $ 0 $ 0 $ 0
Cash generated from operations ....... $ 14,501,763 $ 9,618,956 $ 3,718,086 $ 1,670,406
Less cash distributed to investors ... $ 10,313,604 $ 6,316,185 $ 2,977,136 $ 359,427
Cash generated after cash
distribution......................... $ 4,188,159 $ 3,302,771 $ 740,950 $ 1,310,979
Special items
Capital contributions, net .......... $171,666,206 $71,771,027 $23,496,784 $27,846,983
Fixed asset additions................ $194,557,133 $75,589,089 $28,557,568 $25,549,790
Line of credit....................... $ 18,300,000 $ 3,300,000 $ 5,000,000
Cash generated........................ $ (402,768) $ 2,784,709 $ 680,168 $ 3,608,172
End of period cash.................... $ 6,670,279 $ 7,073,047 $ 4,288,338 $ 3,608,172
Tax and distribution data per $1000
invested
Federal income tax results
Cornerstone Realty Income Trust is a
REIT and thus is not taxed at the
corporate level
Cash distributions to investors
Source (on GAAP basis)
Investment income................... $ 64 $ 72 $ 64 $ 37
Return of capital................... $ 14 $ 15 $ 16 $ 0
Source (on Cash basis)
Sales............................... $ 0 $ 0 $ 0 $ 0
Refinancings........................ $ 0 $ 0 $ 0 $ 0
Operations.......................... $ 68 $ 87 $ 80 $ 37
Other .............................. $ 0 $ 0 $ 0 $ 0
</TABLE>
69
<PAGE>
TABLE IV: RESULTS OF COMPLETED PROGRAMS
Table IV shows the results of programs sponsored by Affiliates of the Advisor
which completed operations in the five years ending September 30, 1996. All of
these programs had investment objectives dissimilar to those of the Company.
<TABLE>
<CAPTION>
COUNTY MOUNTAIN
GREEN VIEW WESTFIELD SUNSTONE FOXCROFT
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Program Name
Dollar amount raised................ $1,595,125 $2,605,800 $1,825,600 $1,890,000 $1,025,500
Number of properties purchased...... 1 1 1 1 1
Date of closing of offering......... DEC 1983 OCT 1984 NOV 1984 JULY 1984 JUNE 1982
Date of first sale of property...... DEC 1993 AUG 1995 APR 1996 NOV 1995 NOV 1993
Date of final sale of property...... DEC 1993 AUG 1995 APR 1996 NOV 1995 NOV 1993
Tax and Distribution data per $1,000
investment through .................
Federal income tax results
Ordinary income
From operations.................... $ 327 $ 68 $ 80 $ 122 $ 172
From recapture..................... $ 1,165 $ 1,200 $ 1,302 $ 526 $ 1,414
Capital gain ....................... $ 0 $ 0 $ 0 $ 0 $ 0
Deferred gain
Capital............................ $ 0 $ 0 $ 0 $ 0 $ 0
Ordinary........................... $ 0 $ 0 $ 0 $ 0 $ 0
Cash distributions to investors
Source (On GAAP basis)
Investment income.................. $ 327 $ 68 $ 80 $ 122 $ 172
Return of capital.................. $ 333 $ 38 $ 233 $ 0 $ 0
Source (On cash basis)
Sales.............................. $ 333 $ 38 $ 233 $ 122 $ 172
Refinancing........................ $ 0 $ 0 $ 0 $ 0 $ 0
Operations......................... $ 327 $ 68 $ 80 $ 0 $ 0
Other.............................. $ 0 $ 0 $ 0 $ 0 $ 0
------------ ------------ ------------ ------------ ------------
Receivable on net purchase money
financing........................... $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
TABLE V: SALES OR DISPOSALS OF PROPERTIES
Table V is not applicable. Cornerstone and its Affiliates have not sold or
disposed of any properties as required for inclusion in the Table (sale or
disposals of properties by programs with similar investment objectives within
the most recent three years).
70
<PAGE>
GLOSSARY
The following definitions are provided for information in reading this
Prospectus:
ACQUISITION COSTS (USED IN "EXPERIENCE OF PRIOR PROGRAMS"). Prepaid items and
fees related to purchase of property, cash down payment, acquisition fees,
legal, and other costs related to the acquisition of properties.
ACQUISITION EXPENSES. The total expenses, including but not limited to legal
fees and expenses, travel and communications expenses, costs of appraisals,
non-refundable option payments on property not acquired, accounting fees and
expenses, title insurance, and miscellaneous expenses related to selection and
acquisition of properties, whether or not acquired. Acquisition Expenses shall
not include Acquisition Fees.
ACQUISITION FEES. The total of all fees and commissions paid by any party in
connection with the purchase or development of real property by the Company,
except a development fee paid to a person not Affiliated with the Sponsor in
connection with the actual development of a project after acquisition of the
land by the Company. Included in the computation of such fees or commissions
shall be any real estate commission, selection fee, development fee,
nonrecurring management fee, or any fee of a similar nature, however designated.
ADDITIONAL SHARE OPTION. The option of Shareholders to reinvest distributions
from the Company in additional Shares so long as the registration statement of
which this Prospectus is a part remains effective.
ADJUSTED NET ASSET VALUE. The net assets of the Company (total assets before
deducting depreciation or non-cash reserves less total liabilities) valued at
fair market value as determined by qualified appraisals or valuations of the
assets.
ADVISOR. The person or entity responsible for directing or performing the
day-to-day business affairs of the Company, including a person or entity to
which the Advisor subcontracts substantially all such functions. The Company has
entered into an Advisory Agreement with Apple Residential Advisors, Inc., which
shall serve as the Advisor until it resigns such appointment or is replaced in
accordance with the provisions of the Bylaws.
ADVISORY AGREEMENT. The agreement between the Company and its Advisor, as the
same may be in effect from time to time.
AFFILIATE. Means (i) any person or entity directly or indirectly controlling,
controlled by or under common control with another person or entity, (ii) any
person or entity owning or controlling 10% or more of the outstanding voting
securities or beneficial interests of such other person or entity, (iii) any
officer, director, trustee or general partner of such person or entity, and (iv)
if such other person or entity is an officer, director, trustee or partner of
another entity, then the entity for which that person or entity acts in any such
capacity. AFFILIATED means being an Affiliate of a specified person or entity.
AMG. Apple Residential Management Group, Inc., a Virginia corporation, which
is an Affiliate of the Advisor.
AMOUNT REMAINING INVESTED IN PROPERTIES AT END OF YEAR (USED IN "EXPERIENCE
OF PRIOR PROGRAMS"). The ratio that acquisition costs of properties retained
bears to the total acquisition costs borne by the program.
ARG. Apple Realty Group, Inc., a Virginia corporation, which is an Affiliate
of the Advisor.
ARTICLES OF INCORPORATION. The Articles of Incorporation of the Company,
including all amendments, restatements or modifications thereof.
ASSET MANAGEMENT FEE. The fee payable to Apple Residential Advisors, Inc. as
the Advisor, pursuant to the Advisory Agreement.
71
<PAGE>
AVERAGE INVESTED ASSETS. The average of the aggregate book value of the
assets of the Company invested, directly or indirectly, in equity interests in
and loans secured by real estate, before reserves for depreciation or bad debts
or other similar non-cash reserves, computed by taking the average of such
values at the end of each month during any period.
BOARD OF DIRECTORS. The Directors of the Company as of any particular time,
under the Articles of Incorporation, whether they be the Directors named therein
or additional or successor Directors.
BYLAWS. The Bylaws of the Company, including all amendments, restatements or
modifications thereof.
CASH GENERATED FROM OPERATIONS (USED IN "EXPERIENCE OF PRIOR PROGRAMS").
Excess or deficiency of operating cash receipts, including interest on
investments, over operating cash expenditures, including debt service.
CODE. The Internal Revenue Code of 1986, as amended from time to time,
including successor statutes thereto.
COMPANY. Apple Residential Income Trust, Inc., a Virginia corporation.
CORNERSTONE. Cornerstone Realty Income Trust, Inc., a Virginia corporation.
DIRECTORS. The persons holding such office, as of any particular time,
whether they be the directors named under the Articles of Incorporation or
additional or successor directors.
EMPLOYEE TRUSTS. Qualified employee pension or profit sharing trusts and
Keogh Plan trusts.
ERISA. The Employee Retirement Income Security Act of 1974, as amended.
ESCROW ACCOUNT. The account into which funds will be deposited and retained
prior to the Initial Closing, and may be deposited thereafter pending investment
in properties.
EXCESS SHARES. Shares owned, directly or indirectly (applying the rules of
Sections 544 and 856(h) of the Code), by a person in excess of 9.8% of the
Company's total outstanding Shares.
EXCHANGE ACT. The Securities Exchange Act of 1934, as amended.
EXEMPT ORGANIZATIONS. Tax-exempt entities, including Employee Trusts and
IRAs.
FINAL CLOSING. The last closing of the sale of Shares offered by the
Prospectus.
FIRPTA. The Foreign Investment in Real Property Tax Act of 1980, as amended.
FUNDS FROM OPERATIONS. Net income (computed in accordance with generally
accepted accounting principles) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation of real property, and
after adjustments for significant non-recurring items and unconsolidated
partnerships and joint ventures. Adjustments for unconsolidated partnerships and
joint ventures will be calculated to reflect funds from operations on the same
basis.
GAAP (USED IN "EXPERIENCE OF PRIOR PROGRAMS"). Generally accepted accounting
principles.
INDEPENDENT DIRECTORS. The Directors of the Company who are not Affiliated,
directly or indirectly, with the Advisor, whether by ownership of, ownership
interest in, employment by, any material business or professional relationship
with, or serving as an officer or director of, the Advisor or an Affiliated
business entity of the Advisor (other than as an Independent Director of up to
three other real estate investment trusts advised by the Advisor or an Affiliate
of the Advisor). An Independent Director may perform no other services for the
Company, except as a Director. Notwithstanding anything to the contrary herein,
any member of a law firm whose only material business or professional
relationship with the Company, the Advisor and their Affiliates is as legal
counsel to any of such entities shall constitute an Independent Director (unless
such person serves as a director for more than three REITs organized by the
Advisor and its Affiliates). An "indirect" affiliation shall be deemed to refer
to
72
<PAGE>
circumstances in which a member of the "immediate family" of a Director is
Affiliated with the Advisor, and a person's "immediate family" shall mean such
person's spouse, parents, children, siblings, mother and father-in-law, sons and
daughters-in-law and brothers and sisters-in-law.
INITIAL CLOSING. The first closing which occurs after the Mimimum Offering is
achieved.
INITIAL OFFERING. The offering of Shares made pursuant to this Prospectus.
MANAGING DEALER. David Lerner Associates, Inc.
MARKETING EXPENSE ALLOWANCE. An amount equal to up to 2.5% of the purchase
price of the Shares payable by the Company to the Managing Dealer or the
Selected Dealers as a non-accountable reimbursement for expenses incurred by
them in connection with the offer and sale of the Shares.
MAXIMUM OFFERING. The sale of $250,000,000 in Shares by the Company in the
offering made by this Prospectus. If achieved, the Maximum Offering would be
comprised of $15,000,000 in Shares at $9 per Share (1,666,666.67 Shares) and
$235,000,000 in Shares at $10 per Share (23,500,000 Shares).
MINIMUM OFFERING. The sale of $15,000,000 in Shares at $9 per Share
(1,666,666.67 Shares) by the Company in the offering made by this Prospectus.
NET ASSETS OR NET ASSET VALUE. The total assets (other than intangibles) at
cost before deducting depreciation or other non-cash reserves less total
liabilities, calculated at least quarterly on a basis consistently applied.
NET INCOME. The total revenues of the Company for any period, less the
expenses applicable to such period other than additions to reserves for
depreciation or bad debts or other similar non-cash reserves.
OPERATING EXPENSES. All operating, general and administrative expenses of the
Company as determined under generally accepted accounting principles (including
regular compensation payable to the Advisor), excluding, however, the following:
(i) expenses of raising capital; (ii) interest payments; (iii) taxes; (iv)
non-cash expenditures, such as depreciation, amortization and bad debt reserve;
(v) incentive fees paid to the Advisor, if any; and (vi) costs related directly
to asset acquisition, operation and disposition.
ORGANIZATIONAL AND OFFERING EXPENSES. Those expenses incurred in connection
with the formation and registration of the Company and in qualifying and
marketing the Shares under applicable federal and state law, and any other
expenses actually incurred and directly related to the qualification,
registration, offer, and sale of the Shares, including such expenses as (i) all
marketing expenses and payments made to broker-dealers as compensation or
reimbursement for all costs of reviewing the offering, including due diligence
investigations and fees and expenses of their attorneys, accountants, and other
experts; (ii) registration fees, filing fees, and taxes; (iii) the costs of
printing, amending, supplementing and distributing the registration statement
and Prospectus; (iv) the costs of obtaining regulatory clearances of, printing,
and distributing sales materials used in connection with the offer and sale of
the Shares; (v) the costs related to investor and broker-dealer sales meetings
concerning the offering; and (vi) accounting and legal fees incurred in
connection with any of the foregoing.
PERCENT LEVERAGE (USED IN "EXPERIENCE OF PRIOR PROGRAMS"). Mortgage financing
divided by the total acquisition costs including such mortgage financing.
PLAN ASSETS. The assets of an employee benefit plan.
PRIOR PROGRAM SPONSOR (USED IN "EXPERIENCE OF PRIOR PROGRAMS"). Apple
Residential Advisors, Inc. and its predecessor and affiliated corporations.
PROPERTIES. All properties owned by the Company from time to time.
73
<PAGE>
PROSPECTUS. The final version of this prospectus of the Company in connection
with the registration of the Shares by registration statement filed with the
Securities and Exchange Commission on Form S-11, as amended and supplemented.
QUALIFIED PLANS. Employee Trusts and IRAs.
RECAPTURE (USED IN "EXPERIENCE OF PRIOR PROGRAMS"). The portion of taxable
income from property sales or other dispositions taxed as ordinary income.
REIT. "REIT" and "real estate investment trust" shall mean a real estate
investment trust as described in Sections 856 through 860 of the Code, as now
enacted or hereafter amended, including successor statutes and regulations
promulgated thereunder.
RESERVES (USED IN "EXPERIENCE OF PRIOR PROGRAMS"). Offering proceeds
designated at the time of acquisition of each property for certain repairs and
renovations and offering proceeds not committed for expenditure and held for
potential unforeseen cash requirements.
RETURN OF CAPITAL (USED IN "EXPERIENCE OF PRIOR PROGRAMS"). Distributions to
investors in excess of net income.
RETURN RATIO. For any period, the ratio of Funds from Operations to Total
Contributions.
SECURITIES ACT. The Securities Act of 1933, as amended.
SELECTED DEALERS. Broker-dealers (other than the Managing Dealer) which offer
and sell Shares on behalf of the Company.
SELLING COMMISSIONS. Selling Commissions payable to the Managing Dealer or
the Selected Dealers in an amount equal to up to 7.5% of the purchase price of
the Shares.
SERVICE. The Internal Revenue Service.
SHAREHOLDERS. Those persons who, at any particular time, are shown as the
holders of record of the Common Shares.
SHARES OR COMMON SHARES. The Common Shares of the Company, no par value, and
all other Common Shares of the Company issued in this or any subsequent
offering.
s
SPONSOR. Any person directly or indirectly instrumental in organizing, wholly
or in part, the Company or any person who will manage or participate in the
management of the Company, and any Affiliate of any such person, but not
including a person who is an Independent Director or whose only relationship
with the Company is as that of an independent property manager, whose only
compensation is as such. Sponsor also does not include wholly independent third
parties such as attorneys, accountants and underwriters whose only compensation
is for professional services. No Independent Director shall be deemed to be a
Sponsor.
UBTI. Unrelated Business Taxable Income, as defined in the Code.
TOTAL CONTRIBUTIONS. The gross offering proceeds which have been received by
the Company from time to time from the sale or sales of the Shares.
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF THE COMPANY
PAGE
----
Report of Independent Auditors .......................................... F-2
Balance Sheet at August 7, 1996 ......................................... F-3
Notes to the Balance Sheet .............................................. F-4
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder of
Apple Residential Income Trust, Inc.
We have audited the accompanying balance sheet of Apple Residential Income
Trust, Inc., as of August 7, 1996. This balance sheet is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Apple Residential Income Trust
Inc., at August 7, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Richmond, Virginia
August 12, 1996
except for Note 5, as to which
the date is November 14, 1996
F-2
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
BALANCE SHEET
AUGUST 7, 1996
Assets
Cash.............................................. $100
======
Stockholder's Equity
Common stock, no par value, Authorized 50,000,000
shares; issued and outstanding 10 shares ......... $100
======
See accompanying notes to balance sheet.
F-3
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO THE BALANCE SHEET
AUGUST 7, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Apple Residential Income Trust, Inc. (the "Company") is a Virginia corporation
that intends to qualify as a real estate investment trust ("REIT") for federal
income tax purposes. The Company, which has no operating history, was formed to
invest primarily in existing residential apartment communities in Texas and
southwestern regions of the United States. Initial capitalization occurred on
August 7, 1996.
Apple Residential Advisors, Inc. (the "Advisor"), which owns 100% of the
outstanding common stock of Apple Residential Income Trust, Inc., is the advisor
to the Company and will provide its day-to-day management under a proposed
agreement between the Company and the Advisor.
SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES
The Company intends to make an election to be treated, and expects to qualify
as, a REIT under the Internal Revenue Code of 1986, as amended. As a REIT, the
Company will be allowed a deduction for the amount of dividends paid to its
shareholders, thereby subjecting the distributed net income of the Company to
taxation only at the shareholder level. The Company's continued qualification as
a REIT will depend on its compliance with numerous requirements, including
requirements as to the nature of its income and assets and distribution of
dividends.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. OFFERING OF SHARES
The Company intends to raise capital through a "best-efforts" offering of shares
by David Lerner Associates, Inc. (the "Managing Dealer"), which will receive
selling commissions and a marketing expense allowance based on proceeds of the
shares sold.
A minimum offering of 1,666,667 shares ($15,000,000) must be sold no later than
one year after the date of the Prospectus, or the offering will terminate and
investors' subscription payments, with interest, will be refunded to investors.
Pending sale of such minimum offering amount, investors' subscription payments
will be placed in an escrow account.
3. RELATED PARTIES
The Company has negotiated, but not signed, a Property Management Agreement with
Apple Residential Management Group, Inc. to manage property to be acquired by
the Company for a management fee equal to 5% of gross rental collections, plus
reimbursement of certain expenses.
The Company has negotiated, but not signed, a Property Acquisition and
Disposition Agreement with Apple Realty Group, Inc. to acquire and dispose of
real estate assets for the Company. A fee of 2% of the purchase or sale price of
the property will be payable for this service.
The Company has negotiated, but not signed, an Advisory Agreement with the
Advisor to provide management of the Company and its assets. An annual fee of
.1% -- .25% of total contributions received by the Company, as defined, will be
payable for this service.
F-4
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
Notes to the Balance Sheet - (Continued)
Apple Residential Management Group, Inc., Apple Realty Group, Inc. and ApplE
Residential Advisors, Inc. are all 100% owned by Glade M. Knight, Chairman and
President of Apple Residential Income Trust, Inc.
Affiliates of the Company have incurred organization and offering costs on
behalf of the Company. Upon successful completion of the offering, the Company
will reimburse the affiliates for these organizational and offering costs. The
Company is not responsible for these costs in the event that the offering is not
successfully completed.
4. STOCK INCENTIVE PLANS
The Company intends to adopt two stock incentive plans (the "Incentive Plan" and
"Directors' Plan") to provide incentives to attract and retain directors,
officers and key employees. The plans provide for the grants of options to
purchase a specified number of shares of common stock ("Options") or grants of
restricted shares of common stock ("Restricted Stock") to selected employees and
directors of the Company and certain affiliates. Following consummation of the
offering, a Compensation Committee ("Committee") will be established to
implement and administer the plans. The Committee will be responsible for
granting Options and shares of Restricted Stock and for establishing the
exercise price of Options and the terms and conditions of Restricted Stock.
5. SUBSEQUENT EVENTS
On November 14, 1996, the Company issued 200,000 shares of Class B Convertible
Shares to Mr. Knight for $.10 per share or $20,000 in aggregate.
There are no dividends payable on the Class B Convertible Shares. On
liquidation of the Company, the holder of the Class B Convertible Shares is
entitled to a liquidation payment of $0.1 per Class B Convertible Share before
any distribution of liquidation proceeds to the holders of the Common Shares.
Holders of more than two-thirds of the Class B Convertible Shares must approve
any proposed amendment to the Articles of Incorporation that would adversely
affect the Class B Convertible Shares or create a new class of stock senior to
or on a parity with the Class B Convertible Shares. The Class B Convertible
Shares are convertible into Common Shares upon and for 180 days following the
occurrence of either of the following events: (1) substantially all of the
Company's assets, stock or business is sold or otherwise transferred, whether
through sale, exchange, merger, consolidation, lease, share exchange or
otherwise, or (2) the Advisory Agreement with the Advisor is terminated or not
renewed, and the Company ceases to use Apple Residential Management Group, Inc.
to provide substantially all of its property management services (the events
described in this clause (2), a "Self-Administration Conversion"). Upon the
occurrence of either triggering event, each Class B Convertible Share is
convertible into a number of Common Shares based upon the gross proceeds raised
through the date of conversion in the offering made by this Prospectus according
to the following formula:
NUMBER OF COMMON
SHARES
GROSS PROCEEDS RAISED FROM THROUGH CONVERSION
SALES OF COMMON SHARES THROUGH OF ONE CLASS B
DATE OF CONVERSION CONVERTIBLE SHARE
- ------------------------------- -----------------------
$50 million.................... 1.0
$100 million................... 2.4
$150 million................... 4.2
$200 million................... 6.4
$250 million................... 8.0
No additional consideration is due upon the conversion of the Class B
Convertible Shares.
F-5
<PAGE>
[SPECIMEN]
EXHIBIT A
SUBSCRIPTION AGREEMENT
To: Apple Residential Income Trust, Inc.
306 East Main Street
Richmond, VA 23219
Gentlemen:
By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) hereby subscribe for the number of
shares of stock set forth on the reverse hereof in Apple Residential Income
Trust, Inc. ("REIT") at a purchase price of and 00/100 Dollars ($ .00) per
Share. By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) further:
(a) acknowledge receipt of a copy of the Prospectus of Apple Residential
Income Trust, Inc., of which this Subscription Agreement is a part, and
understand that the shares being acquired will be governed by the terms of such
Prospectus and any amendments and supplements thereto;
(b) represent that I am (we are) of majority age;
(c) represent that I (we) have adequate means of providing for my (our)
current needs and personal contingencies; have no need for liquidity from this
investment; and through employment experience, educational level attained,
access to advice from qualified advisors, prior experience with similar
investments, or a combination thereof, understand the financial risks and lack
of liquidity of an investment in the REIT;
(d) represent that I (we) have either: (i) a net worth (excluding home, home
furnishings and automobiles) of at least $50,000 and estimate that (without
regard to investment in the REIT) I (we) will have gross income during the
current year of $50,000, or (ii) a net worth (excluding home, home furnishings
and automobiles) of at least $100,000 ($150,000 in the case of Kentucky and
North Carolina purchasers); and, in either event, further represent that the
purchase amount is 10% or less of my (our) net worth as defined above;
(e) represent (if purchasing in a fiduciary or other representative capacity)
that I (we) have due authority to execute the Subscription Agreement and to
thereby legally bind the trust or other entity of which I am (we are)
trustee(s), legal representative(s) or authorized agent(s); and agree to fully
indemnify and hold the REIT, its officers and directors, its affiliates and
employees, harmless from any and all claims, actions and causes of action
whatsoever which may result by a breach or an alleged breach of the
representations contained in this paragraph;
(f) certify, under penalties of perjury, (i) that the taxpayer identification
number shown on the signature page of this Subscription Agreement is true,
correct and complete (or I am (we are) waiting for a number to be issued to me
(us)), and (ii) that I am (we are) not subject to backup withholding either
because (a) I am (we are) exempt from backup withholding, or (b) I (we) have not
been notified by the Internal Revenue Service that I am (we are) subject to
backup withholding as a result of a failure to report all interest or
distributions, or (c) the Internal Revenue Service has notified me (us) that I
am (we are) no longer subject to backup withholding; and
(g) represent that I (we) have due authority to execute (or cause to be
executed on my (or our) behalf) the signature page hereto and to thereby legally
bind myself (ourselves) or the entity of which I am (we are) authorized
agent(s).
It is understood that the REIT shall have the right to accept or reject this
subscription in whole or in part in its sole and absolute discretion. The REIT
will either accept or reject this subscription within four business days from
the receipt of the subscription by the Managing Dealer or Selected Dealer. To
the extent permitted by applicable law, the REIT intends to assert the foregoing
representations as a defense to any claim based on factual assertions contrary
to those set forth above.
It is understood that until the Minimum Offering of $15 million in Shares is
sold, subscription payments will be held in an Escrow Account with First Union
National Bank of North Carolina as escrow agent. After the Minimum Offering
amount is sold, there is no requirement for an Escrow Account, and if there is
an Escrow Account, there is no limitation on the party which may act as escrow
agent.
(h) PRE-DISPUTE ARBITRATION CLAUSE. REGULATORY AUTHORITIES REQUIRE THAT ANY
BROKERAGE AGREEMENT CONTAINING A PRE-DISPUTE ARBITRATION AGREEMENT DISCLOSE THE
FOLLOWING:
1. ARBITRATION IS FINAL AND BINDING BETWEEN THE PARTIES.
2. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT, INCLUDING
THE RIGHT TO JURY TRIAL.
3. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEEDINGS.
4. THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR SEEK MODIFICATION OR RULINGS
BY THE ARBITRATORS IS STRICTLY LIMITED.
5. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF ARBITRATORS
WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
6. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO ARBITRATION,
NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT AGAINST ANY PERSON WHO
HAS INITIATED IN COURT A PUTATIVE CLASS ACTION, OR WHO IS A MEMBER OF A PUTATIVE
CLASS ACTION WHO HAS OPTED OUT OF THE CLASS WITH RESPECT TO ANY CLAIMS
ENCOMPASSED BY THE PUTATIVE CLASS ACTION UNTIL: (1) THE CLASS CERTIFICATION IS
DENIED; OR (II) THE CLASS IS DECERTIFIED; OR (III) THE CUSTOMER IS EXCLUDED FROM
THE CLASS BY THE COURT. SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE
SHALL NOT CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO THE
EXTENT STATED HEREIN.
THE CUSTOMER AGREES TO SETTLE BY ARBITRATION ANY CONTROVERSY BETWEEN HIM/HER
AND THE BROKER CONCERNING THIS AGREEMENT, HIS/HER ACCOUNTS(S), OR ACCOUNT
TRANSACTIONS, OR IN ANY WAY ARISING FROM HIS/HER RELATIONSHIP WITH BROKER
WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO THIS DATE. SUCH ARBITRATION WILL
BE CONDUCTED BEFORE AND ACCORDING TO THE ARBITRATION RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. (NASD) OR ANY OTHER SELF-REGULATORY
ORGANIZATION OF WHICH BROKER IS A MEMBER. EITHER THE BROKER OR THE CUSTOMER MAY
INITIATE ARBITRATION BY MAILING A WRITTEN NOTICE. IF THE CUSTOMER DOES NOT
DESIGNATE THE ARBITRATION FORUM IN HIS/HER NOTICE, OR RESPOND IN WRITING WITHIN
5 DAYS AFTER RECEIPT OF BROKER'S NOTICE, CUSTOMER AUTHORIZES BROKER TO DESIGNATE
THE ARBITRATION FORUM ON CUSTOMER'S BEHALF. JUDGMENT ON ANY ARBITRATION AWARD
MAY BE ENTERED IN ANY COURT HAVING JURISDICTION, AND CUSTOMER SUBMITS
HIMSELF/HERSELF AND PERSONAL REPRESENTATIVES TO THE JURISDICTION OF SUCH COURT.
<PAGE>
[SPECIMEN]
APPLE RESIDENTIAL INCOME TRUST, INC.
SIGNATURE PAGE OF THE SUBSCRIPTION AGREEMENT
1. Social Security Number(s)___________________________________________________
Tax ID Number(s)____________________________________________________________
Account # (If applicable)___________________________________________________
2. Name(s) in which shares are to be registered:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3. Manner in which title is to be held (Please check one).
[]Individual []Joint Tenants WROS []Corporation []Community Property
[]Tenants in Common []Partnership []Trust
[]As Custodian for _________________________________________________________
[]For Estate of ____________________________________________________________
[]Other ____________________________________________________________________
4. Address for correspondence _________________________________________________
5. Are you a non-resident alien individual (other than a non-resident alien who
has elected to be taxed as a resident), a foreign corporation, a foreign
partnership, a foreign trust, a foreign estate, or otherwise not qualified as a
United States person? If so, transaction will not be executed without a
completed W-8 Form. [ ] Yes [ ] No
6. Amount of Investment $___________ for _____________ Shares (Investment must
be for a minimum of $5,000 in Shares or $2,000 in Shares for qualified plans).
Make check payable to: First Union National Bank, Escrow Agent (or as otherwise
instructed). |B* Liquidate funds from money market |B* Check enclosed
7. Instructions for cash distributions [ ] Deposit to money market [ ] Reinvest
in additional Shares
8. I (WE) UNDERSTAND THAT THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION
CLAUSE AT PARAGRAPH (h).
9. Signature(s) of Investor(s) (Please sign in same manner in which Shares are
to be registered. Read Subscription Agreement, an important legal document,
before signing.)
x _____________________________________________________________________________
Signature Date
x _____________________________________________________________________________
Signature Date
10. Broker/Dealer Information:
___________________________________ __________________________________________
Registered Representative's Name Second Registered Representative's Name
___________________________________ __________________________________________
Broker/Dealer Firm Registered Representative's Office Address
___________________________________ __________________________________________
City/State/Zip Telephone Number
11. To substantiate compliance with Appendix F to Article III, Section 34 of the
NASD's Rules of Fair Practice, the undersigned Registered Representative hereby
certifies: I have reasonable grounds to believe, based on information obtained
from the investor(s) concerning investment objectives, other investments,
financial situation and needs and any other information known by me, that
investment in the REIT is suitable for such investor(s) in light of financial
position, net worth and other suitability characteristics.
- --------------------------------------------------------------------------------
Registered Representative Date
- --------------------------------------------------------------------------------
General Securities Principal Date
- --------------------------------------------------------------------------------
Apple Use Only
This Subscription Agreement and Agreed and accepted by:
Signature page will not be an Apple Residential Income Trust, Inc.
effective agreement until it is By ___________________________________
signed by a duly authorized agent of Date _________________________________
Apple Residential Income Trust, Inc.
<PAGE>
SUBSCRIPTION AGREEMENT
To: Apple Residential Income Trust, Inc.
306 East Main Street
Richmond, VA 23219
Gentlemen:
By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) hereby subscribe for the number of
shares of stock set forth on the reverse hereof in Apple Residential Income
Trust, Inc. ("REIT") at a purchase price of and 00/100 Dollars ($ .00) per
Share. By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) further:
(a) acknowledge receipt of a copy of the Prospectus of Apple Residential
Income Trust, Inc., of which this Subscription Agreement is a part, and
understand that the shares being acquired will be governed by the terms of such
Prospectus and any amendments and supplements thereto;
(b) represent that I am (we are) of majority age;
(c) represent that I (we) have adequate means of providing for my (our)
current needs and personal contingencies; have no need for liquidity from this
investment; and through employment experience, educational level attained,
access to advice from qualified advisors, prior experience with similar
investments, or a combination thereof, understand the financial risks and lack
of liquidity of an investment in the REIT;
(d) represent that I (we) have either: (i) a net worth (excluding home, home
furnishings and automobiles) of at least $50,000 and estimate that (without
regard to investment in the REIT) I (we) will have gross income during the
current year of $50,000, or (ii) a net worth (excluding home, home furnishings
and automobiles) of at least $100,000 ($150,000 in the case of Kentucky or North
Carolina purchasers); and, in either event, further represent that the purchase
amount is 10% or less of my (our) net worth as defined above;
(e) represent (if purchasing in a fiduciary or other representative capacity)
that I (we) have due authority to execute the Subscription Agreement and to
thereby legally bind the trust or other entity of which I am (we are)
trustee(s), legal representative(s) or authorized agent(s); and agree to fully
indemnify and hold the REIT, its officers and directors, its affiliates and
employees, harmless from any and all claims, actions and causes of action
whatsoever which may result by a breach or an alleged breach of the
representations contained in this paragraph;
(f) certify, under penalties of perjury, (i) that the taxpayer identification
number shown on the signature page of this Subscription Agreement is true,
correct and complete (or I am (we are) waiting for a number to be issued to me
(us)), and (ii) that I am (we are) not subject to backup withholding either
because (a) I am (we are) exempt from backup withholding, or (b) I (we) have not
been notified by the Internal Revenue Service that I am (we are) subject to
backup withholding as a result of a failure to report all interest or
distributions, or (c) the Internal Revenue Service has notified me (us) that I
am (we are) no longer subject to backup withholding; and
(g) represent that I (we) have due authority to execute (or cause to be
executed on my (or our) behalf) the signature page hereto and to thereby legally
bind myself (ourselves) or the entity of which I am (we are) authorized
agent(s).
It is understood that the REIT shall have the right to accept or reject this
subscription in whole or in part in its sole and absolute discretion. The REIT
will either accept or reject this subscription within four business days from
the receipt of the subscription by the Managing Dealer or Selected Dealer. To
the extent permitted by applicable law, the REIT intends to assert the foregoing
representations as a defense to any claim based on factual assertions contrary
to those set forth above.
It is understood that until the Minimum Offering of $15 million in Shares is
sold, subscription payments will be held in an Escrow Account with First Union
National Bank of North Carolina as escrow agent. After the Minimum Offering
amount is sold, there is no requirement for an Escrow Account, and if there is
an Escrow Account, there is no limitation on the party which may act as escrow
agent.
(h) PRE-DISPUTE ARBITRATION CLAUSE. REGULATORY AUTHORITIES REQUIRE THAT
ANY BROKERAGE AGREEMENT CONTAINING A PRE-DISPUTE ARBITRATION AGREEMENT
DISCLOSE THE FOLLOWING:
1. ARBITRATION IS FINAL AND BINDING BETWEEN THE PARTIES.
2. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT, INCLUDING
THE RIGHT TO JURY TRIAL.
3. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEEDINGS.
4. THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR SEEK MODIFICATION OR RULINGS
BY THE ARBITRATORS IS STRICTLY LIMITED.
5. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF ARBITRATORS
WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
6. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO ARBITRATION,
NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT AGAINST ANY PERSON WHO
HAS INITIATED IN COURT A PUTATIVE CLASS ACTION, OR WHO IS A MEMBER OF A PUTATIVE
CLASS ACTION WHO HAS OPTED OUT OF THE CLASS WITH RESPECT TO ANY CLAIMS
ENCOMPASSED BY THE PUTATIVE CLASS ACTION UNTIL: (1) THE CLASS CERTIFICATION IS
DENIED; OR (II) THE CLASS IS DECERTIFIED; OR (III) THE CUSTOMER IS EXCLUDED FROM
THE CLASS BY THE COURT. SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE
SHALL NOT CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO THE
EXTENT STATED HEREIN.
THE CUSTOMER AGREES TO SETTLE BY ARBITRATION ANY CONTROVERSY BETWEEN HIM/HER
AND THE BROKER CONCERNING THIS AGREEMENT, HIS/HER ACCOUNTS(S), OR ACCOUNT
TRANSACTIONS, OR IN ANY WAY ARISING FROM HIS/HER RELATIONSHIP WITH BROKER
WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO THIS DATE. SUCH ARBITRATION WILL
BE CONDUCTED BEFORE AND ACCORDING TO THE ARBITRATION RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. (NASD) OR ANY OTHER SELF-REGULATORY
ORGANIZATION OF WHICH BROKER IS A MEMBER. EITHER THE BROKER OR THE CUSTOMER MAY
INITIATE ARBITRATION BY MAILING A WRITTEN NOTICE. IF THE CUSTOMER DOES NOT
DESIGNATE THE ARBITRATION FORUM IN HIS/HER NOTICE, OR RESPOND IN WRITING WITHIN
5 DAYS AFTER RECEIPT OF BROKER'S NOTICE, CUSTOMER AUTHORIZES BROKER TO DESIGNATE
THE ARBITRATION FORUM ON CUSTOMER'S BEHALF. JUDGMENT ON ANY ARBITRATION AWARD
MAY BE ENTERED IN ANY COURT HAVING JURISDICTION, AND CUSTOMER SUBMITS
HIMSELF/HERSELF AND PERSONAL REPRESENTATIVES TO THE JURISDICTION OF SUCH COURT.
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
SIGNATURE PAGE OF THE SUBSCRIPTION AGREEMENT
1. Social Security Number(s)__________________________________________________
Tax ID Number(s)____________________________________________________________
Account # (If applicable)___________________________________________________
2. Name(s) in which shares are to be registered:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3. Manner in which title is to be held (Please check one).
[]Individual []Joint Tenants WROS []Corporation []Community Property
[]Tenants in Common []Partnership []Trust
[]As Custodian for _________________________________________________________
[]For Estate of ____________________________________________________________
[]Other ____________________________________________________________________
4. Address for correspondence _________________________________________________
5. Are you a non-resident alien individual (other than a non-resident alien who
has elected to be taxed as a resident), a foreign corporation, a foreign
partnership, a foreign trust, a foreign estate, or otherwise not qualified as a
United States person? If so, transaction will not be executed without a
completed W-8 Form. [ ] Yes [ ] No
6. Amount of Investment $___________ for _____________ Shares (Investment must
be for a minimum of $5,000 in Shares or $2,000 in Shares for qualified plans).
Make check payable to: First Union National Bank, Escrow Agent (or as otherwise
instructed). |B* Liquidate funds from money market |B* Check enclosed
7. Instructions for cash distributions [ ] Deposit to money market [ ] Reinvest
in additional Shares
8. I (WE) UNDERSTAND THAT THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION
CLAUSE AT PARAGRAPH (h).
9. Signature(s) of Investor(s) (Please sign in same manner in which Shares are
to be registered. Read Subscription Agreement, an important legal document,
before signing.)
x _____________________________________________________________________________
Signature Date
x _____________________________________________________________________________
Signature Date
10. Broker/Dealer Information:
___________________________________ __________________________________________
Registered Representative's Name Second Registered Representative's Name
___________________________________ __________________________________________
Broker/Dealer Firm Registered Representative's Office Address
___________________________________ __________________________________________
City/State/Zip Telephone Number
11. To substantiate compliance with Appendix F to Article III, Section 34 of the
NASD's Rules of Fair Practice, the undersigned Registered Representative hereby
certifies: I have reasonable grounds to believe, based on information obtained
from the investor(s) concerning investment objectives, other investments,
financial situation and needs and any other information known by me, that
investment in the REIT is suitable for such investor(s) in light of financial
position, net worth and other suitability characteristics.
- --------------------------------------------------------------------------------
Registered Representative Date
- --------------------------------------------------------------------------------
General Securities Principal Date
- --------------------------------------------------------------------------------
Apple Use Only
This Subscription Agreement and Agreed and accepted by:
Signature page will not be an Apple Residential Income Trust, Inc.
effective agreement until it is By ___________________________________
signed by a duly authorized agent of Date _________________________________
Apple Residential Income Trust, Inc.
<PAGE>
================================================================================
No dealer, salesman or other person
has been authorized to give any
information or to make any
representations other than those
contained in this Prospectus in
connection with the offering made by
this Prospectus, and, if given or
made, such other information or
representations must not be relied
upon. This Prospectus does not
constitute an offer in any state in
which such offer may not legally be
made. The delivery of this
Prospectus at any time does not
imply that information herein has
not changed as of any time
subsequent to its date.
------------------
TABLE OF CONTENTS
PAGE
----
Available Information..............i
Summary of the Offering ...........1 APPLE RESIDENTIAL
Risk Factors .....................10 INCOME TRUST,
Estimated Use of Proceeds ........20 INC.
Compensation .....................21
Conflicts of Interest ............24
Investment Objectives and
Policies........................26
Distribution Policy ..............34
Business and Properties ..........34
Management .......................37
The Advisor and Affiliates .......43
Principal and Management
Stockholders ...................47 PROSPECTUS
Federal Income Tax Consequences ..48
Investment by Tax-Exempt Entities 55
Capitalization ...................57
Management's Discussion and
Analysis of Financial Condition.57
Plan of Distribution .............57
Description of Capital Stock .....59
Summary of Organizational
Documents ......................61
Sales Literature .................64
Reports to Shareholders ..........64
Legal Opinions ...................65
Experts ..........................65
Experience of Prior Programs .....66
Glossary .........................71 DAVID LERNER ASSOCIATES, INC.
Index to Financial Statements of
the Company ...................F-1
Subscription Agreement ....Exhibit A
Until February 17, 1997, all
dealers effecting transactions in
the Shares, whether or not
participating in this distribution,
may be required to deliver a copy of
this Prospectus. This is in addition
to the obligations of dealers to November 19, 1996
deliver a Prospectus when acting as
underwriters and with respect to
their unsold allotments or
subscriptions.
================================================================================
<PAGE>
SUPPLEMENT NO. 7 DATED FEBRUARY 2, 1998
TO PROSPECTUS DATED NOVEMBER 19, 1996
(INCORPORATING SUPPLEMENTS NO. 1, NO. 2, NO. 3, NO. 4, NO. 5 AND NO. 6)
APPLE RESIDENTIAL INCOME TRUST, INC.
The following information supplements the Prospectus of Apple Residential
Income Trust, Inc. dated November 19, 1996 and is part of such Prospectus.
Prospective investors should carefully review the Prospectus and this
Supplement. THIS SUPPLEMENT NO. 7 INCORPORATES AND THEREBY REPLACES SUPPLEMENT
NO. 1 DATED FEBRUARY 10, 1997, SUPPLEMENT NO. 2 DATED APRIL 28, 1997,
SUPPLEMENT NO. 3 DATED JUNE 24, 1997, SUPPLEMENT NO. 4 DATED JULY 30, 1997,
SUPPLEMENT NO. 5 DATED OCTOBER 31, 1997 AND SUPPLEMENT NO. 6 DATED DECEMBER 11,
1997.
TABLE OF CONTENTS TO SUPPLEMENT NO. 7
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Status of the Offering ............................................................... S-2
Developments Involving Cornerstone Realty Income Trust, Inc ........................ S-2
Developments Affecting Directors; Committee Members. ................................. S-3
Unsecured Line of Credit ............................................................ S-3
Property Acquisitions ............................................................... S-4
Security Ownership of Certain Beneficial Owners and Management ..................... S-27
Management's Discussion and Analysis of Financial Condition and Results of Operations S-27
Transfer of Assets to Subsidiary Partnership ....................................... S-29
Experts .............................................................................. S-32
Update on Experience of Prior Programs ............................................. S-33
Index to Financial Statements ...................................................... F-1
</TABLE>
The Prospectus and Supplements thereto contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Such forward-looking statements include, without
limitation, statements as to anticipated renovations to Company properties and
anticipated improvements in property operations from completed and planned
property renovations, and the possible acquisition by Cornerstone Realty Income
Trust, Inc. of Shares in the Company or the business or assets of the Company.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from the results of
operations or plans expressed or implied by such forward-looking statements.
Such factors include, among other things, unanticipated adverse business
developments affecting the Company, the properties or Cornerstone Realty Income
Trust, Inc., as the case may be, adverse changes in the real estate markets and
general and local economic and business conditions. Investors should review the
more detailed risks and uncertainties set forth under the caption "Risk Factors"
in the Prospectus. Although the Company believes that the assumptions underlying
the forward-looking statements contained in the Prospectus and the Supplements
are reasonable, any of the assumptions could be inaccurate, and therefore there
can be no assurance that the forward-looking statements included in the
Prospectus and Supplements will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included in
the Prospectus or the Supplements, the inclusion of such information should not
be regarded as a representation by the Company or any other person that the
results or conditions described in such forward-looking statements or the
objectives and plans of the Company will be achieved.
S-1
<PAGE>
STATUS OF THE OFFERING
As of December 31, 1997, the Company had closed the sale to investors of
2,084,444 Shares at $9 per Share, and 10,287,373 Shares at $10 per Share,
representing aggregate gross proceeds to the Company of $121,633,726, and
proceeds net of selling commissions and marketing expenses of $109,846,358.
These totals include 417,777 Shares purchased by Cornerstone Realty Income
Trust, Inc., as described below under "Developments Involving Cornerstone Realty
Income Trust, Inc. -- Authorization For Additional Share Issuance."
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 appreciated
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
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As described above under "Developments Involving Cornerstone Realty Income
Trust - Authorization for Additional Share Issuance," on December 31, 1997,
Cornerstone owned approximately 3.38% of the Company's outstanding Shares.
Cornerstone's address is 306 East Main Street, Richmond, Virginia 23219. As of
December 31, 1997, no person was the beneficial owner of more than five percent
of any class of the registrant's voting securities.
The following table shows the beneficial ownership of the Company's Shares
by the Company's directors and executive officers as of December 31, 1997.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ----------------------------------- ---------------------- -----------------
<S> <C> <C>
Glade M. Knight .................. 5,555.56 *
Penelope W. Kyle .................. 500 0
Bruce H. Matson .................. 0 0
Lisa B. Kern ..................... 0 0
All Directors and
Executive Officers as a Group ... 6,055.56 *
</TABLE>
- ----------
* Less than 1% of outstanding Shares
In addition, at December 31, 1997, Glade M. Knight owned 170,000 Class B
Convertible Shares of the Company, and each of Debra A. Jones and Stanley J.
Olander, Jr. owned 15,000 Class B Convertible Shares, constituting collectively
all of the Company's issued and outstanding Class B Convertible Shares.
Information on the Class B Convertible Shares of the Company is set forth under
the caption "Principal and Management Stockholders" in the Prospectus. Ms.
Jones and Mr. Olander are officers of Cornerstone.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is based upon the unaudited financial statements
of the Company as of September 30, 1997 and the financial statements of the
Company as of December 31, 1996. The information should be read in conjunction
with the Company's financial statements and notes thereto and the pro forma
financial statements and notes thereto of the Company included elsewhere in this
Supplement. The Company is operated and has elected to be treated as a REIT for
federal income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES. There was a significant change in the
Company's liquidity during the nine months ended September 30, 1997. During the
nine months ended September 30, 1997, the Company closed the sale to investors
of 8,258,996 Shares representing gross proceeds to the Company of $80,923,281
and net proceeds after payment of Selling Commissions and other costs of
$72,245,821. The Company capitalized $2,173,200 of improvements to its various
properties as of September 30, 1997. It is anticipated that some $3,000,000 in
additional capital improvements will be completed during the next year on the
current portfolio. The source to fund these improvements is from equity raised
and set aside specifically for the improvements and from the expected sale of
additional Shares.
S-27
<PAGE>
During the nine months ended September 30, 1997, the Company made ten
acquisitions of residential rental properties as follows:
<TABLE>
<CAPTION>
PURCHASE
PROPERTY NAME DATE ACQUIRED UNITS PRICE LOCATION
- -------------------------------------- --------------- ------- ------------- --------------
<S> <C> <C> <C> <C>
Brookfield Apartments ............... January 1997 232 $ 5,458,485 Dallas, TX
Eagle Crest Apartments ............... January 1997 484 15,650,000 Irving, TX
Tahoe Apartments ..................... January 1997 240 5,690,560 Arlington, TX
Mill Crossing Apartments ............ February 1997 184 4,544,121 Arlington, TX
Polo Run Apartments .................. March 1997 224 6,858,974 Arlington, TX
Wildwood Apartments .................. March 1997 120 3,963,519 Euless, TX
Toscana Apartments .................. March 1997 192 5,854,531 Dallas, TX
The Arbors Apartments ............... April 1997 210 7,748,907 Bedford, TX
Pace's Cove Apartments ............... June 1997 328 9,277,355 Dallas, TX
Remington Hills at Las Colinas ...... August 1997 362 13,100,000 Irving, TX
</TABLE>
During the nine months ended September 30, 1997, the Company borrowed
$39,640,000 against its line of credit in conjunction with property acquisitions
and repaid $34,507,298 of the balance. The balance on the line of credit as of
September 30, 1997 was $5,132,702. In October 1997, the Company repaid the
outstanding balance. This is consistent with the Company's long term business
objective to hold its properties on an unleveraged basis.
Cash and cash equivalents totaled $1,350,305 at September 30, 1997.
While the Company is always assessing potential acquisitions, no material
commitments existed on November 1, 1997 for the purchase of additional
properties. The Company's only on-going commitment for capital expenditures is
to the renovation of its existing portfolio. Equity funds have been raised in
conjunction with the acquisition of properties to fund capital expenditures for
currently held properties. In addition, the Company will acquire new properties
as funds are available.
The Company has short-term cash flow needs to conduct the operation of its
properties. The rental income generated from the properties supplies sufficient
cash to provide for the payment of these operating expenses.
The Company's capital resources are expected to grow with the continued
sale of its Shares and through operations.
RESULTS OF OPERATIONS. As operations of the Company began in January 1997,
a comparison of the three months or nine months ended September 30, 1997 and
1996 is not possible. The Company's property operations for the nine months
ended September 30, 1997 reflect the operations of the Company's ten
acquisitions from their respective acquisition dates. Rental income for the
three and nine months ended September 30, 1997 was $3,789,266 and $7,771,744,
respectively.
The economic occupancy levels for the Company's properties averaged 92% at
the end of the three months and 93% for the nine months ended September 30,
1997. Overall, the average rental rate for the portfolio was $525 per month for
the nine months ended September 30, 1997 and $539 for the three months ended
September 30, 1997.
The Company's other source of income is the investment of its cash and cash
reserves. Interest income for the three and nine months ended September 30, 1997
was $19,043 and $107,584, respectively.
Total expenses for the nine months ended September 30, 1997 were $5,258,721
and $2,718,762 for the three months ended September 30, 1997. The operating
expense ratio (the ratio of rental expenses, excluding general and
administrative, amortization and depreciation expense, to rental income) was 48%
for the nine months ended September 30, 1997 versus 49% for the three months
ended September 30, 1997. General and administrative expenses totaled 5% of
total rental income for the three and nine months ended September 30, 1997. This
percentage is expected to decrease as the Company's asset base
S-28
<PAGE>
and rental income grow. These expenses represent the administrative expenses of
the Company as distinguished from the operations of the Company's properties.
Depreciation expense for the nine months ended September 30, 1997 was $1,086,111
and for the three months ended September 30, 1997 was $642,770.
The Company does not believe that inflation had any significant impact on
the operation of the Company during the nine months ended September 30, 1997.
Future inflation, if any, would likely cause increased operating expenses, but
the Company believes that increases in expenses would be offset by increases in
rental income. Inflation may also cause capital appreciation of the Company's
properties over time, as rental rates and replacement costs increase.
TRANSFER OF ASSETS TO SUBSIDIARY PARTNERSHIP
Originally, the Company's Properties were acquired and owned directly by
the Company 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 interests in the Company in a manner that could
defer tax liabilities for the sellers. Company management felt that this lack of
flexibility could hinder the Company's acquisition of desirable properties from
sellers seeking such tax deferral. Furthermore, Company management believed that
the direct-ownership structure tended to maximize the Company's exposure to
certain franchise taxes.
Based upon the foregoing, Company management proposed to the Board of
Directors, and the Board of Directors adopted and submitted for approval by the
Shareholders, a proposal the effect of which would be to transfer the apartment
properties of the Company to a newly-organized limited partnership indirectly
wholly-owned by the Company.
The Board of Directors approved and submitted to the Shareholders (with its
recommendation for adoption) the following resolutions (collectively, the
"Reorganization Proposal");
RESOLVED, that the Company transfer any and all of the Company's
multifamily rental apartment communities (including all assets associated
therewith) to a partnership to be created by the Company, the partners of
which will be the Company or entities wholly-owned, directly or indirectly,
by the Company; and
RESOLVED, that the following be added as a new Article XIII to the
Company's Bylaws:
ARTICLE XIII
CONDUCT OF BUSINESS THROUGH SUBSIDIARIES
13.1 Subsidiaries. To the extent permitted by the Articles of
Incorporation, these Bylaws (excluding Section 9.1(i) hereof, which shall not
be construed to prohibit anything contemplated by this Article XIII) and
applicable law (including any required consent of the Directors and
Shareholders under applicable law), the Company may conduct its business
through subsidiary companies owned or controlled by the Company (or its
subsidiaries). Any such subsidiary company is referred to as a "Subsidiary
Company" and collectively such subsidiary companies are referred to as the
"Subsidiary Companies." It is specifically acknowledged that the conduct of
the Company's business through a Subsidiary Company or Subsidiary Companies
may be effected and undertaken by the transfer by the Company of properties
to, the acquisition of properties by, and the ownership and operation of
properties in, a partnership all of whose interests are initially owned by
the Company and/or a Subsidiary Company or Subsidiary Companies. However, the
transfer described in the preceding sentence shall not constitute an event
permitting conversion of the Company's Class B Convertible Shares.
13.2 Interpretation and Application of Bylaws. If and to the extent (i)
the Company conducts its business through Subsidiary Companies, or (ii) there
are properties which, in the absence of Subsidiary Companies, would be owned
and operated by the Company but such properties are instead
S-29
<PAGE>
owned and operated by Subsidiary Companies, restrictions on the power of the
Company to engage in certain transactions and restrictions on the authority
of Directors and officers of the Company in these Bylaws, and in particular
the restrictions contained in Articles VIII, IX and X of these Bylaws, shall
be interpreted and applied to Subsidiary Companies in the same manner as they
apply by their terms to the Company to the extent necessary to ensure that
the Bylaw provision is given the effect intended notwithstanding that the
Company's business is conducted through Subsidiary Companies instead of by
the Company directly. The Company shall exercise any rights and powers it has
as an owner or partner (directly or indirectly) of a Subsidiary Company
consistently with this provision.
13.3 Certain Shareholder Consents. If a transaction involving the
proposed sale or other transfer, whether by sale, exchange, merger,
consolidation, lease, share exchange or otherwise, by a Subsidiary Company
would require pursuant to applicable law the consent or approval of
Shareholders if the Company owned directly, and were proposing the sale or
other transfer of, the relevant assets, the Company shall not approve,
undertake or effectuate any such proposed sale or other transfer through such
Subsidiary Company without first obtaining the consent or approval of the
Shareholders of the Company.
Pursuant to notice duly given, to all Shareholders of record on October 31,
1997, in a Proxy Statement dated November 26, 1997, a Special Meeting of
Shareholders of the Company was held at 3:00 p.m. on Wednesday, December 17,
1997, at the offices of McGuire, Woods, Battle & Boothe, L.L.P., Richmond,
Virginia. At the Special Meeting, Shareholders were asked to consider and vote
on the Reorganization Proposal. There being insufficient votes to approve the
Reorganization Proposal at that time, the meeting was adjourned and then
reconvened after adjournment on December 19, 1997 at 2:00 p.m. A vote was then
taken on the Reorganization Proposal. As of the record date, there were
10,108,598 Common Shares outstanding and entitled to vote. A total of 6,845,381
Common Shares were present in person or by proxy. A total of 6,823,288 Common
Shares voted in favor of the Reorganization Proposal. A total of 11,785 Common
Shares voted against the Reorganization Proposal and a total of 10,308 Common
Shares abstained. The Reorganization Proposal was adopted, as 67.5%, or more
than two-thirds, of the Common Shares outstanding and entitled to vote approved
the Reorganization Proposal.
REORGANIZATION
In light of the foregoing and as further described herein, the Company
transferred the Properties to a Virginia limited partnership, the partners of
which are two newly created, wholly-owned subsidiaries of the Company.
The Company formed the two wholly-owned subsidiaries, Apple Limited, Inc.
and Apple General, Inc., as Virginia corporations. The Company then transferred
an undivided 99 percent interest in the Properties to Apple Limited, Inc. and
an undivided 1 percent interest in the Properties to Apple General, Inc. Apple
Limited, Inc. and Apple General, Inc. together formed the limited partnership,
Apple REIT Limited Partnership (the "Partnership"), as a Virginia limited
partnership. Apple Limited, Inc. contributed its 99% interest in the Properties
to the Partnership in exchange for a 99% limited partnership interest in the
Partnership. Apple General, Inc. contributed its 1% interest in the Properties
to the Partnership in exchange for a 1% general partnership interest in the
Partnership. The Properties were transferred to the Partnership on December 29,
1997. The Partnership now holds the Properties and conducts the business
activities of the Company associated with the Properties.
S-30
<PAGE>
The following diagrams set forth the original structure of the Company's
ownership of the Properties and the structure that is in effect following
implementation of the Reorganization:
<TABLE>
<CAPTION>
<S> <C>
Current Company Structure Company Structure Following Reorganization
- ------------------------- ------------------------------------------
(-------------------) (-------------------)
| | | |
| Shareholders | | Shareholders |
| | | |
(-------------------) (-------------------)
| |
| |
| |
[-------------------] [-------------------------------]
| | | |
| The Company | | The Company |
[ | | |
[-------------------] [-------------------------------]
| | |
| 100% ownership| |100% ownership
| | |
| [---------------------] [---------------------]
(-------------------) | | | |
| | | Apple General, Inc. | | Apple Limited, Inc. |
| The Properties | | | | |
| | | | | |
(-------------------) [---------------------] [---------------------]
1% general partner| |99% limited partner
\ /
\ /
\ / \ /
\ / \ /
\ / \ /
\ / Apple \/
/ Limited \
/Partnership\
-------------
|
|
|
(-------------------)
| |
| The Properties |
| |
(-------------------)
</TABLE>
EFFECT OF THE REORGANIZATION AND BYLAW AMENDMENTS
Shareholders effectively continue to hold the same ownership interest in
the Properties following the Reorganization, through the Company's 100%
ownership of Apple Limited, Inc. (which owns a 99% interest in the Partnership),
and 100% ownership of Apple General, Inc. (which owns a 1% interest in the
Partnership). Apple General, Inc., as general partner of the Partnership, will
manage the affairs of the Partnership. The Company, as sole shareholder of Apple
General, Inc., will be entitled to exercise the rights of a 100%-shareholder
with respect to Apple General, Inc., including the election and removal of
directors of that company. At the present time, Glade M. Knight, Chairman of the
Board and Chief Executive Officer of the Company, is the sole director and
President of Apple General, Inc. No substantive change in the rights of the
Shareholders is intended to occur as a result of the Reorganization. To give
effect to this intent, there are now in effect amendments to the Company's
Bylaws (set forth above) designed to retain existing Bylaw restrictions on the
Company and its directors and officers, and to retain certain existing
Shareholder rights, notwithstanding the technical changes in legal ownership
effected by the Reorganization. The transfers described in the Reorganization
are expected to be tax-free transfers at both the state and federal level.
S-31
<PAGE>
EXPERTS
The balance sheets of Apple Residential Income Trust, Inc. at December 31,
1996 and August 7, 1996 (date of inception), appearing in this Prospectus and
Post-Effective Amendment No. 5 to the Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
Certain Statements of Income and Direct Operating Expenses of properties,
included herein, have been included herein in reliance on the reports of L.P.
Martin & Company, P.C., independent certified public accountants, also included
herein, and upon the authority of said firm as experts in accounting and
auditing.
S-32
<PAGE>
UPDATE ON EXPERIENCE OF PRIOR PROGRAMS
The following tables set forth updated information (through December 31,
1997) on Cornerstone Realty Income Trust, Inc. ("Cornerstone"), a real estate
investment trust which was organized by Affiliates of the Advisor of Apple
Residential Income Trust, Inc. Please refer to "Experience of Prior Programs" on
pages 66 through 70 of the Prospectus for additional information, including the
definition of terms used herein.
TABLE I: EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I presents a summary of the funds raised and the use of those funds
by Cornerstone, whose investment objectives are similar to those of the Company
and whose offering closed within three years ending December 31, 1997.
<TABLE>
<S> <C>
Dollar Amount Offered ....................................... 368,536,368
Dollar Amount Raised ....................................... 368,536,368
Less Offering Expenses:
Selling Commissions and Discounts ........................ 7.19%
Organizational Expenses .................................... 3.42%
Other ...................................................... 0.00%
Reserves ................................................... 3.00%
Percent Available for Investment ........................... 86.39%
Acquisition Costs:
Prepaid items and fees to purchase property ............... 85.12%
Cash downpayment .......................................... 0.00%
Acquisition fees .......................................... 1.27%
Other ...................................................... 0.00%
Total Acquisition Costs .................................... 86.39%
Percent Leverage (excluding unsecured debt) .................. 0.00%
Date offering began .......................................... May 1993
Length of offering (in months) .............................. 54
Months to invest amount available for investment ............ 54
</TABLE>
S-33
<PAGE>
TABLE II: COMPENSATION TO SPONSOR AND ITS AFFILIATES
Table II summarizes the compensation paid to the Prior Program Sponsor and
its Affiliates (i) by programs organized by it and closed within three years
ended December 31, 1997, and (ii) by all other programs during the three years
ended December 31, 1997.
<TABLE>
<CAPTION>
OTHER
CORNERSTONE PROGRAM
-------------- -------------
<S> <C> <C>
Date offering commenced .............................. May 1993 Various
Dollar amount raised ................................. $368,536,368 $35,483,175
Amounts paid to Prior Program Sponsor form proceeds
of offering:
Acquisition fees
Real Estate commission .............................. $ 3,610,154 $ 0
Advisory fees ....................................... $ 0 $ 0
Other ............................................. $ 0 $ 0
Cash generated from operations before deducting pay-
ments to Prior Program Sponsor......................... $ 67,594,762 $ 9,069,403
Aggregate compensation to Prior Program Sponsor
Management fees ....................................... $ 3,657,580 $ 954,012
Accounting fees ....................................... $ 0 $ 183,922
Reimbursements ....................................... $ 2,717,655 $ 0
Leasing fees .......................................... $ 0 $ 0
Other fees .......................................... $ 515,689 $ 0
There have been no fees from property sales or refinanc-
ings
</TABLE>
S-34
<PAGE>
TABLE III: OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents a summary of the annual operating results for
Cornerstone, the only offering closed in the five years ending December 31,
1997. Table III is shown on both an income tax basis as well as in accordance
with generally accepted accounting principles, the only significant difference
being the methods of calculating depreciation.
<TABLE>
<CAPTION>
1996 1995 1994
1997 ----------------- --------------- ------------
<S> <C> <C> <C> <C>
Capital contributions by year ............... $ 63,485,868 $176,885,206 $71,771,027 $23,496,784
Gross revenue .............................. $ 71,970,624 $ 40,352,955 $16,300,821 $ 8,177,576
Operating expenses ........................... $ 29,948,366 $ 18,696,781 $ 8,180,016 $ 4,690,941
Interest income (expense) .................. $ (7,230,205) $ (1,140,667) $ (68,061) $ 110,486
Depreciation ................................. $ 15,163,593 $ 8,068,063 $ 2,788,818 $ 1,210,818
Net income (loss) GAAP basis ............... $ 19,225,553 $ (4,169,849) $ 5,229,715 $ 2,386,303
Taxable income .............................. $ 0 $ 0 $ 0 $ 0
Cash generated from operations ............... $ 30,863,533 $ 20,162,776 $ 9,618,956 $ 3,718,086
Less cash distributed to investors ......... $ 31,324,870 $ 15,934,901 $ 6,316,185 $ 2,977,136
Cash generated after cash distribution ...... $ (461,337) $ 4,227,875 $ 3,302,771 $ 740,950
Special items
Capital contributions, net .................. $ 63,485,868 $144,798,035 $71,771,027 $23,496,784
Fixed asset additions ..................... $157,859,343 $194,519,406 $75,589,089 $28,557,568
Line of credit .............................. $ 96,166,141 $ 41,603,000 $ 3,300,000 $ 5,000,000
Cash generated .............................. $ 1,331,335 $ (3,890,496) $ 2,784,709 $ 680,166
End of period cash ........................... $ 4,513,986 $ 3,182,651 $ 7,073,147 $ 4,288,438
Tax and distribution data per $1000 invested
Federal income tax results
Cornerstone Realty Income Trust is a
REIT and thus is not taxed at the cor-
porate level
Cash distributions to investors
Source (on GAAP basis)
Investment income ........................ $ 77 $ 78 $ 72 $ 64
Return of capital ........................ $ 23 $ 12 $ 15 $ 16
Source (on Cash basis)
Sales .................................... $ 0 $ 0 $ 0 $ 0
Refinancings .............................. $ 0 $ 0 $ 0 $ 0
Operations .............................. $ 1 $ 90 $ 87 $ 80
Other .................................... $ 0 $ 0 $ 0 $ 0
</TABLE>
S-35
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF THE COMPANY
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMPANY FINANCIAL STATEMENTS
Report of Independent Auditors ......................................................... F-2
Balance Sheets at December 31, 1996 and August 7, 1996 (Date of Inception) ............ F-3
Notes to the Balance Sheets. ............................................................ F-4
COMPANY INTERIM FINANCIAL STATEMENTS (UNAUDITED):
Balance Sheets -- September 30, 1997 and December 31, 1996 .............................. F-7
Statement of Operations -- Three Months ended September 30, 1997 and Nine Months Ended
September 30, 1997 .................................................................. F-8
Statement of Shareholders' Equity -- Nine Months ended September 30, 1997 ............... F-9
Statement of Cash Flows -- Nine Months ended September 30, 1997 ........................ F-10
Notes to Financial Statements ......................................................... F-11
PROPERTY FINANCIAL STATEMENTS
Brookfield Apartments:
Independent Auditors' Report ......................................................... F-14
Historical Statement of Income and Direct Operating Expenses ........................ F-15
Eagle Crest I & II Apartments:
Independent Auditors' Report ......................................................... F-16
Historical Statement of Income and Direct Operating Expenses ........................ F-17
Tahoe Apartments:
Independent Auditors' Report ......................................................... F-18
Historical Statement of Income and Direct Operating Expenses ........................ F-19
Mill Crossing Apartments:
Independent Auditors' Report ......................................................... F-20
Historical Statement of Income and Direct Operating Expenses ........................ F-21
Polo Run Apartments:
Independent Auditors' Report ......................................................... F-22
Historical Statement of Income and Direct Operating Expenses ........................ F-23
Wildwood Apartments:
Independent Auditors' Report ......................................................... F-24
Historical Statement of Income and Direct Operating Expenses ........................ F-25
Toscana Apartments:
Independent Auditors' Report ......................................................... F-26
Historical Statement of Income and Direct Operating Expenses ........................ F-27
Arbors on Forest Ridge Apartments:
Independent Auditors' Report ......................................................... F-28
Historical Statement of Income and Direct Operating Expenses ........................ F-29
Pace's Cove Apartments:
Independent Auditors' Report ......................................................... F-30
Historical Statement of Income and Direct Operating Expenses ........................ F-31
Remington Hills at Las Colinas (formerly, Chaparosa and Riverhill Apartments):
Independent Auditors' Report (Chaparosa Apartments) ................................. F-32
Historical Statement of Income and Direct Operating Expenses (Chaparosa Apartments) . F-33
Independent Auditors' Report (Riverhill Apartments) ................................. F-34
Historical Statement of Income and Direct Operating Expenses (Riverhill Apartments) ... F-35
Copper Crossing Apartments:
Independent Auditors' Report ......................................................... F-36
Historical Statement of Income and Direct Operating Expenses ........................ F-37
PRO FORMA FINANCIAL STATEMENTS
Pro Forma Balance Sheet as of September 30, 1997 (Unaudited) ........................... F-38
Pro Forma Statement of Operations for the Twelve Months ended December 31, 1996
(Unaudited) ........................................................................... F-39
Pro Forma Statement of Operations for the Nine Months ended September 30, 1997
(Unaudited) ........................................................................... F-40
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of
Apple Residential Income Trust, Inc.
We have audited the accompanying balance sheets of Apple Residential Income
Trust, Inc., as of December 31, 1996 and August 7, 1996 (date of inception). The
balance sheets are the responsibility of the Company's management. Our
responsibility is to express an opinion on these balance sheets based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheets are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheets. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of Apple Residential Income Trust
Inc., at December 31, 1996 and August 7, 1996 (date of inception), in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Richmond, Virginia
March 26, 1997
F-2
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(DATE OF INCEPTION)
DECEMBER 31, 1996 AUGUST 7, 1996
------------------- --------------------
<S> <C> <C>
ASSETS
Cash .......................................... $ 100 $ 100
====== =====
LIABILITIES AND SHAREHOLDERS EQUITY
Shareholder's equity
Common stock, no par value
Authorized 50,000,000 shares; Issued and out-
standing 10 shares (Notes 2 and 5) $ 100 $ 100
Class B Convertible Stock, no par value. Autho-
rized 200,000 shares; Issued and outstanding
200,000 shares (Note 3) ..................... 20,000 --
Receivable from principal shareholder ......... (20,000) --
------- ------
$ 100 $ 100
======= ======
</TABLE>
See accompanying notes to balance sheets.
F-3
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO THE BALANCE SHEETS
DECEMBER 31, 1996
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Apple Residential Income Trust, Inc. (the "Company") is a Virginia
corporation that intends to qualify as a real estate investment trust ("REIT")
for federal income tax purposes. The Company, which has no operating history,
was formed to invest primarily in existing residential apartment communities in
Texas and southwestern regions of the United States. Initial capitalization
occurred on August 7, 1996.
Apple Residential Advisors, Inc. (the "Advisor"), which owned 100% of the
outstanding common stock of Apple Residential Income Trust, Inc. as of December
31, 1996, is the advisor to the Company and will provide its day-to-day
management under a proposed agreement between the Company and the Advisor.
SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES
The Company intends to make an election to be treated, and expects to qualify,
as a REIT under the Internal Revenue Code of 1986, as amended. As a REIT, the
Company will be allowed a deduction for the amount of dividends paid to its
shareholders, thereby subjecting the distributed net income of the Company to
taxation only at the shareholder level. The Company's continued qualification as
a REIT will depend on its compliance with numerous requirements, including
requirements as to the nature of its income and distribution of dividends.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2 -- OFFERING OF SHARES
The Company intends to raise capital through a "best-efforts" offering of shares
by David Lerner Associates, Inc. (the "Managing Dealer"), which will receive
selling commissions and a marketing expense allowance based on proceeds of the
shares sold.
A minimum offering of 1,666,667 shares ($15,000,000) must be sold no later than
November 19, 1997, or the offering will terminate and investors' subscription
payments, with interest, will be refunded to investors. Pending sale of such
minimum offering amount, investors' subscription payments will be placed in an
escrow account.
NOTE 3 -- CLASS B CONVERTIBLE SHARES
On November 14, 1996, the Company issued 200,000 shares of Class B Convertible
Shares to Mr. Glade Knight, President and Chairman of the Board of the Company,
for $.10 per share or $20,000 in aggregate.
There are no dividends payable on the Class B Convertible Shares. On liquidation
of the Company, the holder of the Class B Convertible Shares is entitled to a
liquidation payment of $.10 per Class B Convertible Share before any
distribution of liquidation proceeds to the holders of the Common Shares.
Holders of more than two-thirds of the Class B Convertible Shares must approve
any proposed amendment to the Articles of Incorporation that would adversely
affect the Class B Convertible Shares or create a new class of stock senior to
or on a parity with the Class B Convertible Shares. The Class B
F-4
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO THE BALANCE SHEETS -(CONTINUED)
NOTE 3 -- CLASS B CONVERTIBLE SHARES -(CONTINUED)
Convertible Shares are convertible into Common Shares upon and for 180 days
following the occurrence of either of the following events: (1) substantially
all of the Company's assets, stock or business is sold or otherwise transferred,
whether through sale, exchange, merger, consolidation, lease, share exchange or
otherwise, or (2) the Advisory Agreement with the Advisor is terminated or not
renewed, and the Company ceases to use Apple Residential Management Group, Inc.
to provide substantially all of its property management services. Upon the
occurrence of either triggering event, each Class B Convertible Share is
convertible into a number of Common Shares based upon the gross proceeds raised
through the date of conversion in the "best efforts" offering according to the
following formula:
<TABLE>
<CAPTION>
GROSS PROCEEDS RAISED FROM SALES NUMBER OF COMMON SHARES
OF COMMON SHARES THROUGH THROUGH CONVERSION OF ONE
DATE OF CONVERSION CLASS B CONVERTIBLE SHARE
- ---------------------------------- --------------------------
<S> <C>
$ 50 million ............ 1.0
$100 million ............ 2.4
$150 million ............ 4.2
$200 million ............ 6.4
$250 million ............ 8.0
</TABLE>
No additional consideration is due upon the conversion of the Class B
Convertible Shares. Upon the probable occurrence of a triggering event, the
Company will record expense in the statement of operations based on
convertibility of the Class B Convertible Shares.
NOTE 4 -- ORGANIZATIONAL AND OFFERING COSTS
As of December 31, 1996, affiliates of the Company have incurred on behalf of
the Company organizational and offering costs amounting to approximately
$522,000. Upon the sale of 1,666,667 Common Shares, the Company will reimburse
the affiliates for these organizational and offering costs.
NOTE 5 -- RELATED PARTIES
The Company has negotiated a Property Management Agreement with Apple
Residential Management Group, Inc. ("ARMG") to manage each property to be
acquired by the Company for a management fee equal to 5% of gross rental
collections, plus reimbursement of certain expenses.
The Company has entered into a Property Acquisition and Disposition Agreement
with Apple Realty Group, Inc. ("ARG") to acquire and dispose of real estate
assets for the Company. A fee of 2% of the purchase or sale price of the
property will be payable for this service.
The Company has entered into an Advisory Agreement with the Apple Residential
Advisors, Inc. ("AA") to provide management for the Company and its assets. An
annual fee equal to .1% - .25% of total contributions received by the Company
will be payable for this service.
Mr. Knight owns 100% of the common stock of ARMG, ARG and AA.
Upon the completion of a public offering of common shares being pursued by
Cornerstone Realty Income Trust, Inc., for which Mr. Knight also serves as Chief
Executive Officer and Chairman of the Board, Cornerstone will enter into a
contract with the Company and subcontracts with Apple Residential Management
Group, Inc. and Apple Residential Advisors, Inc. whereby Cornerstone will
provide advisory, property management and brokerage services to the Company in
exchange for fees and expense reimbursements as described above.
Cornerstone Realty Income Trust, Inc. has a continuing right to own up to 9.8%
of the common shares of Apple. In addition, Cornerstone has a right of first
refusal to purchase the properties and business of Apple.
F-5
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO THE BALANCE SHEETS -- (CONTINUED)
NOTE 6 -- STOCK INCENTIVE PLANS
The Company has adopted two stock incentive plans (the "Incentive Plan" and
"Directors' Plan") to provide incentives to attract and retain directors,
officers and key employees. The plans provide for the grant of options to
purchase a specified number of shares of common stock ("Options") or grants of
restricted shares of common stock ("Restricted Stock") to selected employees and
directors of the Company and certain affiliates. A Compensation Committee
("Committee") will be established to implement and administer the plans. The
Committee will be responsible for granting Options and shares of Restricted
Stock and for establishing the exercise price of Options and the terms and
conditions of Restricted Stock.
NOTE 7 - SUBSEQUENT EVENT
For the period January 1, 1997 through March 21, 1997, the Company closed the
sale to investors of 4,643,239 shares (1,666,667 at $9 per share and 2,976,572
at $10 per share) representing gross proceeds to the Company of $44,765,718 and
net proceeds after payment of selling commissions and other costs of
$40,289,146.
During January 1997, effective January 1, 1997, the Company acquired three
apartment communities. Brookfield Apartments, a 232-unit apartment community
located in Dallas, Texas, was purchased for $5,458,485. Eagle Crest Apartments,
a 484-unit apartment community located in Irving, Texas, was purchased for
$15,650,000. Tahoe Apartments, a 240-unit apartment community located in
Arlington, Texas, was purchased for $5,690,560. During February, 1997, the
Company acquired Mill Crossing Apartments, a 184-unit apartment community
located in Arlington, Texas for $4,544,121.
On March 1, 1997 the Company entered into an agreement with a commercial bank to
obtain an unsecured revolving line of credit of $10 million. The line of credit
expires on March 31, 1998. This agreement allows the Company to finance a
portion of the purchase price of property acquisitions. Borrowings under the
agreement are evidenced by an unsecured promissory note and bear interest at
one-month LIBOR plus 200 basis points. As of March 26, 1997, there have been no
borrowings under the agreement.
F-6
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
--------------- -------------
<S> <C> <C>
ASSETS
Investment in Rental Property
Land ......................................................... $ 13,504,976 --
Building ................................................... 67,365,012 --
Property improvements ....................................... 1,683,878 --
Furniture and fixtures ....................................... 489,322 --
------------ ---------
83,043,188 --
Less accumulated depreciation .............................. (1,086,111) --
------------ ---------
81,957,077 --
------------ ---------
Cash and cash equivalents .................................... 1,350,305 $ 100
Prepaid expenses ............................................. 161,391 --
Other assets ................................................ 561,464 --
------------ ---------
2,073,160 100
------------ ---------
Total Assets ............................................. $ 84,030,237 $ 100
============ =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Notes payable ................................................ $ 5,132,702 --
Accounts payable ............................................. 411,069 --
Accrued expenses ............................................. 1,647,832 --
Rents received in advance .................................... 25,969 --
Tenant security deposits .................................... 371,794 --
------------ ---------
7,589,366 --
Shareholders' equity
Common stock, no par value, authorized 50,000,000
shares; issued and outstanding 8,676,784 shares and 10
shares, respectively ....................................... 76,005,921 $ 100
Class B convertible stock, no par value, authorized 200,000
shares: issued and outstanding 200,000 ..................... 20,000 20,000
Receivable from principal shareholder ........................ (20,000) (20,000)
Net income greater than distributions ........................ 434,950 --
------------ ---------
76,440,871 100
------------ ---------
Total Liabilities and Shareholders' Equity ............... $ 84,030,237 $ 100
============ =========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1997
-------------------- ------------------
<S> <C> <C>
REVENUE:
Rental income ................................. $3,789,266 $7,771,744
EXPENSES:
Utility expenses .............................. 385,718 796,570
Repairs and maintenance ........................ 317,500 581,796
Taxes and insurance ........................... 597,227 1,176,182
Property management ........................... 207,026 403,479
Advertising .................................... 88,782 194,785
General and administrative ..................... 192,520 391,837
Amortization .................................... 8,484 25,444
Depreciation of rental property ............... 642,770 1,086,111
Other operating expenses ........................ 278,735 602,517
---------- ----------
Total expenses .............................. 2,718,762 5,258,721
---------- ----------
Income before other income (expense) ............ 1,070,504 2,513,023
Interest and investment income .................. 19,043 107,584
Interest expense .............................. (232,818) (377,154)
---------- ----------
Net income ....................................... $ 856,729 $2,243,453
========== ==========
Net income per share ........................... $ 0.12 $ 0.44
========== ==========
Weighted average number of shares outstanding ... 7,135,536 5,053,423
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK CONVERTIBLE CLASS B STOCK
------------------------- -----------------------------------------------------------
NET OF
RECEIVABLE NET INCOME TOTAL
NUMBER NUMBER FROM PRINCIPAL GREATER THAN SHAREHOLDERS'
OF SHARES AMOUNT OF SHARES SHAREHOLDER DISTRIBUTIONS EQUITY
----------- ------------- ----------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ...... 10 $ 100 200,000 $ 0 $ 0 $ 100
Net proceeds from the sale of shares 8,147,064 71,238,441 -- -- -- 71,238,441
Net income ........................ -- -- -- -- 2,243,453 2,243,453
Cash distributions declared to share-
holders ($.401 per share) -- -- -- -- (1,808,503) (1,808,503)
Shares issued to Cornerstone Realty
Income Trust, Inc. ............... 417,778 3,760,000 -- -- -- 3,760,000
Shares issued through Additional
Share Option ..................... 111,932 1,007,380 -- -- -- 1,007,380
--------- ----------- ------- --- ---------- -----------
Balance at September 30, 1997 ...... 8,676,784 $76,005,921 $200,000 $ 0 $ 434,950 $76,440,871
========= =========== ======== === ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997
------------------
<S> <C>
Cash flow from operating activities:
Net income ......................................................... $ 2,243,453
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .................................... 1,111,555
Changes in operating assets and liabilities:
Prepaid expenses ................................................ (161,391)
Other assets ................................................... (586,908)
Accounts payable ................................................ 411,069
Accrued expenses ................................................ 1,647,832
Rent received in advance ....................................... 25,969
Tenant security deposits ....................................... 371,794
-------------
Net cash provided by operating activities ..................... 5,063,373
Cash flow from investing activities:
Acquisitions of rental property .................................... (80,869,988)
Capital improvements ................................................ (2,173,200)
-------------
Net cash used in investing activities ........................ (83,043,188)
Cash flow from financing activities:
Proceeds from short-term borrowings ................................. 39,640,000
Repayments of short-term borrowings ................................. (34,507,298)
Net proceeds from issuance of shares .............................. 76,005,821
Increase (decrease) in commissions payable to underwriters ......... --
Cash distributions paid to shareholders ........................... (1,808,503)
-------------
Net cash provided by financing activities ..................... 79,330,020
Increase in cash and cash equivalents ........................ 1,350,205
Cash and cash equivalents, beginning of year ........................ 100
-------------
Cash and cash equivalents, end of period ........................... $ 1,350,305
=============
</TABLE>
See accompanying notes to financial statements
F-10
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information required by generally
accepted accounting principles. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine months
ended September 30, 1997 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1997. These financial statements
should be read in conjunction with the Company's December 31, 1996 Annual Report
on Form 10-K.
The Company was formed in August, 1996. Operations commenced in January,
1997.
During the first quarter of 1997, the Financial Accounting Standards Board
issued a new statement on the calculation of earnings per share which is
effective beginning in the 4th quarter of 1997 and early adoption is prohibited.
Under the new statement, primary and fully dilutive earnings per share are
replaced with basic and diluted earnings per share. The Company's basic earnings
per share for the nine month period ended September 30, 1997 according to the
new statement would not change from the reported amounts.
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information." The Company will adopt SFAS No. 131 in
1998. SFAS No. 131 will not have any impact on the financial results or
financial condition of the Company, but will result in certain in required
disclosures of segment reporting.
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
approximates their carrying value.
INVESTMENT IN RENTAL PROPERTY
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.
The investment in rental property is recorded at depreciated cost and
includes real estate brokerage commissions paid to an affiliated company Apple
Realty Group for purchase prior to March 1, 1997, and Cornerstone Realty Income
Trust, Inc. after March 1, 1997.
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 seven 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.
ADVERTISING COSTS
Costs incurred for the production and distribution of advertising are
expensed as incurred.
F-11
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -(CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
INCOME PER SHARE
Net income per share is computed based upon the weighted average number of
shares outstanding during the year. Potentially dilutive securities are not
included since their inclusion would not materially dilute net income per share.
NOTE 2 -- NOTES PAYABLE
On March 1, 1997, the Company entered into an agreement with a commercial
bank for an unsecured revolving line of credit of $10 million. The line of
credit expires on March 31, 1998. During August, 1997, the Company increased its
unsecured line of credit to $20 million. Borrowings under the agreement are
evidenced by an unsecured promissory note and bear interest at one-month LIBOR
plus 200 basis points. As of September 30, 1997 the interest rate on the
unsecured line of credit was 7.6875% and the outstanding balance was
approximately $5.1 million. In October 1997, the Company repaid the full
outstanding balance of the line of credit with proceeds from the additional sale
of shares.
NOTE 3 -- RELATED PARTIES
Prior to March 1, 1997, the Company had contracted with Apple Residential
Management Group, Inc. (The "Management Company") to manage the acquired
properties, Apple Residential Advisors, Inc. (The "Advisor") to advise and
provide the Company with day to day management, and Apple Realty Group, Inc. to
acquire and dispose of real estate assets held by the Company. The Company paid
the Management Company a management fee equal to 5% of rental income plus
reimbursement of certain expenses in the amount of $61,135. The Company paid the
Advisor a fee equal to .1% to .25% of total contributions received by the
Company in the amount of $13,585. The Company paid Apple Realty Group, Inc. a
fee of 2% of the purchase price of the acquired properties in the amount of
$624,863.
Effective March 1, 1997, with the approval of the Company, Cornerstone
Realty Income Trust Inc. ("Cornerstone"), for which Glade M. Knight (Chief
Executive Officer and Chairman of the Board of the Company) entered into
subcontract agreements with the Management Company and Advisor whereby
Cornerstone will provide advisory and property management services to the
Company in exchange for fees and expense reimbursement per the same terms
described above.
Effective March 1, 1997, with the consent of the Company, Cornerstone
acquired all the assets of Apple Realty Group, Inc. The sole material asset of
the company was the acquisition/disposition agreement with the Company.
Cornerstone paid $350,000 in cash and issued 150,000 common shares in exchange
for the assignment of the rights to the acquisition/disposition agreement.
Cornerstone will be entitled to a real estate commission equal to 2% of the
gross purchase price of the Company's properties. As of September 30, 1997,
Cornerstone had earned approximately $1,476,041 for all of the subcontracted and
acquired services.
During the first quarter of 1997, the Company granted Cornerstone a
continuing right to acquire up to 9.8% of the common shares of the Company at
the market price, net of selling commissions. Cornerstone committed to purchase
shares of the Company at $9 per share for approximately $3.76 million which
represented approximately 9.5% of the total common shares of the Company
outstanding as of March 1, 1997. In April 1997, Cornerstone purchased 417,777
common shares of the Company. Cornerstone intends to make periodic evaluations
with the approval of its board of directors to purchase additional common shares
of the Company as of the end of each calendar quarter in order to maintain its
ownership of approximately 9.5% of the outstanding common shares of the Company,
if such additional purchases are deemed by the Cornerstone board of directors to
be in the best interests of Cornerstone and its shareholders.
F-12
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 4 -- SUBSEQUENT EVENTS
During October 1997, the Company distributed to its shareholders
approximately $1,356,204 (20.2 cents per share) of which approximately $855,613
was reinvested in the purchase of additional shares through the Additional Share
Option. The Company also closed the sale to investors of 1,346,262 shares at $10
per share representing net proceeds to the Company of $12,116,361.
NOTE 5 -- ACQUISITIONS
The following unaudited pro forma information for the nine months ended
September 30, 1997 is presented as if (a) the Company had owned the properties
referred to below on January 1, 1997, (b) the Company had qualified as a REIT,
distributed at least 95% of its taxable income and, therefore incurred no
federal income tax expense during the period, and (c) the Company had used
proceeds from its best efforts offering to acquire the properties. The Company
had no operations prior to December 31, 1996. The pro forma information does not
purport to represent what the Company's results of operations would actually
have been if such transactions, in fact, had occurred on January 1, 1997, nor
does it purport to represent the results of operations for future periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
-------------------
<S> <C>
Rental income ............ $12,259,452
Net income ............... $ 3,615,983
Net income per share ...... $ .45
</TABLE>
The pro forma information reflects adjustments for the actual rental income
and rental expenses of Brookfield, Eagle Crest, Tahoe, Mill Crossing, Toscana,
Polo Run, Wildwood, The Arbors , Paces Cove, Chaparosa and River Hill Apartments
for the periods in 1997 prior to their acquisitions by the Company. Net income
has been adjusted as follows: (1) property management and advisory expenses have
been adjusted based on the Company's contractual arrangements of 5% of revenues
from rental income plus reimbursement of certain monthly expenses estimated to
be $2.50 per unit; (2) advisory expenses have been adjusted based on the
Company's contractual arrangement of .25% annual gross proceeds of common stock
raised; and (3) depreciation has been adjusted based on the Company's allocation
of purchase price to buildings over an estimated useful life of 27.5 years.
F-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Brookfield Apartments located in Dallas, Texas for the twelve month
period ended December 31, 1996. This statement is the responsibility of the
management of Brookfield Apartments. Our responsibility is to express an opinion
on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Brookfield Apartments (as
defined above) for the twelve month period ended December 31, 1996, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
March 19, 1997
F-14
<PAGE>
BROOKFIELD APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $1,198,543
----------
DIRECT OPERATING EXPENSES
Administrative and Other ........................ 122,269
Insurance ....................................... 18,936
Repairs and Maintenance ........................ 174,233
Taxes, Property ................................. 133,700
Utilities ....................................... 92,664
----------
Total Direct Operating Expenses ............... 541,802
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property .................................... $ 656,741
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Brookfield Apartments is a 232 unit residential garden style apartment complex
located on 6.936 acres in Dallas, Texas. Living space totals 165,544 square
feet.
During the financial statement period, the assets comprising the property were
owned by Paragon Group, L.P., an entity non-affiliated with Apple Residential
Income Trust, Inc. Apple Residential Income Trust, Inc. purchased the property
in January, 1997.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation, amortization and
management fees.
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Eagle Crest Apartments located in Irving, Texas for the twelve
month period ended December 31, 1996. This statement is the responsibility of
the management of Eagle Crest Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Eagle Crest Apartments (as
defined above) for the twelve month period ended December 31, 1996, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
March 27, 1997
F-16
<PAGE>
EAGLE CREST APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $3,196,618
----------
DIRECT OPERATING EXPENSES
Administrative and Other ........................ 212,613
Insurance ....................................... 93,379
Repairs and Maintenance ........................ 379,120
Taxes, Property ................................. 345,167
Utilities ....................................... 305,101
----------
Total Direct Operating Expenses ............... 1,335,380
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property .................................... $1,861,238
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Eagle Crest Apartments is a residential garden style apartment complex
consisting of two phases totaling 484 units located on 17.88 acres in Irving,
Texas. Living space totals 429,300 square feet.
During the financial statement period, the assets comprising the property were
owned by entities not affiliated with Apple Residential Income Trust, Inc.
Apple Residential Income Trust, Inc. purchased the property on January 30,
1997.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation, amortization, legal and
professional and management fees.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Tahoe Apartments located in Arlington, Texas for the twelve month
period ended December 31, 1996. This statement is the responsibility of the
management of Tahoe Apartments. Our responsibility is to express an opinion on
this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Tahoe Apartments (as
defined above) for the twelve month period ended December 31, 1996, in
conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
April 11, 1997
F-18
<PAGE>
TAHOE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $1,200,270
----------
DIRECT OPERATING EXPENSES
Administrative and Other ........................ 118,781
Insurance ....................................... 30,606
Repairs and Maintenance ........................ 351,750
Taxes, Property ................................. 114,578
Utilities ....................................... 149,166
----------
Total Direct Operating Expenses ............... 764,881
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property .................................... $ 435,389
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Tahoe Apartments is a 240 unit residential garden style apartment complex
located on 17.88 acres in Arlington, Texas. Living space totals 160,928 square
feet.
During the financial statement period, the assets comprising the property were
owned by two separate entities, neither of which was affiliated with Apple
Residential Income Trust, Inc. Apple Residential Income Trust, Inc. purchased
the property on January 31, 1997.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation, legal fees and management
fees. Also, excluded are certain employee bonuses which one of the former owners
paid when they sold the apartment project.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Mill Crossing Apartments located in Arlington, Texas for the twelve
month period ended January 31, 1997. This statement is the responsibility of the
management of Mill Crossing Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Mill Crossing Apartments
(as defined above) for the twelve month period ended January 31, 1997, in
conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
April 29, 1997
F-20
<PAGE>
MILL CROSSING APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED JANUARY 31, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $ 908,336
---------
DIRECT OPERATING EXPENSES
Administrative and Other ........................ 102,522
Insurance ....................................... 23,714
Repairs and Maintenance ........................ 216,500
Taxes, Property ................................. 91,663
Utilities ....................................... 148,270
---------
Total Direct Operating Expenses ............... 582,669
---------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property .................................... $ 325,667
=========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Mill Crossing Apartments is a 184 unit garden style apartment complex located on
8 acres in Arlington, Texas. Living space totals 127,168 square feet.
During the financial statement period, the assets comprising the property were
owned by two separate entities, neither of which was affiliated with Apple
Residential Income Trust, Inc. Apple Residential Income Trust, Inc. purchased
the property in February 1997.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation, amortization, legal fees
and management fees.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Polo Run Apartments located in Arlington, Texas for the twelve
month period ended February 28, 1997. This statement is the responsibility of
the management of Polo Run Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Polo Run Apartments (as
defined above) for the twelve month period ended February 28, 1997, in
conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
May 21, 1997
F-22
<PAGE>
POLO RUN APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED FEBRUARY 28, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $1,304,547
----------
DIRECT OPERATING EXPENSES
Administrative and Other ........................ 101,400
Insurance ....................................... 28,521
Repairs and Maintenance ........................ 257,602
Taxes, Property ................................. 133,509
Utilities ....................................... 128,924
----------
Total Direct Operating Expenses ............... 649,956
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property .................................... $ 654,591
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Polo Run Apartments is a 224 unit residential garden style apartment complex
located on 9.15 acres in Arlington, Texas.
During the financial statement period, the assets comprising the property were
owned by A V Polo Run Associates, Ltd. Apple Residential Income Trust, Inc.
subsequently purchased the property.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation and management fees.
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Wildwood Apartments located in Euless, Texas for the twelve month
period ended February 28, 1997. This statement is the responsibility of the
management of Wildwood Apartments. Our responsibility is to express an opinion
on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Wildwood Apartments (as
defined above) for the twelve month period ended February 28, 1997, in
conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
June 4, 1997
F-24
<PAGE>
WILDWOOD APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED FEBRUARY 28, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $ 809,555
---------
DIRECT OPERATING EXPENSES
Administrative and Other ........................ 110,035
Insurance ....................................... 15,246
Repairs and Maintenance ........................ 123,470
Taxes, Property ................................. 85,616
Utilities ....................................... 78,937
---------
Total Direct Operating Expenses ............... 413,304
---------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property .................................... $ 396,251
=========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Wildwood Apartments is a 120 unit garden style apartment complex located on
10.01 acres in Euless, Texas.
The assets comprising the property were owned by Western Rim Investors 1991-4,
L.P., an entity unaffiliated with Apple Residential Income Trust, Inc., during
the financial statement period. Apple Residential Income Trust, Inc.
subsequently purchased the property.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, amortization, professional fees and
management fees.
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Toscana Apartments located in Dallas, Texas for the twelve month
period ended February 28, 1997. This statement is the responsibility of the
management of Toscana Apartments. Our responsibility is to express an opinion on
this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Toscana Apartments (as
defined above) for the twelve month period ended February 28, 1997, in
conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
June 4, 1997
F-26
<PAGE>
TOSCANA APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED FEBRUARY 28, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $1,083,249
----------
DIRECT OPERATING EXPENSES
Administrative and Other ........................ 128,884
Insurance ....................................... 18,985
Repairs and Maintenance ........................ 117,117
Taxes, Property ................................. 123,710
Utilities ....................................... 84,886
----------
Total Direct Operating Expenses ............... 473,582
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property .................................... $ 609,667
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Toscana Apartments is a 192 unit garden style apartment complex located on 3.975
acres in Dallas, Texas.
The assets comprising the property were owned by Western Rim Investors 1993-2,
L.P., an entity unaffiliated with Apple Residential Income Trust, Inc., during
the financial statement period. Apple Residential Income Trust, Inc.
subsequently purchased the property.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, amortization, professional fees and
management fees.
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property The Arbors on Forest Ridge Apartments located in Bedford, Texas for
the twelve month period ended February 28, 1997. This statement is the
responsibility of the management of The Arbors on Forest Ridge Apartments. Our
responsibility is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of The Arbors on Forest Ridge
Apartments (as defined above) for the twelve month period ended February 28,
1997, in conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
June 4, 1997
F-28
<PAGE>
ARBORS ON FOREST RIDGE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $1,381,014
DIRECT OPERATING EXPENSES
Administrative and Other ........................ 111,636
Insurance ....................................... 34,263
Repairs and Maintenance ........................ 109,577
Taxes, Property ................................. 147,923
Utilities ....................................... 85,182
----------
Total Direct Operating Expenses ............... 488,581
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property .................................... $ 892,433
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Arbors on Forest Ridge Apartments is a 210 unit garden style apartment
complex located on 8.913 acres in Bedford, Texas.
The assets comprising the property were owned by Western Rim Investors 1992-5,
L.P., an entity unaffiliated with Apple Residential Income Trust, Inc., during
the financial statement period. Apple Residential Income Trust, Inc.
subsequently purchased the property.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, amortization, professional fees and
management fees.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Pace's Cove Apartments located in Dallas, Texas for the twelve
month period ended May 31, 1997. This statement is the responsibility of the
management of Pace's Cove Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statement. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion in a filing by Apple Residential Income Trust, Inc.) and excludes
material expenses, described in Note 2 to the statement, that would not be
comparable to those resulting from the proposed future operations of the
property.
In our opinion, the statement referred to above presents fairly, in all
material respects, the income and direct operating expenses of Pace's Cove
Apartments (as defined above) for the twelve month period ended May 31, 1997, in
conformity with generally accepted accounting principles.
Richmond, Virginia L.P. Martin & Co., P.C.
July 22, 1997
F-30
<PAGE>
PACE'S COVE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MAY 31, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................... $1,832,695
DIRECT OPERATING EXPENSES
Administrative and Other ........................... 237,030
Insurance .......................................... 42,627
Repairs and Maintenance ........................... 273,102
Taxes, Property .................................... 213,985
Utilities .......................................... 118,907
----------
TOTAL DIRECT OPERATING EXPENSES .................. 885,651
----------
Operating income exclusive of items not comparable
to the proposed future operations of the property. $ 947,044
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION
Pace's Cove Apartments is a 328 unit garden style apartment complex located on
12.97 acres in Dallas, Texas. The assets comprising the property were owned by
Intercapital Portfolio 944 I Limited Partnership, an entity unaffiliated with
Apple Residential Income Trust, Inc. during the financial statement period.
Apple Residential Income Trust, Inc. subsequently purchased the property.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, legal and professional fees and management fees.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items of items not comparable to the proposed future
operations of the property Chaparosa Apartments located in Irving, Texas for the
twelve month period ended June 30, 1997. This statement is the responsibility of
the management of Chaparosa Apartments, Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statement. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion in a filing by Apple Residential Income Trust, Inc.) and excludes
material expenses, described in Note 2 to the statement, that would not be
comparable to those resulting from the proposed future operations of the
property.
In our opinion, the statement referred to above presents fairly, in all
material respects, the income and direct operating expenses of Chaparosa
Apartments (as defined above) for the twelve month period ended June 30, 1997,
in conformity with generally accepted accounting principles.
Richmond, Virginia L.P. Martin & Co., P.C.
September 24, 1997
F-32
<PAGE>
CHAPAROSA APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income .............................. $1,374,365
----------
DIRECT OPERATING EXPENSES
Administrative and Other .............................. 187,182
Insurance ............................................. 18,284
Repairs and Maintenance .............................. 226,512
Taxes, Property ....................................... 148,416
Utilities ............................................. 78,209
TOTAL DIRECT OPERATING EXPENSES 658,603
----------
Operating income exclusive of items not comparable to
the proposed future operations of the property ...... $ 715,762
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION
Chaparosa Apartments is a 170 unit garden and townhouse style apartment complex
located on 7.48 acres in Irving, Texas. The assets comprising the property were
owned by Hutton/Con Am Realty Pension Investors, an entity unaffiliated with
Apple Residential Income Trust, Inc., during the financial statement period.
Apple Residential Income Trust, Inc. purchased the property in August, 1997.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue and Expense Recognition -- The accompanying statement of rental
operations has been prepared using the accrual method of accounting. In
accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation and management fees.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Repairs and Maintenance -- Repairs and maintenance costs are expensed as
incurred, while significant improvements, renovations and replacements are
capitalized.
Advertising -- Advertising costs are expensed in the period incurred.
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Riverhill Apartments located in Irving, Texas for the twelve month
period ended June 30, 1997, This statement is the responsibility of the
management of Riverhill Apartments, Our responsibility is to express an opinion
on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards, Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statement. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion in a filing by Apple Residential Income Trust, Inc.) and excludes
material expenses, described in Note 2 to the statement, that would not be
comparable to those resulting from the proposed future operations of the
property.
In our opinion, the statement referred to above presents fairly, in all
material respects, the income and direct operating expenses of Riverhill
Apartments (as defined above) for the twelve month period ended June 30, 1997,
in conformity with generally accepted accounting principles.
Richmond, Virginia L.P. Martin & Co., P.C.
September 24, 1997
F-34
<PAGE>
RIVERHILL APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income .............................. $1,529,649
----------
DIRECT OPERATING EXPENSES
Administrative and Other .............................. 210,774
Insurance ............................................. 20,274
Repairs and Maintenance .............................. 254,466
Taxes, Property ....................................... 192,345
Utilities ............................................. 115,741
TOTAL DIRECT OPERATING EXPENSES 793,600
Operating income exclusive of items not comparable to
the proposed future operations of the property ...... $ 736,049
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION
Riverhill Apartments is a 192 unit garden and townhouse style apartment complex
located on 9.33 acres in Irving, Texas. The assets comprising the property were
owned by Riverhill Apartments Limited Partnership, an entity unaffiliated with
Apple Residential Income Trust, Inc., during the financial statement period.
Apple Residential Income Trust, Inc. purchased the property in August, 1997.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue and Expense Recognition -- The accompanying statement of rental
operations has been prepared using the accrual method of accounting. In
accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property, Excluded
expenses are property depreciation and management fees.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of revenues and expenses during
the reporting period, Actual results could differ from those estimates.
Repairs and Maintenance -- Repairs and maintenance costs are expensed as
incurred, while significant improvements, renovations and replacements are
capitalized.
Advertising -- Advertising costs are expensed in the period incurred.
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Copper Crossing Apartments located in Fort Worth, Texas for the
twelve month period ended October 31, 1997. This statement is the responsibility
of the management of Copper Crossing Apartments. Our responsibility is to
express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Copper Crossing Apartments
(as defined above) for the twelve month period ended October 31, 1997, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
December 16, 1997
F-36
<PAGE>
COPPER CROSSING APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED OCTOBER 31, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income .............................. $ 987,109
---------
DIRECT OPERATING EXPENSES
Administrative and Other .............................. 138,305
Insurance ............................................. 32,363
Repairs and Maintenance .............................. 210,279
Taxes, Property ....................................... 92,700
Utilities ............................................. 109,793
---------
Total Direct Operating Expenses ..................... 583,440
---------
Operating income exclusive of items not comparable to
the proposed future operations of the property ...... $ 403,669
=========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED OCTOBER 31, 1997
NOTE 1 -- ORGANIZATION
Copper Crossing Apartments is a 200 unit garden style apartment complex located
on 6.91 acres in Fort Worth, Texas. The assets comprising the property were
owned by Cooper Crossing Investors, Ltd., an entity unaffiliated with Apple
Residential Income Trust, Inc., during the financial statement period. Apple
Residential Income Trust, Inc. subsequently purchased the property.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulations S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, management fees and entity expenses.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-37
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
PRO FORMA BALANCE SHEET AS OF SEPTEMBER 30, 1997 (UNAUDITED)
The accompanying Unaudited Pro Forma Balance Sheet as of September 30, 1997 is
presented as if the Company had owned the properties included in the table below
as of September 30, 1997. In the opinion of management, all adjustments
necessary to reflect the effects of the Offering have been made.
The Unaudited Pro Forma Balance Sheet is presented for comparative purposes
only, and is not necessarily indicative of what the actual financial position of
the Company would have been at September 30, 1997, nor does it purport to
represent the future financial position of the Company. This Unaudited Pro Forma
Balance Sheet should be read in conjunction with, and is qualified in its
entirety by, the respective historical financial statements and notes thereto of
the Company. The Pro Forma column assumes the Company used the proceeds from its
"best efforts" offerings to acquire the properties.
<TABLE>
<CAPTION>
COPPER
HISTORICAL CROSSING
BALANCE PRO FORMA TOTAL
SHEET ADJUSTMENTS PRO FORMA
--------------- ------------- ---------------
<S> <C> <C> <C>
ASSETS
Investment in rental property
Land ....................................... $ 13,504,976 $ 872,100 $ 14,377,076
Building .................................... 67,365,012 3,972,900 71,337,912
Property improvements ........................ 1,683,878 -- 1,683,878
Furniture and fixtures ..................... 489,322 -- 489,322
------------ ---------- ------------
83,043,188 4,845,000 87,888,188
Less accumulated depreciation ............... (1,086,111) -- (1,086,111)
------------ ---------- ------------
81,957,077 4,845,000 86,802,077
Cash and cash equivalents .................. 1,350,305 -- 1,350,305
Prepaid expenses ........................... 161,391 -- 161,391
Other assets ................................. 561,464 -- 561,464
------------ ---------- ------------
Total Assets ................................. $ 84,030,237 $4,845,000 $ 88,875,237
============ ========== ============
LIABILITIES
Notes payable .............................. $ 5,132,702 -- $ 5,132,702
Accounts payable ........................... 411,069 -- 411,069
Accrued expenses ........................... 1,647,832 -- 1,647,832
Rents received in advance .................. 25,969 -- 25,969
Tenant security deposits ..................... 371,794 -- 371,794
------------ ---------- ------------
7,589,366 -- 7,589,366
SHAREHOLDERS' EQUITY
Common stock, no par value .................. 76,005,921 4,845,000 80,850,921
Class B Convertible Stock, no par value . 20,000 -- 20,000
Receivable from principal shareholder ...... (20,000) -- (20,000)
Net income greater than distributions ...... 434,950 -- 434,950
------------ ---------- ------------
76,440,871 4,845,000 81,285,871
Total Liabilities and Shareholders'
Equity ....................................... $ 84,030,237 $4,845,000 $ 88,875,237
============ ========== ============
</TABLE>
NOTES TO PRO FORMA BALANCE SHEET
Pro Forma adjustments represent the purchase price of the related property,
including the 2% acquisition fee to Cornerstone Realty Income Trust, Inc.
allocated between land and building. Adjustments to common stock reflect the net
proceeds from sales of common stock from the Company's continuous offering.
F-38
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 (UNAUDITED)
The accompanying Unaudited Pro Forma Statement of Operations for the year ended
December 31, 1996 is presented as if (a) the Company had acquired the properties
shown below on January 1, 1996; (b) the Company had qualified as a REIT,
distributed at least 95% of its taxable income and, therefore, incurred no
federal income tax liability for the period presented; and (c) the Company had
used proceeds from its best efforts offering to acquire the properties. The
Company had no operations during the period ending December 31, 1996.
Accordingly, the Company had no revenue or operating profits or loss. In the
opinion of management, all adjustments necessary to reflect the effects of these
transactions have been made.
The Unaudited Pro Forma Statement of Operations is presented for comparative
purposes only and is not necessarily indicative of what the actual results of
the Company would have been for the year ended December 31, 1996 if the
acquisitions and Offering had occurred at the beginning of the period presented,
nor does it purport to be indicative of the results of operations in future
periods. The Unaudited Pro Forma Statement of Operations should be read in
conjunction with, and is qualified in its entirety by, the respective historical
financial statements and notes thereto of the Company.
<TABLE>
<CAPTION>
HISTORICAL BROOKFIELD EAGLE CREST TAHOE
STATEMENT OF PRO FORMA PRO FORMA PRO FORMA
OPERATIONS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
-------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Dates of Acquisitions ... -- 1/31/97 1/31/97 1/31/97
Rental income ............ -- $1,198,543 $3,196,618 $1,200,270
Expenses
Utilities ............... -- 92,664 305,101 149,166
Repairs and maintenance -- 174,233 379,120 351,750
Taxes and insurance ...... -- 152,636 438,546 145,184
Property management
fee ..................... -- -- -- --
Advertising ............... -- 30,567 53,153 29,695
Other operating ex-
penses -- -- -- --
General and administra-
tive -- -- -- --
-- -- -- --
Depreciation of real es-
tate -- -- -- --
Amortization ............ -- -- -- --
Other ..................... -- 91,702 159,460 89,086
-- ----------- ----------- -----------
-- 541,802 1,335,380 764,881
Income before interest in-
come -- 656,741 1,861,238 435,389
Interest income ......... -- -- -- --
-- ----------- ----------- -----------
Net income ............... -- $ 656,741 $1,861,238 $ 435,389
== =========== =========== ===========
Net income per share ...... --
==
Weighted average number
of shares outstanding ... --
==
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MILL CROSSING POLO RUN WILDWOOD TOSCANA THE ARBORS PACES COVE CHAPAROSA
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
--------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dates of Acquisitions ... 2/28/97 3/31/97 3/31/97 3/31/97 4/25/97 6/30/97 8/6/97
Rental income ............ $908,336 $1,304,547 $809,555 $1,083,249 $1,381,014 $1,832,695 $1,374,365
Expenses
Utilities ............... 148,270 128,924 78,937 84,886 85,182 118,907 78,209
Repairs and maintenance 216,500 257,602 123,470 117,117 109,577 273,102 226,512
Taxes and insurance ...... 115,377 162,030 100,862 142,695 182,186 256,612 166,700
Property management
fee ..................... -- -- -- -- -- -- --
Advertising ............... 25,631 25,350 27,509 32,221 27,909 59,257 46,796
Other operating ex-
penses -- -- -- -- -- -- --
General and administra-
tive -- -- -- -- -- -- --
-- -- -- -- -- -- --
Depreciation of real es-
tate -- -- -- -- -- -- --
Amortization ............ -- -- -- -- -- -- --
Other ..................... 76,891 76,050 82,526 96,663 83,727 177,773 140,387
-------- ----------- -------- ----------- ----------- ----------- -----------
582,669 649,956 413,304 473,582 488,581 885,651 658,604
Income before interest in-
come 325,667 654,591 396,251 609,667 892,433 947,044 715,761
Interest income ......... -- -- -- -- -- -- --
-------- ----------- -------- ----------- ----------- ----------- -----------
Net income ............... $325,667 $ 654,591 $396,251 $ 609,667 $ 892,433 $ 947,044 $ 715,761
======== =========== ======== =========== =========== =========== ===========
Net income per share ......
Weighted average number
of shares outstanding ... --
========
</TABLE>
<TABLE>
<CAPTION>
COPPER
RIVERHILL CROSSING
PRO FORMA PRO FORMA PRO FORMA TOTAL
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- ------------- -------------------- ------------
<S> <C> <C> <C> <C>
Dates of Acquisitions ... 8/6/97 11/25/97
Rental income ............ $1,529,649 $ 987,109 -- $16,805,950
Expenses
Utilities .............. 115,741 109,793 -- 1,495,780
Repairs and maintenance 254,466 210,279 -- 2,693,728
Taxes and insurance ..... 212,619 125,063 -- 2,200,510
Property management
fee .................... -- -- 923,578 (A) 923,578
Advertising .............. 52,694 34,576 -- 445,358
Other operating ex-
penses -- -- -- --
General and administra-
tive -- -- 211,386 (B) 521,386
-- -- 310,000 (D) --
Depreciation of real es-
tate -- -- 2,512,341 (C) 2,512,341
Amortization ........... -- -- --
Other .................... 158,081 103,729 -- 1,336,075
----------- --------- ------------- -----------
793,601 583,440 3,975,305 12,128,755
Income before interest in-
come 736,048 403,669 (3,957,305) 4,677,195
Interest income ........ -- -- -- --
----------- --------- ------------- -----------
Net income ................ $ 736,048 $ 403,669 $ (3,957,305) $ 4,677,195
=========== ========= ============= ===========
Net income per share ....... $ 0.47
===========
Weighted average number
of shares outstanding ... 9,885,561 (E) 9,885,561
============= ===========
</TABLE>
<PAGE>
===================
(A) Represents the property management fees of 5% of rental income and
processing costs equal to $2.50 per apartment per month charged by the
external management company for the period of time not owned by the
company.
(B) Represents the advisory fee of .25% of accumulated capital contributions
under the "best efforts" offering for the period of time not owned by the
company.
(C) Represents the depreciation expense of the properties acquired based on the
purchase price, excluding amounts allocated to land, of the properties for
the period of time not owned by the company. The weighted average life of
the property depreciated was 27.5 years.
(D) Represents the expenses related to operations as a public REIT, which
consists of directors and officers insurance, investor relations, corporate
accounting, legal and director expenses.
(E) Represents additional common shares assuming the properties were acquired
on January 1, 1996 with the "best efforts" offering of $9 per share for the
first $15 million and $10 per share above $15 million.
F-39
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
The accompanying Unaudited Pro Forma Statement of Operations for the nine months
ended September 30, 1997 is presented as if (a) the Company had acquired the
properties shown below on January 1, 1997; (b) the Company had qualified as a
REIT, distributed at least 95% of its taxable income and, therefore, incurred no
federal income tax liability for the period presented; and (c) the Company had
used proceeds from its best efforts offering to acquire the properties. In the
opinion of management, all adjustments necessary to reflect the effects of these
transactions have been made.
The Unaudited Pro Forma Statement of Operations is presented for comparative
purposes only and is not necessarily indicative of what the actual results of
the Company would have been for the nine months ended September 30, 1997 if the
acquisitions and Offering had occurred at the beginning of the period presented,
nor does it purport to be indicative of theresults of operations in future
periods. The Unaudited Pro Forma Statement of Operations should be read in
conjunction with, and is qualified in its entirety by, the respective historical
financial statements and notes thereto of the Company.
<TABLE>
<CAPTION>
HISTORICAL BROOKFIELD EAGLE CREST TAHOE MILL CROSSING
STATEMENT OF PRO FORMA PRO FORMA PRO FORMA PRO FORMA
OPERATIONS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
-------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Dates of Acquisitions ... -- 1/31/97 1/31/97 1/31/97 2/28/97
Rental income ............ $7,771,744 $ 99,879 $266,385 $100,023 $151,389
Expenses
Utilities .............. 796,570 7,722 25,425 12,431 24,712
Repairs and maintenance 581,796 14,519 31,593 29,313 36,083
Taxes and insurance .... 1,176,182 12,720 36,546 12,099 19,230
Property management
fee ................... 403,479 -- -- -- --
Advertising ............. 194,785 2,547 4,429 2,475 4,272
General and administra-
tive 391,837 -- -- -- --
Depreciation of real es-
tate 25,444 -- -- -- --
Amortization .......... 1,086,111 -- -- -- --
Other operating ex-
penses 602,517 7,642 13,288 7,424 12,815
---------- -------- -------- -------- --------
5,258,721 45,150 111,281 63,742 97,112
Income before interest in-
come 2,513,023 54,729 155,104 36,281 54,277
Interest income ....... 107,584 -- -- -- --
Interest expense ....... (377,154) -- -- -- --
---------- -------- -------- -------- --------
Net income ............... $2,243,453 $ 54,729 $155,104 $ 36,281 $ 54,277
========== ======== ======== ======== ========
Net income per share ...... $ 0.44
----------
Weighted average number
of shares outstanding .. 5,053,423
==========
<CAPTION>
PACES
POLO RUN WILDWOOD TOSCANA THE ARBORS COVE CHAPAROSA RIVERHILL
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- ------------- ------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dates of Acquisitions ... 3/31/97 3/31/97 3/31/97 4/25/97 6/30/97 8/6/97 8/6/97
Rental income ............ $326,137 $202,389 $270,812 $460,338 $916,348 $801,713 $892,295
Expenses
Utilities ............... 32,231 19,734 21,222 28,394 59,454 45,622 67,516
Repairs and maintenance 64,401 30,868 29,279 36,526 136,551 132,132 148,439
Taxes and insurance ...... 40,508 25,216 35,674 60,729 128,306 97,242 124,028
Property management
fee ..................... -- -- -- -- -- -- --
Advertising ............... 6,338 6,877 8,055 9,303 29,629 27,298 30,738
General and administra-
tive -- -- -- -- -- -- --
Depreciation of real es-
tate -- -- -- -- -- -- --
Amortization ............ -- -- -- -- -- -- --
Other operating ex-
penses 19,013 20,632 24,166 27,909 88,887 81,892 92,214
-------- -------- -------- -------- -------- -------- --------
162,491 103,327 118,396 162,861 442,827 384,186 462,935
Income before interest in-
come 163,646 99,062 152,416 297,477 473,521 417,527 429,360
Interest income ......... -- -- -- -- -- -- --
Interest expense ......... -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income ............... $163,646 $ 99,062 $152,416 $297,477 $473,521 $417,527 $429,360
======== ======== ======== ======== ======== ======== ========
Net income per share ......
Weighted average number
of shares outstanding ...
</TABLE>
<TABLE>
<CAPTION>
COPPER
CROSSING 1997
PRO FORMA PRO FORMA TOTAL
ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- ------------------- ---------------
<S> <C> <C> <C>
Dates of Acquisitions ... 11/25/97
Rental income ............ $ 740,332 -- $12,999,784
Expenses
Utilities ............. 82,345 -- 1,223,378
Repairs and maintenance 157,709 -- 1,429,210
Taxes and insurance .... 93,797 -- 1,862,277
Property management
fee ................... -- 286,587 (A) 690,066
Advertising ............. 25,932 -- 352,678
General and administra-
tive -- 65,243 (B) 457,080
Depreciation of real es-
tate -- 767,996 (C) 793,440
Amortization .......... -- -- 1,086,111
Other operating ex-
penses 77,797 -- 1,076,196
--------- -------- -----------
437,580 1,119,826 8,970,436
Income before interest in-
come 302,752 (1,119,826) 4,029,348
Interest income ....... -- -- 107,584
Interest expense ....... -- -- (377,154)
--------- ----------- -----------
Net income ............... $302,752 ($1,119,826) $3,759,778
========= ============= ===========
Net income per share ...... $ 0.41
-----------
Weighted average number
of shares outstanding .. 4,030,153 (D) 9,083,576
============= ===========
</TABLE>
===================
(A) Represents the property management fees of 5% of rental income and
processing costs equal to $2.50 per apartment per month charged by the
external management company for the period of time not owned by the
company.
(B) Represents the advisory fee of .25% of accumulated capital contributions
under the "best efforts" offering for the period of time not owned by the
company.
(C) Represents the depreciation expense of the properties acquired based on the
purchase price, excluding amounts allocated to land, of the properties for
the period of time not owned by the company. The weighted average life of
the property depreciated was 27.5 years.
(D) Represents additional common shares assuming the properties were acquired
on January 1, 1997 with the "best efforts" offering of $9 per share for the
first $15 million and $10 per share above $15 million.
F-40
<PAGE>
II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are estimates of the expenses to be incurred in connection
with the issuance and distribution of the securities to be registered:
SEC registration fee ............... $ 86,208
NASD filing fee .................. 25,500
Printing and engraving fees ...... 250,000
Legal fees and expenses ............ 300,000
Accounting fees and expenses ...... 200,000
Blue Sky fees and expense ......... 50,000
Escrow agent and registrar ......... 20,000
Registrant travel expense ......... 30,000
Marketing Expense Allowance ...... 6,250,000
Contingency ........................ 38,292
----------
Total ........................... $7,250,000
==========
ITEM 31. SALES TO SPECIAL PARTIES.
On August 7, 1996, the Registrant sold 10 Common Shares to Apple Realty
Advisors, Inc. for $100 cash.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
On August 7, 1996, the Registrant sold 10 Common Shares to Apple Realty
Advisors, Inc. for $100 cash, in a transaction that was exempt from registration
under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.
On November 14, 1996, the Registrant sold 200,000 Class B Convertible Shares to
Glade M. Knight for $20,000 cash, in a transaction that was exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
4(2) thereof.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company will obtain, and pay the cost of, directors' and officers'
liability insurance coverage which insures (i) the directors and officers of the
Company from any claim arising out of an alleged wrongful act by the directors
and officers of the Company in their respective capacities as directors and
officers of the Company, and (ii) the Company to the extent that the Company has
indemnified the directors and officers for such loss.
The Virginia Stock Corporation Act (the "Virginia Act") permits, and the
Registrant's Articles of Incorporation and Bylaws require, indemnification of
the Registrant's directors and officers in a variety of circumstances, which may
include liabilities under the Securities Act of 1933. Under Section 13.1-697 of
the Virginia Act, a Virginia corporation generally is authorized to indemnify
its directors in civil or criminal actions if they acted in good faith and
believed their conduct to be in the best interests of the corporation and, in
the case of criminal actions, had no reasonable cause to believe that the
conduct was unlawful. The Registrant's Articles of Incorporation and Bylaws
require indemnification of officers and directors with respect to any action
except in the case of willful misconduct, bad faith, reckless disregard of
duties or violations of the criminal law. In addition, the Registrant may carry
insurance on behalf of directors, officers, employees or agents that may cover
liabilities under the Securities Act of 1933. The Registrant's Articles of
Incorporation, as permitted by the Virginia Act, eliminate the damages that may
be assessed against a director or officer of the Registrant in a shareholder or
derivative proceeding. This limit on liability will not apply in the event of
willful misconduct or a knowing violation of the criminal law or of federal or
state securities laws. Reference also is made to the indemnification provisions
set forth in the form of Agency Agreement filed as Exhibit 1 hereto.
II-1
<PAGE>
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
None of the proceeds will be credited to an account other than the
appropriate capital share account.
ITEM 35. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
(a) Financial Statements. See Index to Financial Statements in the
Prospectus and Supplement No. 7 for the financial statements which are included
in the Prospectus and in Supplement No. 7, respectively.
(b) Financial Statement Schedules: None.
(c) Exhibits. Except as noted, the Exhibits have been previously filed.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- - ------------------------
1.1 Agency Agreement between the Registrant and David Lerner Associates,
Inc. with form of Selected Dealer Agreement attached as Exhibit A
thereto.
1.2 Escrow Agreement among the Registrant, First Union National Bank of
North Carolina and David Lerner Associates, Inc.
3.1 Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
3.3 Articles of Amendment to the Articles of Incorporation of the
Registrant.
3.4 Articles of Amendment to the Articles of Incorporation of the
Registrant.
3.5 Amended and Restated Bylaws of the Registrant (Amended and Restated
through December 19, 1997). FILED HEREWITH.
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. FILED HEREWITH.
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. FILED HEREWITH.
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. FILED HERE- WITH.
5 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to the legality
of the securities being registered.
8 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to certain tax
matters.
10.1 Advisory Agreement between the Registrant and Apple Residential
Advisors, Inc.
10.2 Form of Property Management Agreement between the Registrant and Apple
Residential Management Group, Inc.
10.3 Property Acquisition/Disposition Agreement between the Registrant and
Apple Realty Group, Inc.
10.4 Apple Residential Income Trust, Inc. 1996 Incentive Plan.
10.5 Apple Residential Income Trust, Inc. 1996 Non-Employee Directors Stock
Option Plan.
10.6 Share Purchase Warrants Warrant Agreement.
10.7 Right of First Refusal Agreement.
10.8 Advisory Agreement Subcontract among the Registrant, Apple Residential
Advisors, Inc. and Cornerstone Realty Income Trust, Inc. Incorporated
herein by reference to Exhibit 10.4 to Form S-3 of Cornerstone Realty
Income Trust, Inc. (File No. 333-23693) filed on March 20, 1997.
II-2
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
10.9 Property Management Agreement Subcontract among the Registrant, Apple
Residential Management Group, Inc. and Cornerstone Realty Income Trust,
Inc. Incorporated herein by reference to Exhibit 10.5 to Form S-3 of
Cornerstone Realty Income Trust, Inc. (File No. 333- 23693) filed on
March 20, 1997.
10.10 Agreement and Bill of Transfer and Assignment among the Registrant,
Apple Realty Group, Inc. and Cornerstone Realty Income Trust, Inc.
Incorporated herein by reference to Exhibit 10.6 to Form S-3 of
Cornerstone Realty Income Trust, Inc. (File No. 333-23693) filed on
March 20, 1997.
10.11 Common Share Purchase Option Agreement between the Registrant and
Cornerstone Realty Income Trust, Inc. Incorporated herein by reference
to Exhibit 10.8 to Form S-3 of Cornerstone Realty Income Trust, Inc.
(File No. 333-23693) filed on March 20, 1997.
10.12 Articles of Incorporation of Apple Limited, Inc. FILED HEREWITH.
10.13 Bylaws of Apple Limited, Inc. FILED HEREWITH.
10.14 Articles of Incorporation of Apple General, Inc. FILED HEREWITH.
10.15 Bylaws of Apple General, Inc. FILED HEREWITH.
10.16 Certificate of Limited Partnership of Apple REIT Limited Partnership.
FILED HEREWITH.
10.17 Limited Partnership Agreement of Apple REIT Limited Partnership. FILED
HEREWITH.
23.1 Consent of McGuire, Woods, Battle & Boothe, L.L.P. (included in
Exhibits 5 and 8).
23.2 Consent of Ernst & Young LLP. FILED HEREWITH.
23.3 Consent of L.P. Martin & Company, P.C. FILED HEREWITH.
24.1 Power of Attorney of Glade M. Knight.
24.2 Power of Attorney of Ted W. Smith.
24.3 Power of Attorney of Penelope W. Kyle.
24.4 Power of Attorney of Bruce H. Matson.
24.5 Power of Attorney of Lisa B. Kern.
ITEM 36. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
II-3
<PAGE>
(b) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) That all post-effective amendments will comply with the applicable
forms, rules and regulations of the Commission in effect at the time such
post-effective amendments are filed.
(d) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The Registrant undertakes to send to each Shareholder at least on an annual
basis a detailed statement of any transactions with the Advisor or its
Affiliates, and of fees, commissions, compensation and other benefits paid or
accrued to the Advisor or its Affiliates for the fiscal year completed, showing
the amount paid or accrued to each recipient and the services performed.
The Registrant undertakes to provide to the Shareholders the financial
statements required by Form 10-K for the first full fiscal year of operations of
the Registrant.
The Registrant undertakes to file during the offering period a sticker
supplement pursuant to Rule 424(c) under the Act describing each property not
identified in the Prospectus at such time as there arises a reasonable
probability of investment in such property by the Registrant and to consolidate
all such stickers into a post-effective amendment filed at least once every
three months with the information contained in such amendment provided
simultaneously to the existing Shareholders. Each sticker supplement will also
disclose all compensation and fees received by the Advisor or its Affiliates in
connection with any such investment. The post-effective amendment shall include
audited financial statements meeting the requirements of Rule 3-14 of Regulation
S-X only for properties acquired during the distribution period.
The Registrant undertakes to file, after the end of the offering period, a
current report on Form 8-K containing the financial statements and any
additional information required by Rule 3-14 of Regulation S-X, to reflect each
commitment not previously disclosed in the Prospectus or a supplement thereto
involving the use of 10% or more (on a cumulative basis) of the net proceeds of
the offering and to provide the information contained in such report to the
Shareholders at least once each quarter after the end of the offering period.
The Registrant undertakes to file the financial statements required by Form 10-K
for the first full fiscal year of operations and will provide the financial
information contained therein to the Shareholders. The Registrant undertakes to
file a final report on Form SR pursuant to Rule 463 of the Act.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to officers, directors and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commis- sion
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than for expenses incurred in a
successful defense) is asserted by such officer, director or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
ITEM 37.
TABLE VI: ACQUISITION OF PROPERTIES BY CORNERSTONE
Cornerstone acquired the following properties since inception in 1993. All
properties acquired are residential communities. All of Cornerstone's
acquisitions are done on a mortgage-free basis. Cost of acquisition represents
the total cost of the purchase price including any downpayment.
CONTRACT
NAME OF DATE OF NUMBER PURCHASE
PROPERTY(1) LOCATION PURCHASE OF UNITS SINCE
- ----------------------- ----------------- ---------- ---------- --------------
GEORGIA
West Eagle Greens Augusta 1996 165 $ 4,020,000
Savannah West Augusta 1996 456 $ 9,843,620
Carlyle Club Lawrenceville 1997 243 $ 11,580,000
Ashley Run Norcross 1997 348 $ 18,000,000
Dunwoody Springs Dunwoody 1997 350 $ 15,200,000
Barrington Parc Norcross 1997 188 $ 7,850,000
NORTH CAROLINA
Chase Mooring Wilmington 1994 224 $ 3,594,000
Wimbledon Chase Wilmington 1994 192 $ 3,300,000
Osprey Landing Wilmington 1995 176 $ 4,375,000
Sailboat Bay Charlotte 1995 358 $ 9,100,000
Meadow Creek Charlotte 1996 250 $ 11,100,000
Beacon Hill Charlotte 1996 349 $ 13,579,203
Hanover Landing Charlotte 1995 192 $ 5,725,000
Bridgetown Bay Charlotte 1996 120 $ 5,025,000
Summerwalk Charlotte 1996 160 $ 5,660,000
The Meadows Asheville 1996 176 $ 6,200,000
Glen Eagles Winston Salem 1995 166 $ 7,300,000
Mill Creek Winston Salem 1995 220 $ 8,550,000
Wind Lake Greensboro 1995 299 $ 8,760,000
The Landing Durham 1996 200 $ 8,345,000
The Hollows Raleigh 1993 176 $ 4,200,000
The Trestles Raleigh 1994 280 $ 10,350,000
Paces Glen Charlotte 1996 172 $ 7,425,000
Signature Place Greenville 1996 171 $ 5,462,948
Heatherwood Charlotte 1996 476 $ 17,630,457
Highland Hills Carrboro 1996 264 $ 12,100,000
Parkside at Woodlake Durham 1996 266 $ 14,663,886
Deerfield Durham 1996 204 $ 10,675,000
Paces Arbor/Forest Raleigh 1997 218 $ 12,061,700
Charleston Place Charlotte 1997 214 $ 9,475,000
Clarion Crossing Raleigh 1997 228 $ 10,600,000
Sterling Arbor Raleigh 1997 180 $ 9,800,000
Sterling Place Raleigh 1997 136 $ 7,900,000
SOUTH CAROLINA
Polo Club Greenville 1993 365 $ 4,300,000
Magnolia Run Greenville 1995 212 $ 5,500,000
Breckinridge Greenville 1995 236 $ 5,600,000
Stone Ridge Columbia 1993 191 $ 3,325,000
Arbors at Windsor Columbia 1997 228 $ 10,875,000
Westchase Charleston 1997 352 $ 11,000,000
VIRGINIA
County Green Lynchburg 1993 180 $ 3,800,000
Ashley Park Richmond 1996 272 $ 12,205,000
Trolley Square Richmond 1996 320 $ 10,242,575
Trophy Chase Charlottesville 1996 185 $ 3,710,000
Bay Watch Pointe Virginia Beach 1995 160 $ 3,372,525
Harbour Club Virginia Beach 1994 214 $ 5,250,000
Arbor Trace Virginia Beach 1996 148 $ 5,000,000
Mayflower Seaside Virginia Beach 1993 263 $ 7,634,144
Tradewinds Hampton 1995 284 $ 10,200,000
Hampton Glen Richmond 1996 232 $ 11,599,931
Greenbrier Fredericksburg 1996 185 $ 11,099,525
<PAGE>
OTHER TOTAL AVERAGE
NAME OF ACQUISITION EXPENDITURES ACQUISITION SQUARE FT.
PROPERTY(1) FEE CAPITALIZED COST OF UNITS
- ----------------------- ------------- -------------- -------------- -----------
GEORGIA
West Eagle Greens $ 80,000 $ 1,956,355 $ 6,056,355 796
Savannah West $ 196,080 $ 2,461,609 $ 12,501,309 872
Carlyle Club $ -- $ 657,864 $ 12,237,864 1,089
Ashley Run $ -- $ 684,443 $ 18,684,443 1,150
Dunwoody Springs $ -- $ 1,394,594 $ 16,594,594 948
Barrington Parc $ -- $ 103,881 $ 7,953,881 937
NORTH CAROLINA
Chase Mooring $ 71,880 $ 1,508,242 $ 5,174,122 867
Wimbledon Chase $ 66,000 $ 2,095,662 $ 5,461,662 863
Osprey Landing $ 87,500 $ 2,380,454 $ 6,842,954 981
Sailboat Bay $ 182,000 $ 3,916,131 $ 13,198,131 906
Meadow Creek $ 222,000 $ 973,434 $ 12,295,434 860
Beacon Hill $ 266,000 $ 672,592 $ 14,517,795 734
Hanover Landing $ 114,500 $ 1,425,357 $ 7,264,857 832
Bridgetown Bay $ 100,000 $ 638,770 $ 5,763,770 868
Summerwalk $ 114,000 $ 1,365,674 $ 7,139,674 963
The Meadows $ 124,000 $ 1,136,262 $ 7,460,262 1,066
Glen Eagles $ 146,000 $ 1,417,487 $ 8,863,487 952
Mill Creek $ 171,000 $ 674,861 $ 9,395,861 897
Wind Lake $ 175,200 $ 881,850 $ 9,817,050 727
The Landing $ 168,000 $ 1,314,290 $ 9,827,290 961
The Hollows $ 84,000 $ 1,578,730 5,862,730 903
The Trestles $ 207,000 $ 788,191 $ 11,345,191 926
Paces Glen $ -- $ 602,477 $ 8,027,477 905
Signature Place $ -- $ 1,264,487 $ 6,727,435 1,037
Heatherwood $ -- $ 1,273,485 18,903,942 942
Highland Hills $ -- $ 1,801,839 $ 13,901,839 1,000
Parkside at Woodlake $ -- $ 266,022 $ 14,929,908 865
Deerfield $ -- $ 420,295 $ 11,095,295 888
Paces Arbor/Forest $ -- $ 568,234 $ 12,629,934 891
Charleston Place $ -- $ 532,406 $ 10,007,406 806
Clarion Crossing $ -- $ 212,429 $ 10,812,429 769
Sterling Arbor $ -- $ 87,449 $ 9,887,449 840
Sterling Place $ -- $ 82,291 $ 7,982,291 1,098
SOUTH CAROLINA
Polo Club $ 86,000 $ 2,518,635 $ 6,904,635 842
Magnolia Run $ 110,000 $ 1,140,125 $ 6,750,125 849
Breckinridge $ 112,000 $ 1,184,124 $ 6,896,124 726
Stone Ridge $ 66,500 $ 2,221,092 $ 5,612,592 1,027
Arbors at Windsor $ -- $ 464,651 $ 11,339,651 948
Westchase $ -- $ 1,199,764 $ 12,199,764 706
VIRGINIA
County Green $ 76,000 $ 1,327,820 $ 5,203,820 1,000
Ashley Park $ 244,100 $ 493,702 $ 12,942,802 765
Trolley Square $ 120,000 $ 2,184,434 $ 12,547,009 559
Trophy Chase $ 72,000 $ 2,699,964 $ 6,481,964 803
Bay Watch Pointe $ 67,451 $ 1,441,932 $ 4,881,908 911
Harbour Club $ 105,000 $ 749,145 $ 6,104,145 813
Arbor Trace $ 100,000 $ 767,816 $ 5,867,816 850
Mayflower Seaside $ 152,683 $ 1,731,086 $ 9,517,913 698
Tradewinds $ 204,000 $ 485,492 $ 10,889,492 929
Hampton Glen $ -- $ 857,570 $ 12,457,501 788
Greenbrier $ -- $ 714,289 $ 11,813,814 851
Note: (1) Cornerstone does not have any mortgages on its properties nor
have down payments outstanding. In addition all cash expenditures incurred in
the acquisition of a community are capitalized.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Post-Effective
Amendment No. 5 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Richmond, Commonwealth of
Virginia, on February 2, 1998.
APPLE RESIDENTIAL INCOME TRUST, INC.
By: /s/ Glade M. Knight
------------------------------------
Glade M. Knight
President, and as President, the
Registrant's Principal Executive
Officer, Principal Financial Officer
and Principal Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 5 to Registration Statement has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITIES DATE
- --------------------------- --------------------------------------- -----------------
<S> <C> <C>
/s/ Glade M. Knight Director and President, and As February 2, 1998
------------------------- President, the Registrant's Principal
Glade M. Knight Executive Officer, Principal Financial
Officer and Principal Accounting
Officer
* Director February 2, 1998
-------------------------
Penelope W. Kyle
* Director February 2, 1998
-------------------------
Bruce H. Matson
* Director February 2, 1998
-------------------------
Lisa B. Kern
</TABLE>
*By: /s/ Glade M. Knight
---------------------------
Glade M. Knight, as
attorney-in-fact for
the above-named persons
II-6
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- -------- ------------------------
1.1 Agency Agreement between the Registrant and David Lerner Associates,
Inc. with form of Selected Dealer Agreement attached as Exhibit A
thereto.
1.2 Escrow Agreement among the Registrant, First Union National Bank of
North Carolina and David Lerner Associates, Inc.
3.1 Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
3.3 Articles of Amendment to the Articles of Incorporation of the
Registrant.
3.4 Articles of Amendment to the Articles of Incorporation of the
Registrant.
3.5 Amended and Restated Bylaws of the Registrant (Amended and Restated
through December 19, 1997). FILED HEREWITH.
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. FILED HEREWITH.
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. FILED HEREWITH.
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. FILED HEREWITH.
5 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to the legality
of the securities being registered.
8 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to certain tax
matters.
10.1 Advisory Agreement between the Registrant and Apple Residential
Advisors, Inc.
10.2 Form of Property Management Agreement between the Registrant and Apple
Residential Management Group, Inc.
10.3 Property Acquisition/Disposition Agreement between the Registrant and
Apple Realty Group, Inc.
10.4 Apple Residential Income Trust, Inc. 1996 Incentive Plan.
10.5 Apple Residential Income Trust, Inc. 1996 Non-Employee Directors Stock
Option Plan.
10.6 Share Purchase Warrants Warrant Agreement.
10.7 Right of First Refusal Agreement.
10.8 Advisory Agreement Subcontract among the Registrant, Apple Residential
Advisors, Inc. and Cornerstone Realty Income Trust, Inc. Incorporated
herein by reference to Exhibit 10.4 to Form S-3 of Cornerstone Realty
Income Trust, Inc. (File No. 333-23693) filed on March 20, 1997.
10.9 Property Management Agreement Subcontract among the Registrant, Apple
Residential Management Group, Inc. and Cornerstone Realty Income Trust,
Inc. Incorporated herein by reference to Exhibit 10.5 to Form S-3 of
Cornerstone Realty Income Trust, Inc. (File No. 333- 23693) filed on
March 20, 1997.
10.10 Agreement and Bill of Transfer and Assignment among the Registrant,
Apple Realty Group, Inc. and Cornerstone Realty Income Trust, Inc.
Incorporated herein by reference to Exhibit 10.6 to Form S-3 of
Cornerstone Realty Income Trust, Inc. (File No. 333-23693) filed on
March 20, 1997.
10.11 Common Share Purchase Option Agreement between the Registrant and
Cornerstone Realty Income Trust, Inc. Incorporated herein by reference
to Exhibit 10.8 to Form S-3 of Cornerstone Realty Income Trust, Inc.
(File No. 333-23693) filed on March 20, 1997.
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- -------- ------------------------
10.12 Articles of Incorporation of Apple Limited, Inc. FILED HEREWITH.
10.13 Bylaws of Apple Limited, Inc. FILED HEREWITH.
10.14 Articles of Incorporation of Apple General, Inc. FILED HEREWITH.
10.15 Bylaws of Apple General, Inc. FILED HEREWITH.
10.16 Certificate of Limited Partnership of Apple REIT Limited Partnership.
FILED HEREWITH.
10.17 Limited Partnership Agreement of Apple REIT Limited Partnership. FILED
HEREWITH.
23.1 Consent of McGuire, Woods, Battle & Boothe, L.L.P. (included in
Exhibits 5 and 8).
23.2 Consent of Ernst & Young LLP. FILED HEREWITH.
23.3 Consent of L.P. Martin & Company, P.C. FILED HEREWITH.
24.1 Power of Attorney of Glade M. Knight.
24.2 Power of Attorney of Ted W. Smith.
24.3 Power of Attorney of Penelope W. Kyle.
24.4 Power of Attorney of Bruce H. Matson.
24.5 Power of Attorney of Lisa B. Kern.
Exhibit 3.5
Amended and Restated Through December 19, 1997
AMENDED AND RESTATED
BYLAWS
OF
APPLE RESIDENTIAL INCOME TRUST, INC.
<PAGE>
TABLE OF CONTENTS
ARTICLES: Page
----
ARTICLE I
THE COMPANY; DEFINITIONS............................................ 1
1.1 Name.......................................................... 1
1.2 Nature of Company............................................. 1
1.3 Definitions................................................... 1
ARTICLE II
MINIMUM CAPITAL..................................................... 6
2.1 Minimum Capital............................................... 6
2.2 [Reserved].................................................... 6
ARTICLE III
OFFICES; FISCAL YEAR................................................ 6
3.1 Principal Office.............................................. 6
3.2 Other Offices................................................. 6
3.3 Taxable Year.................................................. 6
ARTICLE IV
MEETINGS OF SHAREHOLDERS............................................ 7
4.1 Place of Meetings............................................. 7
4.2 Annual Meetings............................................... 7
4.3 Special Meetings.............................................. 8
4.4 Notice; Affidavit of Notice................................... 8
4.5 Record Date for Shareholder Notice, Voting and Giving
Consents...................................................... 9
4.6 Adjourned Meetings; Notice.................................... 10
4.7 Voting at Meetings of Shareholders............................ 10
4.8 Quorum........................................................ 10
4.9 Waiver of Notice or Consent of Absent Shareholders............ 11
4.10 Action Without Meeting........................................ 11
4.11 Proxies....................................................... 11
4.12 Inspectors of Election........................................ 12
ARTICLE V
DIRECTORS........................................................... 13
5.1 Powers........................................................ 13
5.2 Number, Tenure and Qualifications............................. 13
5.3 Nomination of Directors....................................... 14
5.4 Vacancies..................................................... 15
5.5 Place of Meeting.............................................. 16
5.6 Organization Meeting.......................................... 16
5.7 Special Meetings.............................................. 16
5.8 Adjournment................................................... 17
5.9 Notice of Adjournment......................................... 17
5.10 Entry of Notice............................................... 17
5.11 Waiver of Notice.............................................. 17
5.12 Quorum........................................................ 17
5.13 Fees and Compensation......................................... 17
i
<PAGE>
5.14 Action Without Meeting........................................ 18
5.15 Independent Directors......................................... 18
5.16 Removal of Director for Cause................................. 20
5.17 Removal of Director Without Cause............................. 20
5.18 Committees.................................................... 20
5.19 Fiduciary Relationship........................................ 21
ARTICLE VI
OFFICERS............................................................ 21
6.1 Officers...................................................... 21
6.2 Election...................................................... 21
6.3 Subordinate Officers.......................................... 22
6.4 Removal and Resignation....................................... 22
6.5 Vacancies..................................................... 22
6.6 Chairman of the Board......................................... 22
6.7 President..................................................... 22
6.8 Vice Presidents............................................... 23
6.9 Secretary..................................................... 23
6.10 Assistant Secretaries......................................... 23
6.11 Chief Financial Officer....................................... 23
6.12 Assistant Chief Financial Officers............................ 24
ARTICLE VII
SHARES OF STOCK..................................................... 24
7.1 Registered Ownership, Share Certificates and Shares in
"Unissued Certificate" Form................................... 24
7.2 Transfer of Shares............................................ 25
7.3 Disclosures by Holders of Shares; Redemption of Shares........ 25
7.4 Right to Refuse to Transfer the Shares........................ 26
7.5 Limitation on Acquisition of Shares........................... 26
7.6 Lost or Destroyed Certificates................................ 28
7.7 Dividend Record Date and Closing Stock Books.................. 28
7.8 Dividend Reinvestment Plan.................................... 28
ARTICLE VIII
EMPLOYMENT OF ADVISOR, LIMITATION
ON EXPENSES AND LEVERAGE............................................ 29
8.1 Employment of Advisor......................................... 29
8.2 Term.......................................................... 30
8.3 Other Activities of Advisor................................... 30
8.4 Limitation on Offering and Organization Expenses and
Acquisition Fees and Expenses................................. 31
8.5 Limitation on Operating Expenses.............................. 31
8.6 Limitation on Real Estate Brokerage Commissions on
Purchase and Resale of Property............................... 32
8.7 Limitation on Incentive Fees.................................. 32
8.8 Limitations on Leverage....................................... 33
ARTICLE IX
RESTRICTIONS ON INVESTMENTS AND ACTIVITIES.......................... 33
9.1 Restrictions.................................................. 33
ii
<PAGE>
ARTICLE X
TRANSACTIONS WITH AFFILIATES; CERTAIN DUTIES AND LIABILITIES
OF DIRECTORS, SHAREHOLDERS, ADVISOR AND AFFILIATES.................. 35
10.1 Transactions with Affiliates.................................. 35
10.2 Restriction of Duties and Liabilities......................... 36
10.3 Persons Dealing with Directors or Officers.................... 37
10.4 Reliance...................................................... 37
10.5 Income Tax Status............................................. 37
ARTICLE XI
MISCELLANEOUS....................................................... 38
11.1 Competing Programs............................................ 38
11.2 Corporate Seal................................................ 38
11.3 Inspection of Bylaws.......................................... 38
11.4 Inspection of Corporate Records............................... 39
11.5 Checks, Drafts, Etc........................................... 39
11.6 Contracts, Etc., How Executed................................. 39
11.7 Representation of Shares of Other Corporations................ 39
11.8 Annual Report................................................. 39
11.9 Quarterly Reports............................................. 40
11.10 Other Reports................................................. 40
11.11 Provisions of the Company in Conflict with Law or
Regulation.................................................... 40
11.12 Voluntary Dissolution......................................... 41
11.13 Distributions................................................. 41
11.14 Shareholder Liability......................................... 41
11.15 Return of Offering Proceeds................................... 41
ARTICLE XII
AMENDMENTS TO BYLAWS................................................ 41
12.1 Amendments.................................................... 41
12.2 [Reserved].................................................... 42
ARTICLE XIII
CONDUCT OF BUSINESS THROUGH SUBSIDIARIES............................ 42
13.1 Subsidiaries.................................................. 42
13.2 Interpretation and Application of Bylaws...................... 42
13.3 Certain Shareholder Consents.................................. 42
iii
<PAGE>
ARTICLE I
THE COMPANY; DEFINITIONS
1.1 Name. The name of the corporation is APPLE RESIDENTIAL
INCOME TRUST, INC. and is referred to in these Bylaws as the "Company." As far
as practicable and except as otherwise provided in the Organizational Documents,
the Directors shall direct the management of the business and the conduct of the
affairs of the Company, execute all documents and sue or be sued in the name of
the Company. If the Directors determine that the use of that name is not
practicable, legal or convenient, they may use such other designation or may
adopt another name under which the Company may hold property or conduct all or
part of its activities.
1.2 Nature of Company. The Company is a corporation organized
under the laws of the Commonwealth of Virginia. It is intended that the Company
shall carry on business as a "real estate investment trust" ("REIT").
1.3 Definitions. Whenever used in these Bylaws, the terms
defined in this Section 1.3 shall, unless the context otherwise requires, have
the respective meanings specified in this Section 1.3. In these Bylaws, words in
the singular number include the plural and in the plural number include the
singular.
(a) Acquisition Expenses. The total expenses,
including but not limited to legal fees and expenses, travel and communications
expenses, costs of appraisals, non-refundable option payments on property not
acquired, accounting fees and expenses, title insurance, and miscellaneous
expenses related to selection and acquisition of properties, whether or not
acquired. Acquisition Expenses shall not include Acquisition Fees.
(b) Acquisition Fees. The total of all fees and
commissions paid by any party in connection with the purchase or development of
real property by the Company, except a development fee paid to a person not
Affiliated with the Sponsor in connection with the actual development of a
project after acquisition of the land by the Company. Included in the
computation of such fees or commissions shall be any real estate commission,
selection fee, development fee, nonrecurring management fee, or any fee of a
similar nature, however designated.
(c) Adjusted Net Asset Value. The net assets of
the Company (total assets before deducting depreciation or non-cash reserves
less total liabilities) valued at fair market value as determined by qualified
appraisals or valuations of the assets.
(d) Advisor. The Person responsible for
directing or performing the day-to-day business affairs of the
<PAGE>
Company, including a Person to which the Advisor subcontracts substantially all
such functions.
(e) Affiliate. Means (i) any Person directly or
indirectly controlling, controlled by or under common control with another
Person, (ii) any Person owning or controlling 10% or more of the outstanding
voting securities or beneficial interests of such other Person, (iii) any
officer, director, trustee or general partner of such Person, and (iv) if such
other Person is an officer, director, trustee or partner of another entity, then
the entity for which that Person acts in any such capacity. Affiliated means
being an Affiliate of a specified Person.
(f) Annual Report. As set forth in Section 11.8.
(g) Appraisal. The values as of the date of the
appraisal or valuation of property in its existing state or in a state to be
created, as determined by the Directors, the Advisor or by another person, who
is a member in good standing of the American Institute of Real Estate Appraisers
or who in the sole judgment of the Directors is properly qualified to make such
a determination. The Directors may in good faith rely on a previous Appraisal
made on behalf of another Person, provided (i) it meets the standards of this
definition and was made in connection with an investment in which the Company
acquires the entire or a participating interest, and (ii) it was prepared not
earlier than two years prior to the acquisition by the Company of its interest
in the property. In appraising properties, appraisers may take into
consideration each of the specific terms and conditions of a purchase, including
any leaseback or other guarantee arrangement. The Appraisal may not necessarily
represent the cash value of the property but may consider the value of the
income stream from such property plus the discounted value of the fee interest
and other terms of the purchase. An Appraisal shall be obtained from an
independent qualified appraiser if a majority of the Independent Directors so
decides or if the transaction is with the Advisor, Directors or any of their
Affiliates. Each Appraisal shall be maintained in the Company's records for a
minimum of five years and shall be available for inspection and duplication by
any Shareholder.
(h) Articles of Incorporation. The Articles of
Incorporation of the Company, including all amendments, restatements or
modifications thereof.
(i) Average Invested Assets. The average of the
aggregate book value of the assets of the Company invested, directly or
indirectly, in equity interests in and loans secured by real estate, before
reserves for depreciation or bad debts or other similar non-cash reserves,
computed by taking the average of such values at the end of each month during
any period.
2
<PAGE>
(j) Bylaws. These Bylaws, including all
amendments, restatements or modifications hereof.
(k) Competitive Real Estate Commission. The
real estate or brokerage commission paid for the purchase or sale of a property
which is reasonable, customary and competitive in light of the size, type and
location of such property.
(l) Contract Price. The amount actually paid or
allocated to the purchase, development, construction or improvement of real
property exclusive of Acquisition Fees and Acquisition Expenses.
(m) Directors. As of any particular time, the
directors of the Company holding office at such time.
(n) Dividend Reinvestment Plan. The program
adopted by the Board of Directors pursuant to Section 5.1 hereof and available
to Shareholders to reinvest dividends in Shares available under the Liquidity
Matching Program.
(o) Independent Director. A Director of the
Company who is not Affiliated, directly or indirectly, with the Advisor, whether
by ownership of, ownership interest in, employment by, any material business or
professional relationship with, or serving as an officer or director of, the
Advisor, or an Affiliated business entity of the Advisor (other than as an
Independent Director of up to three other real estate investment trusts advised
by the Advisor or an Affiliate of the Advisor). An Independent Director may
perform no other services for the Company, except as a Director. Notwithstanding
anything to the contrary herein, any member of a law firm whose only material
business or professional relationship with the Company, the Advisor and their
Affiliates is as legal counsel to any of such entities shall constitute an
Independent Director (unless such person serves as a director for more than
three REITs organized by the Advisor and its Affiliates). The independence of
any Independent Director must be maintained throughout his term as Director. An
"indirect" affiliation shall be deemed to refer to circumstances in which a
member of the "immediate family" of a Director is Affiliated with the Advisor,
and a person's "immediate family" shall mean such person's spouse, parents,
children, siblings, mother and father-in-law, sons and daughters- in-law and
brothers and sisters-in-law.
(p) Initial Investment. That portion of the
initial capitalization of the Company contributed by the Sponsor or its
Affiliates.
(q) Leverage. The aggregate amount of
indebtedness of the Company for money borrowed (including purchase money
mortgage loans) outstanding at any time, both
3
<PAGE>
secured and unsecured.
(r) Liquidity Matching Program. The program
adopted by the Board of Directors pursuant to Section 5.1 hereof under which
Shareholders may tender Shares for resale to participants in the Dividend
Reinvestment Plan.
(s) Net Assets. The total assets of the Company
(other than intangible assets) at cost before deducting depreciation or other
non-cash reserves less total liabilities, calculated at least quarterly on a
basis consistently applied.
(t) Net Income. The total revenues of the
Company for any period, less the expenses applicable to such period other than
additions to reserves for depreciation or bad debts or other similar non-cash
reserves. For purposes of calculating Operating Expenses, Net Income shall
exclude any gain from the sale of the Company's assets.
(u) Offering and Organization Expenses. Those
expenses incurred in connection with the formation and registration of the
Company and in qualifying and marketing the Shares under applicable federal and
state law, and any other expenses actually incurred and directly related to the
qualification, registration, offer and sale of the Shares, including such
expenses as (i) all marketing expenses and payments made to broker-dealers as
compensation or reimbursement for all costs of reviewing the offering, including
due diligence investigations and fees and expenses of their attorneys,
accountants and other experts; (ii) registration fees, filing fees and taxes;
(iii) the costs of printing, amending, supplementing and distributing the
registration statement and Prospectus; (iv) the costs of obtaining regulatory
clearances of, printing and distributing sales materials used in connection with
the offer and sale of the Shares; (v) the costs related to investor and
broker-dealer sales meetings concerning the offering; and (vi) accounting and
legal fees incurred in connection with any of the foregoing.
(v) Operating Expenses. All operating, general
and administrative expenses of the Company as determined under generally
accepted accounting principles (including regular compensation payable to the
Advisor), excluding, however, the following:
(i) expenses of raising capital;
(ii) interest payments;
(iii) taxes;
(iv) non-cash expenditures, such as depreciation,
4
<PAGE>
amortization and bad debt reserve;
(v) incentive fees paid to the Advisor, if any;
and
(vi) costs related directly to asset
acquisition, operation and disposition.
(w) Organizational Documents. The Articles of
Incorporation and these Bylaws.
(x) Person. An individual, corporation,
partnership, joint venture, association, company, trust, bank or other entity,
or government and any agency and political subdivision of a government.
(y) Prospectus. Shall mean a Prospectus as that
term is defined by the Securities Act of 1933, including a preliminary
Prospectus, an offering circular as described in Rule 256 of the General Rules
and Regulations promulgated under the Securities Act of 1933 and, in the case of
an intra-state offering, any document, by whatever name known, utilized for the
purpose of offering and selling securities to the public.
(z) REIT. A real estate investment trust, as
defined in Section 856 of the Internal Revenue Code of 1986, as
amended.
(aa) REIT Provisions of the Internal Revenue
Code. Part II, Subchapter M of Chapter 1, of the Internal Revenue Code of 1986,
as amended, or successor statutes, and regulations and rulings promulgated
thereunder.
(bb) Securities. Any stock, shares, voting trust
certificates, bonds, debentures, notes or other evidences of indebtedness,
secured or unsecured, convertible, subordinated or otherwise, or in general any
instruments commonly known as "securities."
(cc) Shares or Common Shares. All of the common
shares of the Company, no par value.
(dd) Shareholders. As of any particular date, all
holders of record of outstanding Common Shares at such time.
(ee) Sponsor. Any Person directly or indirectly
instrumental in organizing, wholly or in part, the Company or any Person who
will manage or participate in the management of the Company, and any Affiliate
of any such Person, but not including a Person who is an Independent Director or
whose only relationship with the Company is that of an independent property
manager, whose only compensation is as such, or wholly
5
<PAGE>
independent third parties such as attorneys, accountants and underwriters whose
only compensation is for professional services. No Independent Director shall be
deemed to be a Sponsor.
(ff) Unimproved Real Property. Property which has
the following three characteristics: (i) an equity interest in property which
was not acquired for the purpose of producing rental or other operating income,
(ii) has no development or construction in process on such land, and (iii) no
development or construction on such land is planned in good faith to commence
within one year.
ARTICLE II
MINIMUM CAPITAL
2.1 Minimum Capital. Prior to the public offering of the
Shares, the Sponsor or Affiliates of the Sponsor purchased 10 Common Shares for
an aggregate purchase price of $100, as an Initial Investment. The Sponsor or
its Affiliates may not withdraw the Initial Investment for a period of one year
following completion of the offering.
2.2 [Reserved].
ARTICLE III
OFFICES; FISCAL YEAR
3.1 Principal Office. The principal executive office of the
Company shall be located at 306 East Main Street, Richmond, Virginia 23219,
until otherwise established by a vote of a majority of the Board of Directors.
3.2 Other Offices. Other offices may at any time be
established by the Board of Directors at any place or places they deem
appropriate.
3.3 Taxable Year. The annual accounting period of the
Company shall be the calendar year.
6
<PAGE>
ARTICLE IV
MEETINGS OF SHAREHOLDERS
4.1 Place of Meetings. All annual and all other meetings of
Shareholders shall be held at such place, either within or outside of the
Commonwealth of Virginia as from time to time may be fixed by the President or
by the Board of Directors.
4.2 Annual Meetings. The annual meetings of Shareholders shall
be held on such date as is fixed by the President or the Board of Directors;
provided, however, that the first annual meeting of Shareholders who purchase
Shares in the public offering made by the Prospectus shall be held in the year
following the year in which the Initial Closing (as defined in the Prospectus)
occurs; and provided further, that such date fixed by the Directors shall not be
less than 30 days after the Board of Directors shall have caused to be sent to
the Shareholders an Annual Report as provided in Section 11.8 of these Bylaws,
but if no such date and time is fixed by the President or the Board of
Directors, the meeting for any calendar year shall be held on the first Tuesday
in May in such year, if not a legal holiday under the laws of Virginia. If the
date fixed by the President or the Board of Directors falls upon a legal
holiday, then any annual meeting of Shareholders shall be held at the same time
and place on the next day which is not a legal holiday. At each annual meeting
of Shareholders, only such business shall be conducted as is proper to consider
and has been brought before the meeting (i) pursuant to the Company's notice of
the meeting, (ii) by or at the direction of the Board of Directors, or (iii) by
a Shareholder who is a Shareholder of record of a class of Shares entitled to
vote on the business such Shareholder is proposing, both at the time of the
giving of the Shareholder's notice hereinafter described in this Section 4.2 and
on the record date for such annual meeting, and who complies with the notice
procedures set forth in this Section 4.2.
In order to bring before an annual meeting of Shareholders any
business which may properly be considered and which a Shareholder has not had
included in the Company's proxy statement for the meeting, a Shareholder who
meets the requirements set forth in the preceding paragraph must give the
Company timely written notice. To be timely, a Shareholder's notice must be
given, either by personal delivery to the Secretary of the Company at the
principal office of the Company, or by first class United States mail, with
postage thereon prepaid, addressed to the Secretary of the Company at the
principal office of the Company. Any such notice must be received (i) on or
after February 1st and before March 1st of the year in which the meeting will be
held, if clause (ii) is not applicable, or (ii) not less than 60 days before the
date of the meeting if the date of such meeting is earlier than May 1 or
7
<PAGE>
later than May 31 in such year.
Each such Shareholder's notice shall set forth as to each
matter the Shareholder proposes to bring before the annual meeting (i) the name
and address, as they appear on the Company's stock transfer books, of the
Shareholder proposing business, (ii) the class and number of Shares of stock of
the Company beneficially owned by such Shareholder, (iii) a representation that
such Shareholder is a Shareholder of record at the time of the giving of the
notice and intends to appear in person or by proxy at the meeting to present the
business specified in the notice, (iv) a brief description of the business
desired to be brought before the meeting, including the complete text of any
resolutions to be presented and the reasons for wanting to conduct such
business, and (v) any interest which the Shareholder may have in such business.
The Secretary of the Company shall deliver each Shareholder's
notice that has been timely received to the Chairman for review.
4.3 Special Meetings. Special meetings of the Shareholders may
be called at any time for any purpose or purposes whatsoever by the President,
by a majority of the Board of Directors, by a majority of Independent Directors,
by the Chairman of the Board or by one or more Shareholders holding not less
than 10% of the eligible votes. If a meeting is called by any Person or Persons
other than the Board of Directors, the Chairman of the Board or the President, a
request shall be made in writing, specifying the time of the meeting and the
general nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the Chairman of the Board, the President, or the Secretary of
the Company. The officer receiving the request shall cause notice to be promptly
given to the Shareholders entitled to vote, in accordance with the provisions of
Section 4.4.
4.4 Notice; Affidavit of Notice. Notice of meetings of the
Shareholders of the Company shall be given in writing to each Shareholder
entitled to vote thereat, either personally or by first class mail, or, if the
Company has 500 or more Shareholders, by third-class mail, or other means of
written communication, charges prepaid, addressed to the Shareholder at his or
its address appearing on the books of the Company or given by the Shareholder to
the Company for the purpose of notice. Notice of any such meeting of
Shareholders shall be sent to each Shareholder entitled thereto not less than 10
nor more than 60 days before the meeting; provided, however, that within 10
business days after receipt by the Company, in person, or by registered mail, of
a written request for a meeting by Shareholders holding not less than 10% of the
outstanding Shares
8
<PAGE>
entitled to vote at such meeting, the Company shall provide written notice of
such meeting to all Shareholders, and such meeting shall be held not less than
20 nor more than 60 days after the Company's receipt of such written Shareholder
request; and, provided further, that if such notice is not given within 10
business days after receipt of the request, the Person or Persons requesting the
meeting may give the notice. Nothing contained in this Section 4.4 shall be
construed as limiting, fixing or affecting the time when a meeting of
Shareholders called by action of the Board of Directors may be held. All notices
given pursuant to this Section shall state the place, date and hour of the
meeting and, (i) in the case of special meetings, the general nature of the
business to be transacted, and no other business may be transacted, or (ii) in
the case of annual meetings, those matters which the Board of Directors, at the
time of the mailing of the notice, intends to present for action by the
Shareholders, and (iii) in the case of any meeting at which Directors are to be
elected, the names of the nominees intended at the time of the mailing of the
notice to be presented by management for election. An affidavit of the mailing
or other means of giving any notice of any Shareholders' meeting shall be
executed by the Secretary, Assistant Secretary or any transfer agent of the
Company giving the notice, and shall be filed and maintained in the minute book
of the Company.
4.5 Record Date for Shareholder Notice, Voting and Giving
Consents. For purposes of determining the Shareholders entitled to notice of any
meeting or to vote or entitled to give consent to corporate action without a
meeting, the Board of Directors may fix, in advance, a record date, which shall
not be more than 60 days nor less than 10 days before the date of any meeting
nor more than 60 days before any action without a meeting, and in this event
only Shareholders of record on the date so fixed are entitled to notice and to
vote or to give consents, as the case may be, notwithstanding any transfer of
any Shares on the books of the Company after the record date.
If the Board of Directors does not so fix a record date:
(a) The record date for determining Shareholders
entitled to notice of or to vote at a meeting of Shareholders shall be at the
close of business on the business day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the business day next
preceding the date on which the meeting is held.
(b) The record date for determining Shareholders
entitled to give consent to corporate action in writing without a meeting, (i)
when no prior action by the Board has been taken, shall be the day on which the
first written consent in given, or (ii) when prior action of the Board has been
taken, shall be at
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the close of business on the day on which the Board adopts the resolution
relating to that action, or the 60th day before the date of the other action,
whichever is later.
4.6 Adjourned Meetings; Notice. Any Shareholders' meeting,
annual or special, whether or not a quorum is present, may be adjourned from
time to time by the vote of the majority of the Shares, the holders of which are
either present in person or represented by proxy, but in the absence of a quorum
no other business may be transacted at the meeting.
When any Shareholders' meeting, either annual or special, is
adjourned for more than 45 days or if after the adjournment a new record date is
fixed for the adjourned meeting, notice of the adjourned meeting shall be given
as in the case of a special meeting. In all other cases, it shall not be
necessary to give any notice of an adjournment or of the business to be
transacted at any adjourned meeting other than by announcement at the meeting at
which the adjournment is taken.
4.7 Voting at Meetings of Shareholders. Subject to the
provisions of the Virginia Stock Corporation Act, and subject to the right of
the Board of Directors to provide otherwise, only Persons in whose name Shares
entitled to vote registered on the stock records of the Company on the record
date shall be entitled to the notice of and to vote at the meeting,
notwithstanding any transfer of any Shares on the books of the Company after the
record date.
The vote may be via voice or by ballot; provided, however,
that all elections for Directors must be by ballot upon demand made by any
Shareholder at any election and before the voting begins. Except as provided in
this Section 4.7, each outstanding Share shall be entitled to one vote on each
matter submitted to a vote of Shareholders.
4.8 Quorum. The presence in person or by proxy of a majority
of the Shares entitled to vote at any meeting shall constitute a quorum for the
transaction of business. Except as otherwise expressly provided in these Bylaws,
if a quorum exists, action on a matter, other than the election of Directors, is
approved if the votes cast favoring the action exceed the votes cast opposing
the action unless a vote of a greater number is required by the Articles of
Incorporation or by the Virginia Stock Corporation Act. Directors shall be
elected by a plurality of the votes cast by the Shares entitled to vote in the
election at a meeting at which a quorum is present. The Shareholders present at
a duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
Shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the Shares required to
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constitute a quorum.
4.9 Waiver of Notice or Consent of Absent Shareholders. The
transactions of any meeting of Shareholders, either annual or special, however
called and noticed, shall be as valid as though made at a meeting duly held
after regular call and notice, if a quorum is present either in person or by
proxy and if, either before or after the meeting, each of the Shareholders
entitled to vote, not present in person or by proxy, signs a written waiver of
notice or a consent to the holding of the meeting or an approval of the minutes.
All waivers, consents or approvals shall be filed with the corporate records or
made a part of the minutes of the meeting.
4.10 Action Without Meeting. Any action which may be taken at
any annual or special meeting of Shareholders may be taken without a meeting and
without action by the Board of Directors, if the action is taken by all the
Shareholders entitled to vote on the action. The action shall be evidenced by
one or more written consents describing the action taken, signed by all the
Shareholders entitled to vote on the action, and delivered to the Secretary of
the Company for inclusion in the minutes or filing with the corporate records.
Action taken under this Section 4.10 shall be effective when all consents are in
the possession of the Company, unless the consent specifies a different
effective date and states the date of execution by each Shareholder, in which
event it shall be effective according to the terms of the consent. A Shareholder
may withdraw consent only by delivering a written notice of withdrawal to the
Company prior to the time that all consents are in the possession of the
Company.
The record date for determining Shareholders entitled to take
action without a meeting is the date the first Shareholder signs the consent
described in the preceding paragraph.
Any form of written consent distributed to 10 or more
Shareholders must afford the Person whose consent is thereby solicited an
opportunity to specify a choice among approval, disapproval or abstention as to
each matter or group of related matters presented, other than elections of
Directors or officers.
4.11 Proxies. Every Person entitled to vote or execute
consents shall have the right to do so either in person or by one or more agents
authorized by a written proxy executed by such Person or his duly authorized
agent and filed with the Secretary of the Company, provided that no such proxy
shall be valid after the expiration of 11 months from the date of its execution,
unless the Person executing it specifics in the proxy the length of time for
which the proxy is to continue in force.
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A proxy shall be deemed signed if the Shareholder's name is
placed on the proxy (whether by manual signature, typewriting, telegraphic
transmission or otherwise) by the Shareholder or the Shareholder's attorney in
fact. A validly executed proxy which does not state that it is irrevocable shall
continue in full force and effect unless revoked by the Person executing it
before the vote pursuant to that proxy by (i) a writing delivered to the Company
stating that the proxy is revoked, (ii) execution of a subsequent proxy, (iii)
attendance at the meeting and voting in person (but only as to any items on
which the Shareholder chooses to vote in person), or (iv) transfer of the Shares
represented by the proxy to a transferee who becomes a Shareholder of record
prior to the record date established for the vote. A validly executed proxy
otherwise may be revoked by written notice of the death or incapacity of the
maker of that proxy received by the Company before the vote pursuant to that
proxy is counted.
Any proxy distributed to 10 or more Shareholders must afford
the Person voting an opportunity to specify a choice among approval, disapproval
or abstention as to each matter or group of related matters, other than election
of Directors or officers.
4.12 Inspectors of Election. Before any meeting of
Shareholders, the Board of Directors may appoint any Persons, other than
nominees for office, to act as inspectors of election at the meeting or its
adjournment. If no inspectors of election are so appointed, the Chairman of the
meeting may, and on the request of any Shareholder or a Shareholder's proxy
shall, appoint inspectors of election at the meeting. The number of inspectors
shall be either one or three. If inspectors are appointed at a meeting on the
request of one or more Shareholders or proxies, the holders of a majority of
Shares or their proxies present at the meeting shall determine whether one or
three inspectors are to be appointed. If any Person appointed as inspector fails
to appear or fails or refuses to act, the Chairman of the meeting may, and upon
the request of any Shareholder or a Shareholder's proxy shall, appoint a Person
to fill that vacancy.
These inspectors shall:
(a) Determine the number of Shares outstanding
and the voting power of each, the Shares represented at the meeting, the
existence of a quorum, and the authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and
questions in any way arising in connection with the right to vote;
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(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to
conduct the election or vote with fairness to all Shareholders.
ARTICLE V
DIRECTORS
5.1 Powers. Subject to limitations contained in the Articles
of Incorporation, these Bylaws and the Virginia Stock Corporation Act relating
to action required to be authorized or approved by the Shareholders, or by the
holders of a majority of the outstanding Shares, and subject to the duties of
Directors as prescribed by these Bylaws, all corporate powers shall be exercised
by or under the authority of, and the business and affairs of the Company shall
be controlled by, the Board of Directors. The Board of Directors may delegate
the management of the day-to-day operation of the business of the Company to the
Advisor, provided that the business and affairs of the Company shall be managed
and all corporate powers shall be exercised under the ultimate direction of the
Board of Directors. The Board of Directors shall establish policies on
investments and borrowings and shall monitor the administrative procedures,
investment operations and performance of the Company and the Advisor, to assure
that such policies are carried out.
Each individual Director, including each Independent Director,
may engage in other business activities of the type conducted by the Company and
is not required to present to the Company any investment opportunities presented
to them even though the investment opportunities may be within the Company's
investment policies.
5.2 Number, Tenure and Qualifications. The authorized number
of Directors of the Board of Directors shall be not less than three nor more
than 15 as shall be determined from time to time by resolution of the Board of
Directors. Notwithstanding the foregoing, until Initial Closing (as defined in
the Prospectus), the number of Directors shall be not less than one.
Each individual Director, including each Independent Director,
shall have at least three years of relevant experience demonstrating the
knowledge and experience required successfully to acquire and manage the type of
assets being acquired by the Company, and as set forth in Section 5.15, at least
one
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Independent Director shall have relevant real estate experience. Directors need
not be Shareholders.
Except as provided in Section 5.3, the Directors elected by
the holders of the Shares at a meeting of Shareholders at which a quorum is
present shall be those persons who receive the greatest number of votes even
though they do not receive a majority of the votes cast. No individual shall be
named or elected as a Director without his prior consent.
5.3 Nomination of Directors. No person shall be eligible for
election as a Director at a meeting of Shareholders unless nominated (i) by the
Board of Directors or any committee thereof or (ii) by a Shareholder who is a
Shareholder of record of a class of Shares entitled to vote for the election of
Directors, both at the time of the giving of the Shareholder's notice
hereinafter described in this Section 5.3 and on the record date for the meeting
at which the nominee(s) will be voted upon, and who complies with the notice
procedures set forth in this Section 5.3.
In order to nominate for election as Directors at a meeting of
Shareholders any persons who are not listed as nominees in the Company's proxy
statement for the meeting, a Shareholder who meets the requirements set forth in
the preceding paragraph must give the Company timely written notice. To be
timely, a Shareholder's notice must be given, either by personal delivery to the
Secretary of the Company at the principal office of the Company, or by first
class United States mail, with postage thereon prepaid, addressed to the
Secretary of the Company at the principal office of the Company. Any such notice
must be received (i) on or after February 1st and before March 1st of the year
in which the meeting will be held if the meeting is to be an annual meeting and
clause (ii) is not applicable, or (ii) not less than 60 days before an annual
meeting, if the date of the applicable annual meeting is earlier than May 1 or
later than May 31 in such year, or (iii) not later than the close of business on
the tenth day following the day on which notice of a special meeting of
Shareholders called for the purpose of electing Directors is first given to
Shareholders.
Each such Shareholder's notice shall set forth the following:
(i) as to the Shareholder giving the notice, (a) the name and address of such
Shareholder as they appear on the Company's stock transfer books, (b) the class
and number of Shares of the Company beneficially owned by such Shareholder, (c)
a representation that such Shareholder is a Shareholder of record at the time of
giving the notice and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice, and (d) a description of
all arrangements or understandings, if any, between such Shareholder and each
nominee and any other person or persons (naming such
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person or persons) pursuant to which the nomination or nominations are to be
made; and (ii) as to each person whom the Shareholder wishes to nominate for
election as a Director, (a) the name, age, business address and residence
address of such person, (b) the principal occupation or employment of such
person, (c) the class and number of Shares of the Company which are beneficially
owned by such person, and (d) all other information that is required to be
disclosed about nominees for election as Directors in solicitations of proxies
for the election of Directors under the rules and regulations of the Securities
and Exchange Commission. In addition, each such notice shall be accompanied by
the written consent of each proposed nominee to serve as a Director if elected
and such consent shall contain a statement from the proposed nominee to the
effect that the information about him or her contained in the notice is correct.
5.4 Vacancies. Vacancies in the Board of Directors may be
filled by a majority of the remaining Directors, though less than a quorum, or
by a sole remaining Director, except that a vacancy created by the removal of a
Director by the vote or written consent of the Shareholders or by court order
may be filled only by the vote of a majority of the Shares entitled to vote
represented at a duly held meeting at which a quorum is present, or by the
written consent of holders of a majority of the outstanding Shares entitled to
vote. Each Director so elected shall hold office until his successor is elected
at an annual or a special meeting of the Shareholders.
A vacancy or vacancies in the Board of Directors shall be
deemed to exist in case of the death, resignation or removal of any Director or
if the authorized number of Directors is increased or if the Shareholders fail,
at any annual or special meeting of Shareholders at which any Director or
Directors are elected, to elect the full authorized number of Directors to be
voted for at that meeting.
Any Director may resign effective on giving written notice to
the Chairman of the Board, the President, the Secretary, or the Board of
Directors. The Shareholders may elect a Director or Directors at any time to
fill any vacancy or vacancies not filled by the Directors. Any election by
written consent to fill a vacancy shall require the consent of a majority of the
outstanding Shares entitled to vote.
If the Board of Directors accepts the resignation of a
Director tendered to take effect at a future time, the Board or the Shareholders
shall have the power to elect a successor to take office when the resignation is
to become effective; provided, however, that any remaining Independent Directors
shall nominate replacements for vacancies among the Independent Director
positions.
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No reduction of the authorized number of Directors shall have
the effect of removing any Director prior to the expiration of his term of
office.
If the number of vacancies occurring during a year is
sufficiently large that a majority of the Directors in office has not been
elected by the Shareholders, the holders of 5% or more of the outstanding Shares
entitled to vote may call a special meeting of Shareholders to elect the entire
Board of Directors.
5.5 Place of Meeting. Regular meetings of the Board of
Directors shall be held at any place within or without the Commonwealth of
Virginia which has been designated from time to time by the Chairman of the
Board or by written consent of all members of the Board. In the absence of a
designation, regular meetings shall be held at the principal office of the
Company. Special meetings of the Board may be held either at a place so
designated or at the principal office. Members of the Board may participate in a
meeting through use of conference telephone or similar communication equipment,
so long as all members participating in such meeting can hear one another.
Participation in a meeting by telephone or similar communication equipment shall
constitute presence in person at the meeting.
5.6 Organization Meeting. Immediately following each annual
meeting of Shareholders, the Board of Directors shall hold a regular meeting for
the purpose of organization, election of officers and the transaction of other
business. Notice of that meeting is hereby dispensed with.
5.7 Special Meetings. Special meetings of the Board of
Directors for any purpose or purposes shall be called at any time by the
Chairman of the Board or the President or Vice President or the Secretary or any
two Directors.
Written notice of the time and place of special meetings shall
be delivered personally to the Directors or sent to each Director by mail or by
other form of written communication, charges prepaid, addressed to him at his
address as it appears upon the records of the Company or, if it is not so shown
or is not readily ascertainable, at the place in which the meetings of Directors
are regularly held. In case the notice is mailed, it shall be deposited in the
United States mail in the place in which the principal office of the Company is
located at least four days prior to the time of the meeting. In case the notice
is delivered personally, telegraphed or communicated by electronic means, it
shall be delivered, deposited with the telegraph company or communicated at
least 48 hours prior to the time of the meeting. Mailing, telegraphing or
delivery, as above provided, shall be due legal and personal notice to the
Director.
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5.8 Adjournment. A majority of the Directors present, whether
or not a quorum is present, may adjourn any Directors' meeting to another time
and place.
5.9 Notice of Adjournment. If a meeting is adjourned for more
than 24 hours, notice of any adjournment to another time or place shall be given
prior to the time of the adjourned meeting to the Directors who were not present
at the time of adjournment.
5.10 Entry of Notice. Whenever any Director has been absent
from any special meeting of the Board of Directors, an entry in the minutes to
the effect that notice has been duly given shall be conclusive and
incontrovertible evidence that due notice of the special meeting was given to
that Director as required by law and the Bylaws of the Company.
5.11 Waiver of Notice. The transactions of any meeting of the
Board of Directors, however called and noticed, or wherever held, shall be as
valid as though authorized at a meeting duly held after regular call and notice
if a quorum is present and if, either before or after the meeting, each of the
Directors not present signs a written waiver of notice of or consent to holding
the meeting or an approval of the minutes. All waivers, consents or approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.
5.12 Quorum. A majority of the authorized number of Directors
shall be necessary to constitute a quorum for the transaction of business,
except to adjourn as provided above or to fill a vacancy. Every act or decision
done or made by a majority of the Directors at a meeting duly held at which a
quorum is present shall be regarded as an act of the Board of Directors unless a
greater number be required by law or by the Articles of Incorporation or these
Bylaws. However, a meeting at which a quorum is initially present may continue
to transact business notwithstanding the withdrawal of Directors, if any action
taken after such withdrawal is approved by at least a majority of the Directors
required to constitute a quorum for the meeting.
5.13 Fees and Compensation. The Directors shall be entitled to
receive such reasonable compensation for their services as Directors as the
Directors may fix or determine from time to time by resolution of the Board of
Directors; provided, however, that Directors and officers of the Company who are
Affiliated with the Advisor shall not receive compensation from the Company for
their services as Directors or officers of the Company. The Directors shall also
be entitled to receive remuneration for services rendered to the Company, either
directly or indirectly, in any other capacity. Those services may include,
without limitation, services as an officer of the
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Company, legal, accounting or other professional services, or services as a
broker, transfer agent or underwriter, whether performed by a Director or any
Person Affiliated with a Director.
5.14 Action Without Meeting. Any action required or permitted
to be taken by the Board of Directors under the Virginia Stock Corporation Act
and these Bylaws may be taken without a meeting if all members of the Board
individually or collectively consent in writing to such action. The consent or
consents shall be filed with the minutes of the meetings of the Board. Any
certificate or other document filed under the provision of the Virginia Stock
Corporation Act which relates to action so taken shall state that the action was
taken by unanimous written consent of the Board of Directors without a meeting.
5.15 Independent Directors. At all times after Initial Closing
(as defined in the Prospectus), a majority of the Directors of the Company, and
a majority of the members of any Board committee, will be Independent Directors,
except during the 60 days following the departure of an Independent Director.
Successor Independent Directors will be nominated by any remaining Independent
Directors. At least one of the Independent Directors shall have had three years
of actual direct experience in acquiring or managing the type of real estate to
be acquired by the Company for his or her account or as an agent. The Directors
shall, in good faith, determine for all purposes which persons constitute or
would constitute Independent Directors and which persons do not or would not
constitute Independent Directors. Notwithstanding any other provision of these
Bylaws, the Independent Directors, in addition to their other duties, to the
extent that they may legally do so, shall:
(a) Monitor the relationship of the Company with
the Advisor. In this regard, the Independent Directors as a group, in addition
to all Directors as a group, will monitor the Advisor's performance of the
advisory contract and will determine at least annually that the Advisor's
compensation is reasonable in relation to the nature and quality of services
performed. This determination will be based on (i) the size of the advisory fee
in relationship to the size, composition and profitability of the invested
assets; (ii) the investment opportunities generated by the Advisor; (iii)
advisory fees paid to other advisors by other real estate investment trusts and
to advisors performing similar services by investors other than real estate
investment trusts; (iv) additional revenues realized by the Advisor and its
Affiliates through their relationship with the Company, including loan
administration, underwriting or broker commissions, servicing, engineering,
inspection and other fees, whether paid by the Company or by others with whom
the Company does business; (v) the quality and extent of service and advice
furnished by the Advisor; (vi) the performance of the investment portfolio of
the
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Company, including income, conservation or appreciation of capital, frequency of
problem investments and competence in dealing with distress situations; (vii)
quality of the portfolio of the Company in relationship to the investments
generated by the Advisor for its own account; and (viii) all other factors the
Independent Directors may deem relevant. The Independent Directors will also
determine that the Advisor's compensation is within the limits prescribed by
Sections 8.5, 8.6 and 8.7 herein.
The Independent Directors shall approve all
transactions between the Company and the Advisor or any Affiliates of the
Advisor (other than as provided in Section 10.1 herein). The material terms and
circumstances of all such approved transactions shall be fully disclosed in the
Annual Report of the Company as required by Section 11.8, and the Independent
Directors shall examine and comment in the Annual Report on the fairness of such
transactions.
(b) Review at least annually the Company's
investment policies to determine that they remain in the best interests of the
Shareholders. The findings of the Independent Directors shall be set forth in
the minutes of meetings of the Board of Directors. Such investment policies may
be altered from time to time by the Board of Directors with the consent of a
majority of the Independent Directors and without approval of the Shareholders
upon a determination that such a change is in the best interests of the Company
and the Shareholders.
(c) Take reasonable steps to ensure that the
Annual Report is sent to Shareholders and that the annual meeting is conducted
pursuant to Article IV.
(d) Determine at least annually that the total
fees and expenses of the Company are reasonable in light of its Net Assets and
Net Income, the investment experience of the Company, and the fees and expenses
of comparable advisors in real estate. In this regard, the Independent Directors
will have the fiduciary responsibility of limiting Operating Expenses to amounts
that do not exceed the limitation set forth in Section 8.5, unless they conclude
that a higher level of expense is justified for such a year based on unusual and
nonrecurring factors which they deem sufficient.
Within 60 days after the end of any fiscal quarter
of the Company for which Operating Expenses (for the 12 months then ended)
exceed the limitations set forth in Section 8.5, there shall be sent to the
Shareholders a written disclosure of such fact together with an explanation of
the factors the Independent Directors considered in arriving at the conclusion
that the higher Operating Expenses were justified. In the event the Independent
Directors determine that the excess expenses are not justified, the Advisor
shall reimburse the Company at the
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time and in the manner set forth in the Company's agreement with the Advisor.
(e) The Independent Directors shall review at
least quarterly the aggregate borrowings, secured and unsecured, of the Company
to determine that the relation of such borrowings to Net Assets does not exceed
the limitations set forth in Sections 8.8 and 9.1(k) and (l) of these Bylaws.
Any excess in borrowings over the limitations set forth in Sections 9.1(k) and
(l) shall be approved by a majority of the Independent Directors and disclosed
to Shareholders in the next quarterly report of the Company, along with a
justification of the excess.
(f) For all purposes, a transaction which is
subject to approval by the Independent Directors shall be approved if the
Independent Directors voting to approve the transaction in any vote of the
Directors or the Independent Directors constitute an absolute majority of all
Independent Directors serving at such time.
5.16 Removal of Director for Cause. The Board of Directors may
declare vacant the office of a Director who has been declared of unsound mind by
an order of court, or who has pled guilty or nolo contendere to or been
convicted of a felony involving moral turpitude. In addition, throughout the
term of the existence of the Company, any Director may be removed for cause by:
(i) a vote or written consent of all Directors other than the Director who is to
be removed, or (ii) the vote of the holders of a majority of the outstanding
Shares of the Company at a meeting of the Shareholders called for such purpose.
The notice for such special meeting of Shareholders shall state that the
purpose, or one of the purposes, of the meeting is to vote on the removal of a
Director. "For cause" shall mean, for purposes of this Section, a willful
violation of the Articles of Incorporation or these Bylaws, or gross negligence
in the performance of a Director's duties.
5.17 Removal of Director Without Cause. Any or all Directors
may be removed without cause upon the affirmative vote of a majority of the
outstanding Shares entitled to vote. A Director may be removed by the
Shareholders only at a meeting called for the purpose of removing him and the
meeting notice must state that the purpose, or one of the purposes of the
meeting, is removal of the Director. Any reduction of the authorized number of
Directors shall not operate to remove any Director prior to the expiration such
Director's term of office.
5.18 Committees. The Board of Directors may, by resolution
adopted by a majority of the authorized number of Directors, designate one or
more committees, each consisting of three or more Directors, to serve at the
pleasure of the Board of Directors. The Board of Directors may designate one or
more
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Directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. The appointment of members or alternate
members of a committee requires the vote of a majority of the authorized number
of Directors. Any such committee, to the extent provided in the resolution of
the Board of Directors, shall have all the authority of the Board of Directors
in the management of the business and affairs of the Company, except that no
committee shall have authority to take any action with respect to (i) the
approval of any action requiring Shareholders' approval or approval of the
outstanding Shares, (ii) the filling of vacancies of the Board or any committee,
(iii) the fixing of compensation of Directors for serving on the Board or a
committee, (iv) the adoption, amendment or repeal of these Bylaws, (v) the
amendment or repeal of any resolution of the Board that by its express terms is
not so amendable or repealable, (vi) a distribution to Shareholders, except at a
rate or in a periodic amount or within a price range determined by the Board,
and (vii) the appointment of other committees of the Board or the members
thereof. A majority of the Directors on all committees must be Independent
Directors and only Independent Directors may serve as alternate members for
Independent Directors on committees. However, notwithstanding anything to the
contrary in these Bylaws, the Board of Directors may appoint a committee to
administer any stock incentive plan adopted by the Company, which committee may
have as few as two (2) Directors, and each of whose Directors may be either an
Independent Director or not an Independent Director, except as otherwise
provided in the applicable stock incentive plan.
5.19 Fiduciary Relationship. The Directors of the Company have
a fiduciary relationship to the Shareholders as provided by applicable Virginia
law, which includes a fiduciary duty to the Shareholders to supervise the
relationship of the Company with the Advisor. A majority of the Independent
Directors must approve matters which these Bylaws state are subject to the
approval of the Independent Directors.
ARTICLE VI
OFFICERS
6.1 Officers. The officers of the Company shall be as
determined by the Board of Directors and shall include a President and
Secretary, and may include a Chairman of the Board, Chief Financial Officer
(Treasurer) and such other officers with such titles and duties as may be
appointed in accordance with the provisions of Section 6.3 of this Article. Any
number of offices may be held by the same person.
6.2 Election. The officers of the Company, except such
officers as may be appointed in accordance with the
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provisions of Section 6.3 or Section 6.5 of this Article, shall be chosen
annually by the Board of Directors to serve at the pleasure of the Board of
Directors, and each shall hold his office until he shall resign or shall be
removed or otherwise disqualified to serve or his successor shall be elected and
qualified. All officers serve at the will of the Board of Directors and nothing
in these Bylaws shall give any officer any expectation or vesting of employment.
6.3 Subordinate Officers. The Board of Directors may appoint
other officers as the business of the Company may require, each of whom shall
hold office for the period, have the authority and perform the duties as are
provided in these Bylaws or as the Board of Directors may from time to time
determine.
6.4 Removal and Resignation. Any officer may be removed,
either with or without cause, by a majority of the Directors at the time in
office, at any regular or special meeting of the Board or, except in the case of
an officer chosen by the Board of Directors, by any officer upon whom such power
of removal may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to
the Board of Directors or to the Chairman, the President or to the Secretary of
the Company. A resignation shall take effect at the date of the receipt of the
notice or any later time specified in the notice; and, unless otherwise
specified, the acceptance of the resignation shall not be necessary to make it
effective.
6.5 Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular appointments to such office.
6.6 Chairman of the Board. The Chairman of the Board shall be
the Chief Executive Officer of the Company, and, if present, shall preside at
all meetings of the Board of Directors and Shareholders and exercise and perform
all other powers and duties as may from time to time be assigned to him by the
Board of Directors or prescribed by these Bylaws.
6.7 President. The President shall, subject to the Board of
Directors and the supervisory powers of the Chairman of the Board, have general
supervision, direction and control of the business of the Company. He shall
preside at meetings of the Shareholders or at meetings of the Board of Directors
if the Chairman is absent. He shall have general powers and duties of
management, together with any other powers and duties as may be prescribed by
the Board of Directors.
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6.8 Vice Presidents. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Board of
Directors or, if not ranked, the Vice President designated by the Board of
Directors, shall perform all the duties of the President and, when so acting,
shall have all the powers of and be subject to all the restrictions upon, the
President. The Vice Presidents shall have any other powers and shall perform
other duties as from time to time may be prescribed for them respectively by the
Board of Directors or these Bylaws.
6.9 Secretary. The Secretary shall keep, or cause to be kept,
a book of minutes at the principal office, or any other place as the Board of
Directors may order, of all meetings of Directors or Shareholders, with the time
and place of holding, whether regular or special and, if special, how
authorized, the notice thereof given, the names of those present at Directors'
meetings, the number of Shares present or represented at Shareholders' meetings
and the proceedings of meetings.
The Secretary shall keep, or cause to be kept, at the
principal office or at the office of the Company's transfer agent, a Share
register or a duplicate Share register showing the names of the Shareholders and
their addresses, the number and classes of Shares held by each (whether in
certificate or "unissued certificate" form), the number and the date of
certificates issues, if any, and the number and date of cancellation of every
certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all
the meetings of the Shareholders and of the Board of Directors required by these
Bylaws or by law to be given, shall keep the seal of the Company (if any) in
safe custody and shall have such other powers and shall perform such other
duties as may be prescribed by the Board of Directors or these Bylaws.
6.10 Assistant Secretaries. In the absence or disability of
the Secretary, the Assistant Secretaries in order of their rank as fixed by the
Board of Directors or, if not ranked, the Assistant Secretary designated by the
Board of Directors, shall perform all the duties of the Secretary and, when so
acting, shall have all the powers of and be subject to all the restrictions
upon, the Secretary. The Assistant Secretaries shall have any other powers and
shall perform other duties as from time to time may be prescribed for them by
the Board of Directors or these Bylaws.
6.11 Chief Financial Officer. The Chief Financial Officer may
also be designated by the alternate title of "Treasurer." The Chief Financial
Officer shall have custody of all moneys and securities of the Company and shall
keep regular books of account. Such officer shall disburse the funds of the
Company in payment of the just demands against the Company, or as
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may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Board of Directors from time to time as
may be required of such officer, an account of all transactions as Chief
Financial Officer and of the financial condition of the Company. Such officer
shall perform all duties incident to such officer or which are properly required
by the President or by the Board of Directors.
6.12 Assistant Chief Financial Officers. The Assistant Chief
Financial Officers or the Assistant Treasurers, in the order of their seniority,
shall, in the absence or disability of the Chief Financial Officer, or in the
event of such officer's refusal to act, perform the duties and exercise the
powers of the Chief Financial Officer, and shall have such powers and discharge
such duties as may be assigned from time to time by the President or by the
Board of Directors.
ARTICLE VII
SHARES OF STOCK
7.1 Registered Ownership, Share Certificates and Shares in
"Unissued Certificate" Form. Certificates shall be issued and transferred in
accordance with these Bylaws, but need not be issued if the Shareholder elects
to have his Shares maintained in "unissued certificate" form. The Persons in
whose names certificates of Shares in "unissued certificate" form are registered
on the records of the Company shall be deemed the absolute owners of the Shares
represented thereby for all purposes of the Company; but nothing in these Bylaws
shall be deemed to preclude the Directors or officers, or their agents or
representatives, from inquiring as to the actual ownership of Shares. The Shares
are non-assessable. Until a transfer is duly effected on the records of the
Company, the Directors shall not be affected by any notice of transfer, either
actual or constructive. The receipt by the Person in whose name any Shares are
registered on the records of the Company or of the duly authorized agent of that
Person, or if the Shares are so registered in the names of more than one Person,
the receipt by any one of these Persons, or by the duly authorized agent of that
Person, shall be a sufficient discharge for all dividends or distributions
payable or deliverable in respect of the Shares and from all liability to see
the application of those funds. The certificates of Shares of the capital stock
of the Company, if any, shall be in a form consistent with the Articles of
Incorporation and the laws of the Commonwealth of Virginia as shall be approved
by the Board of Directors. All certificates shall be signed by (i) the Chairman
of the Board or the President or a Vice President and (ii) the Treasurer or the
Secretary or any Assistant Secretary, certifying the number of Shares and the
class or series of Shares owned by the Shareholder. Any or all of the signatures
on the certificate may be facsimile signatures.
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7.2 Transfer of Shares. Subject to the provisions of law and
of Sections 7.3, 7.4 and 7.5, Shares shall be transferable on the records of the
Company only by the record holder or by his agent thereunto duly authorized in
writing upon delivery to the Directors or a transfer agent of the certificate or
certificates (unless held in "unissued certificate" form, in which case an
executed stock power duly guaranteed must be delivered), properly endorsed or
accompanied by duly executed instruments of transfer and accompanied by all
necessary documentary stamps together with evidence of the genuineness of each
endorsement, execution or authorization and of other matters as may reasonably
be required by the Directors or transfer agent. Upon delivery, the transfer
shall be recorded in the records of the Company and a new certificate, if
requested, for the Shares so transferred shall be issued to the transferee and
in case of a transfer of only a part of the Shares represented by any
certificate or account, a new certificate or statement of account for the
balance shall be issued to the transferor. Any Person becoming entitled to any
Shares in consequence of the death of a Shareholder or otherwise by operation of
law shall be recorded as the holder of such Shares and shall receive a new
certificate, if requested, but only upon delivery to the Directors or a transfer
agent of instruments and other evidence required by the Directors or the
transfer agent to demonstrate that entitlement, the existing certificate (or
appropriate instrument of transfer if held in "unissued certificate" form) for
the Shares and any necessary releases from applicable governmental authorities.
Nothing in these Bylaws shall impose upon the Directors or a transfer agent any
duty or limit their rights to inquire into adverse claims.
7.3 Disclosures by Holders of Shares; Redemption of Shares.
The Holders of the Shares shall upon demand disclose to the Directors in writing
such information with respect to direct and indirect ownership of their Shares
as the Directors deem necessary to comply with the provisions of the Internal
Revenue Code of 1986, as amended, and applicable regulations, as amended, or to
comply with the requirements of any taxing authority. If the Directors shall at
any time and in good faith be of the opinion that direct or indirect ownership
of the Shares of the Company has or may become concentrated to an extent which
would prevent the Company from qualifying as a REIT under the REIT Provisions of
the Internal Revenue Code, the Directors shall have the power by lot or other
means deemed equitable by them to prevent the transfer and/or call for
redemption of a number of the Shares sufficient in the opinion of the Directors
to maintain or bring the direct or indirect ownership of the Shares into
conformity with the requirements for a REIT. The redemption price shall be (i)
the last reported sale price of the Shares on the last business day prior to the
redemption date on the principal national securities exchange on which the
Shares are listed or admitted to trading, or (ii) if the Shares are not so
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listed or admitted to trading, the average of the highest bid and lowest asked
prices on such last business day as reported by the NASDAQ, National Quotation
Bureau or a similar organization selected by the Company for that purpose, or
(iii) otherwise, as determined in good faith by the Directors. The holders of
any Shares so called for redemption shall be entitled to payment of such
redemption price within 21 days of the redemption date. From and after the date
fixed for redemption, the holders of such Shares shall cease to be entitled to
dividends, distributions, voting rights and other benefits with respect to the
Shares, excepting only the right to payment of the redemption price fixed as
described above. The redemption date with respect to any Shareholders shall be
the date specified by the Directors which is not less than one week after the
date postmarked on the disclosure demand made by the Directors under this
Section 7.3, or, if such date is not a business day, on the next business day
thereafter. For the purpose of this Section 7.3, the term "individual" shall be
construed as provided in Section 542(a)(2) of the Internal Revenue Code of 1986,
as amended, or any successor provisions and "ownership" of Shares shall be
determined as provided in Section 544 of the Internal Revenue Code of 1986, as
amended, or any successor provision.
7.4 Right to Refuse to Transfer the Shares. Whenever
it is deemed by them to be reasonably necessary to protect the tax status of the
Company, the Directors may require statements or affidavits from any holder of
the Shares or proposed transferee of the Shares or warrants to purchase such
Shares, setting forth the number of Shares (and warrants to purchase such
Shares) already owned by him or it and any related Person specified in the form
prescribed by the Directors for that purpose. If, in the opinion of the
Directors, which shall be conclusive upon any proposed transferor or proposed
transferee of Shares, or warrants to purchase such Shares, any proposed transfer
or exercise would jeopardize the status of the Company as a REIT under the
Internal Revenue Code of 1986, as amended, the Directors may refuse to permit
the transfer or exercise. Any attempted transfer or exercise as to which the
Directors have refused their permission shall be void and of no effect to
transfer any legal or beneficial interest in the Shares. All contracts for the
sale or other transfer or exercise of the Shares or warrants to purchase such
Shares, shall be subject to this provision.
7.5 Limitation on Acquisition of Shares.
(a) Subject to the provisions of Section 7.5(b), no
Person may own in excess of 9.8% of the total outstanding Shares, and no Shares
shall be transferred (or issued) to any Person if, following the transfer, the
Person's direct or indirect ownership of Shares would exceed this limit. For the
purpose of this Section 7.5, ownership of Shares shall be
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computed in accordance with Internal Revenue Code Sections 856(h), 542(a)(2) and
544.
(b) If Shares are purportedly acquired by any Person in
violation of this Section 7.5, the acquisition shall be valid only to the extent
it does not result in a violation of this Section 7.5, and the acquisition shall
be null and void ab initio with respect to the excess ("Excess Shares") unless
the Person acquiring the Excess Shares provides the Independent Directors with
evidence and an opinion of counsel so that the Independent Directors are
satisfied that the Company's qualification as a REIT will not be jeopardized.
Excess Shares shall be deemed to have been acquired and to be held on behalf of
the Company, and, as the equivalent of treasury shares for that purpose, shall
not be considered to be outstanding for quorum or voting purposes, and shall not
be entitled to receive dividends, interest or any other distribution. If prior
to the discovery by the Company of the acquisition or transfer of any Excess
Shares dividends, interest or any other distributions are paid with respect to
any Excess Shares, then such dividends, interest or any other distributions
shall be repaid to the Company.
(c) This Section 7.5 shall apply to the acquisition of
Shares only after conclusion of the earlier of the Company's sale of the Minimum
Offering (as defined in the Prospectus) or the Company's first taxable year, and
a Shareholder will not be required to dispose of Excess Shares acquired prior to
the earlier of the conclusion of the sale of the Minimum Offering or the
Company's first taxable year. So long as any Person holds more than 9.8% of the
outstanding Shares, a lower percentage limit may be established by the Directors
to the extent necessary to assure, to the extent possible, that no five persons
own in the aggregate more than 50% of the outstanding Shares.
(d) The Company shall, if deemed necessary or
desirable to implement the provisions of any portion of this Article VII,
include on the face or back of each Share certificate issued by the Company an
appropriate legend referring the holder of the certificate to the restrictions
contained in any portion of this Article VII and stating that the complete text
of Article VII, or these Bylaws, is on file with the Secretary of the Company at
the Company's offices, and/or will be furnished without charge by the Company to
any Shareholder.
(e) Nothing in these Bylaws shall limit the
ability of the Directors to impose, or to seek judicial or other imposition of
additional restrictions if deemed necessary or advisable to protect the Company
and the interests of its Shareholders by preservation of the Company's status as
a qualified REIT.
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(f) If any provision of this Section 7.5 is
determined to be invalid, in whole or in part, by any federal or state court
having jurisdiction, the validity of the remaining provisions shall not be
affected and the provision shall be affected only to the extent necessary to
comply with the determination of the court.
(g) For purposes of this Section 7.5 only, "Shares"
means the Common Shares of the Company as defined in these Bylaws, and includes
any Shares issuable upon conversion, surrender or exercise of any other
Securities of the Company.
(h) The Advisor and its Affiliates shall not
purchase in the offering made by the Company's Prospectus more than 2.5% of the
total number of Shares sold in such offering. This limitation shall not apply to
any Shares issued pursuant to a stock incentive plan duly adopted by the
Company.
(i) The Company shall have the right to issue
fractional Shares.
7.6 Lost or Destroyed Certificates. The holder of any Shares
shall immediately notify the Company of any loss or destruction of the Share
certificates, and the Company may issue a new certificate in the place of any
certificate alleged to have been lost or destroyed upon approval of the Board of
Directors. The Board may, in its discretion, as a condition to authorizing the
issue of such new certificate, require the owner of the lost or destroyed
certificate, or his legal representative, to make proof satisfactory to the
Board of Directors of the loss or destruction and to give the Company a bond or
other security, in such amount and with such surety or sureties, as the Board of
Directors may determine as indemnity against any claim that may be made against
the Company on account of the certificate alleged to have been lost or
destroyed.
7.7 Dividend Record Date and Closing Stock Books. The
Board of Directors may fix a date in the future as a record date for the
determination of the Shareholders entitled to receive any dividend or
distribution or any allotment of rights or to exercise rights with respect to
any change, conversion or exchange of Shares. The record date so fixed shall not
be more than 60 days or less than 10 days prior to the date of the event for the
purposes of which it is fixed. When a record date is so fixed, only Shareholders
of record on that day shall be entitled to receive the dividend, distribution or
allotment of rights or to exercise the rights, as the case may be,
notwithstanding any transfer of any Shares on the books of the Company after the
record date.
7.8 Dividend Reinvestment Plan. The Company's Dividend
Reinvestment Plan shall provide that:
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(a) all material information regarding the
distribution to the Shareholder and the effect of reinvesting such distribution,
including the tax consequences thereof, shall be provided to the Shareholder at
least annually, and
(b) each Shareholder participating in the
Dividend Reinvestment Plan shall have a reasonable opportunity to withdraw from
the Dividend Reinvestment Plan at least annually after receipt of the
information required by Section 7.8(a) of these Bylaws.
ARTICLE VIII
EMPLOYMENT OF ADVISOR, LIMITATION
ON EXPENSES AND LEVERAGE
8.1 Employment of Advisor. The Directors have absolute and
exclusive control of the management of the Company, its property and the
disposition thereof. The Directors are responsible for the general policies of
the Company and for general supervision of the business of the Company conducted
by all officers, agents, employees, advisors, managers or independent
contractors of the Company as may be necessary to insure that the business
conforms to the provisions of these Bylaws. However, the Directors shall not be
required personally to conduct all the business of the Company, and subject to
their ultimate responsibility as stated above, the Directors shall have the
power to appoint, employ or contract with any Person (including one or more of
themselves or any corporation, partnership, or company in which one or more of
them may be directors, officers, stockholders, partners or directors) as the
Directors may deem necessary or proper for the transaction of the business of
the Company. The Directors may employ or contract with such a Person and the
Directors may grant or delegate authority to any such Person as the Directors
may in their sole discretion deem necessary or desirable without regard to
whether that authority is normally granted or delegated by Directors.
The Directors (subject to the provisions of this Article VIII)
shall have the power to determine the terms and compensation of the Advisor or
any other Person whom they may employ or with whom they may contract; provided,
however, that any determination to employ or contract with any Director or any
Person of which a Director is an Affiliate, shall be valid only if made,
approved or ratified by the Independent Directors. The Directors may exercise
broad discretion in allowing the Advisor to administer and regulate the
operations of the Company, to act as agent for the Company, to execute documents
on behalf of the Company, and to make executive decisions which conform to
general policies and general principals previously established by the Directors.
The Directors must evaluate the performance of the
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Advisor and the criteria used in such evaluation shall be reflected in the
minutes of the meeting.
Notwithstanding anything to the contrary in the advisory contract or
these Bylaws, the Advisor shall not be required to, and shall not, advise the
Company as to any investments in securities, except when, and to the extent
that, the Advisor and the Company specifically agree (i) that such advice is
desirable, and (ii) that such advice can be rendered consistently with
applicable legal requirements, including any applicable provisions of relevant
"investment advisor" laws. The Directors and officers of the Company shall be
responsible for decisions as to investments in securities, except insofar as the
Directors elect to consult with (i) the Advisor in compliance with the preceding
sentence, or (ii) any other Person in compliance with any applicable laws.
8.2 Term. The Directors shall not enter into any advisory
contract with the Advisor unless the contract has a term of no more than one
year and provides for annual renewal or extension thereafter, except that the
initial contract may have a term ending one year after Final Closing, where
"Final Closing" is the last closing of the sale of Shares offered by the
Prospectus. The Directors shall not enter into a similar contract with any
Person of which a Director is an Affiliate unless the contract provides for
renewal or extension by the Independent Directors. The advisory contract with
the Advisor may be terminated by the Advisor upon 60 days' written notice or by
the Company without cause by action of the Independent Directors of the Company
upon 60 days' written notice, in a manner to be set forth in the advisory
contract with the Advisor. The advisory contract shall also require the Advisor
to cooperate with the Company to provide an orderly management transition after
any termination. The Directors shall determine that any successor Advisor (i) is
qualified to perform advisory functions for the Company and (ii) can justify the
compensation provided for in the advisory contract.
8.3 Other Activities of Advisor. The Advisor shall not be
required to administer the investment activities of the Company as its sole and
exclusive function and may have other business interests and may engage in other
activities similar or in addition to those relating to the Company, including
the performance of services and advice to other Persons (including other real
estate investment companies) and the management of other investments (including
investments of the Advisor and its Affiliates). The Directors may request the
Advisor to engage in other activities which complement the Company's investment,
and the Advisor may receive compensation or commissions for those activities
from the Company or other Persons.
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The Advisor shall be required to use its best efforts to
present a continuing and suitable investment program to the Company which is
consistent with the investment policies and objectives of the Company, but
neither the Advisor nor any Affiliate of the Advisor shall be obligated
generally to present any particular investment opportunity to the Company even
if the opportunity is of a character which, if presented to the Company, could
be taken by the Company, and, subject to the foregoing, shall be protected in
taking for its own account or recommending to others the particular investment
opportunity.
Upon request of any Director, the Advisor and any Person who controls,
is controlled by, or is under common control with the Advisor shall from time to
time promptly furnish the Directors with information on a confidential basis as
to any investments within the Company's investment policies made by the Advisor
or the other Person for its own account.
8.4 Limitation on Offering and Organization Expenses and
Acquisition Fees and Expenses. The Offering and Organization Expenses paid by
the Company in connection with the Company's formation or the offering of its
Shares or other Securities shall in each case be reasonable and in no event
exceed an amount equal to 15% of the gross proceeds raised in any such offering.
The Advisor shall pay (without the right of reimbursement from the Company) any
Offering and Organization Expenses in the initial offering of Shares which,
exclusive of the Selling Commissions and Marketing Expense Allowance, exceed 3%
of gross offering proceeds.
The total of all Acquisition Fees and Acquisition Expenses
paid by the Company in connection with the purchase of real property by the
Company shall be reasonable and shall in no event exceed an amount equal to 6%
of the Contract Price for such real property, or, in the case of a mortgage
loan, 6% of the funds advanced, unless a majority of the Directors (including a
majority of the Independent Directors) not otherwise interested in the
transaction approve the transaction as being commercially competitive, fair and
reasonable to the Company.
Any Offering and Organization Expenses or Acquisition Fees and
Acquisition Expenses incurred by the Company in excess of the permitted limits
set forth in this Section 8.4 shall be payable to the Company by the Advisor
immediately upon demand of the Company.
8.5 Limitation on Operating Expenses. The total Operating
Expenses of the Company, including fees paid to the Advisor, shall not exceed in
any year the greater of 2% of the total Average Invested Assets of the Company
or 25% of the Net Income of the Company for such year. Subject to the
determination referred to in Section 5.15(d), the Advisor shall
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reimburse the Company at least annually for the amount by which Operating
Expenses of the Company exceed the above limitations. All figures used in the
foregoing computation shall be determined in accordance with generally accepted
accounting principals applied in a consistent basis. The compensation of the
Advisor shall be computed by an independent certified public accountant at the
end of each year and there shall be made any necessary adjustments between the
compensation so computed and that already paid.
8.6 Limitation on Real Estate Brokerage Commissions on
Purchase and Resale of Property. If the Advisor, any Director or any Affiliate
thereof provides a substantial amount of the services in the effort to purchase
or sell the real property of the Company, then such Person may receive a real
estate or brokerage commission which is reasonable, customary and competitive in
light of the size, type and location of such property; provided that such
commission shall not exceed an amount equal to 2% of the contracted for purchase
or sales price for such property. In the event such real estate or brokerage
commissions are also payable to any other party pursuant to such transactions,
the Advisor, any Director or any Affiliate may receive up to one-half of the
brokerage commission paid but in no event to exceed an amount equal to 2% of the
contracted for purchase or sales price for such property. In addition, the
amount paid when added to the sums paid to unaffiliated parties in such a
capacity shall not exceed the lesser of the Competitive Real Estate Commission
or an amount equal to 6% of the contracted for sales price. The Company may
enter into an agreement (with any term approved by the Directors) pursuant to
which the Advisor, any Director or any Affiliate thereof will provide the
services referred to in this Section with respect to all of the Company's
properties, and will receive compensation therefor.
8.7 Limitation on Incentive Fees. An incentive fee based upon
an interest in the gain from the sale, financing or refinancing of real property
of the Company, for which full consideration is not paid in cash or property of
equivalent value, shall be allowed provided the amount or percentage of such
interest is reasonable. Such an interest in gain from the sale of real property
of the Company shall be considered reasonable if it does not exceed 15% of the
balance of such gain remaining after payment to Shareholders, in the aggregate,
of an amount equal to 100% of the adjusted price per Share (defined to be the
original issue price of the Common Shares reduced by prior distributions of gain
from the sale of the Company's assets), plus an amount equal to a 6% per annum
cumulative (noncompounded) return on the adjusted price per Share. In the case
of multiple Advisors, Advisors and their Affiliates shall be allowed incentive
fees provided such fees are distributed by a proportional method reasonably
designed to reflect the value added to such assets by each respective Advisor or
Affiliate.
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Distribution of incentive fees to Advisors and their Affiliates in proportion to
the length of time served as Advisor while such property was held by the Company
or in ratio to the fair market value of the asset at the time of the Advisor's
termination, and the fair market value of the asset upon its disposition by the
Company shall be considered reasonable methods by which to apportion incentive
fees.
8.8 Limitations on Leverage. All borrowings by the Company
must be approved by the Directors. The aggregate borrowings of the Company,
secured and unsecured, shall be reasonable in relation to the Net Assets of the
Company and shall be reviewed by the Directors at least quarterly.
ARTICLE IX
RESTRICTIONS ON INVESTMENTS AND ACTIVITIES
9.1 Restrictions. Notwithstanding any other provision of these
Bylaws, the Company shall not:
(a) invest more than 10% of the total assets of
the Company in Unimproved Real Property or mortgage loans on
Unimproved Real Property;
(b) invest in commodities or commodity future
contracts or effect short sales of commodities or securities,
except when done solely for hedging purposes;
(c) invest in or make mortgage loans on property
unless the Company shall obtain a mortgagee's or owner's title insurance policy
or commitment as to the priority of the mortgage or the condition of the title;
(d) invest in contracts for the sale of real
estate unless they are recordable in the chain of title;
(e) make or invest in mortgage loans, including
construction loans, on any one property if the aggregate amount of all mortgage
loans outstanding on the property (at the time the Company makes or invests in
its mortgage loan), including the loans of the Company, would exceed 85% of the
appraised value of the property;
(f) make or invest in junior mortgage loans
(provided that this and the preceding limitation shall not apply to the Company
taking back secured debt in connection with the sale of any property);
(g) issue securities that are redeemable;
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(h) issue debt securities unless the historical
debt service coverage (in the most recently completed fiscal year) as adjusted
for known changes is sufficient to properly service the higher level of debt or
unless the cash flow of the Company (for the last fiscal year) excluding
extraordinary, nonrecurring items, is sufficient to cover the debt service on
all debt securities to be outstanding;
(i) invest more than 20% of its total assets in
the equity securities of any non-governmental issuer, including other REITs or
limited partnerships for a period in excess of 18 months;
(j) issue equity securities on a deferred payment
basis or other similar arrangement;
(k) incur any indebtedness, secured or unsecured,
which would result in an aggregate amount of indebtedness in excess of 100% of
Net Assets (before subtracting any liabilities), unless any excess borrowing
over such 100% level shall be approved by a majority of the Independent
Directors and disclosed to the Shareholders in the next quarterly report of the
Company, along with justification for such excess;
(l) allow aggregate borrowings of the Company to
exceed 50% of the Adjusted Net Asset Value (before subtracting any liabilities)
of the Company, unless any excess borrowing over such 50% level shall be
approved by a majority of the Independent Directors and disclosed to the
Shareholders in the next quarterly report of the Company, along with
justification for such excess;
(m) invest in single-family residential homes,
condominiums, secondary homes, resort or recreation properties, nursing homes,
gaming facilities, mobile home parks, or any other commercial or industrial
properties (other than shopping centers);
(n) engage in any short sale, underwrite or
distribute, as an agent, securities issued by others, or engage in trading, as
compared with investment activities; and
(o) acquire Securities in any company holding
investments or engaging in activities prohibited by the Internal Revenue Code of
1986, as amended, Virginia law or this Section 9.1.
The foregoing limitations shall not limit the manner in which
any required investment by the Advisor or its Affiliates in the Company is made
or preclude the Company from structuring an investment in real property to
minimize Shareholder liability and facilitate the investment policies of the
Company under Article IX.
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ARTICLE X
TRANSACTIONS WITH AFFILIATES; CERTAIN DUTIES AND LIABILITIES
OF DIRECTORS, SHAREHOLDERS, ADVISOR AND AFFILIATES
10.1 Transactions with Affiliates.
(a) Neither the Advisor nor any Affiliate of the Advisor shall
sell, transfer or lend any assets or property to the Company or purchase, borrow
or otherwise acquire any assets or property from the Company, directly or
indirectly, unless the transaction comes within one of the following exceptions:
(i) the transaction consists of the acquisition
of property or assets at the formation of the Company or
shortly thereafter, and is fully disclosed in the Prospectus;
or
(ii) the transaction is a borrowing of money by the
Company on terms not less favorable than those then prevailing
for comparable arms-length borrowings; or
(iii) the transaction consists of the acquisition by
the Company of federally insured or guaranteed mortgages at
prices not exceeding the currently quoted prices at which the
Federal National Mortgage Association is purchasing comparable
mortgages; or
(iv) the transaction consists of the acquisition of
other mortgages if an Appraisal is obtained concerning the
underlying property and on terms not less favorable to the
Company than similar transactions involving unaffiliated
parties; or
(v) the transaction consists of the acquisition by
the Company of other property at prices not exceeding the fair
value thereof as determined by an independent Appraisal.
All of the above transactions and all other transactions (other than
the entering into, and the initial term under, the Advisory Agreement, the
Property Acquisition/Disposition Agreement, and the Property Management
Agreement for each property acquired by the Company, each of which agreement is
specifically disclosed in the Prospectus), whether such transaction involves the
transfer of property, the lending of money or the rendition of any services, in
which any such Persons have any direct or indirect interest shall be permitted
only if:
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(i) such transaction has been approved by the
affirmative vote of the majority of the Independent Directors;
and
(ii) if the transaction involves the purchase or
acquisition of property, the purchase or acquisition from any
such Person is on terms not less favorable to the Company than
those then prevailing for arms-length transactions concerning
comparable property (based upon a determination of a majority
of the Directors, including a majority of the Independent
Directors); and
(iii) each such transaction is in all respects on
such terms at the time of the transaction and under the
circumstances then prevailing, fair and reasonable to the
Shareholders of the Company and, in the case of a purchase or
acquisition of property, at a price to the Company no greater
than the cost of the asset to such Persons (based upon a
determination of a majority of the Directors, including a
majority of the Independent Directors) or, if the price to the
Company is in excess of such cost, then substantial
justification for such excess must exist and such excess is
not unreasonable (based upon a determination of a majority of
the Directors, including a majority of the Independent
Directors).
(b) Neither the Advisor nor any Affiliate of the
Advisor shall invest in joint ventures with the Company, unless (i) such
transaction has been approved by the affirmative vote of a majority of the
Independent Directors; (ii) the transaction is on terms not less favorable to
the Company than those then prevailing for comparable arms-length transactions
(based upon a determination of a majority of the Directors, including a majority
of the Independent Directors); and (iii) each such transaction is in all
respects on such terms at the time of the transaction and under the
circumstances then prevailing, fair and reasonable to the Shareholders of the
Company and on substantially the same terms and conditions as those received by
other joint venturers (based upon a determination of a majority of the
Directors, including a majority of the Independent Directors).
10.2 Restriction of Duties and Liabilities. The duties and
liabilities of Shareholders, Directors and officers shall in no event be greater
than the duties and liabilities of shareholders, directors and officers of a
Virginia corporation. The Shareholders, Directors and officers shall in no event
have any greater duties or liabilities than those imposed by applicable law as
shall be in effect from time to time. However, in no event shall the duties and
liabilities of Shareholders,
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Directors and officers be inconsistent with the standards contained in the
Articles of Incorporation.
10.3 Persons Dealing with Directors or Officers. Any act of
the Directors or officers purporting to be done in their capacity as such shall,
as to any Persons dealing in good faith with the Directors or officers, be
conclusively deemed to be within the purposes of this Company and within the
powers of the Directors and officers.
The Directors may authorize any officer or officers or agent
or agents to enter into any contract or execute any instrument in the name and
on behalf of the Company and/or Directors.
No Person dealing in good faith with the Directors or any of
them or with the authorized officers, employees, agents or representatives of
the Company, shall be bound to see to the application of any funds or property
passing into their hands or control. The receipt of the Directors, or any of
them, or of authorized officers, employees, agents, or representatives of the
Company, for moneys or other considerations, shall be binding upon the Company.
10.4 Reliance. The Directors and officers may consult with
counsel and the advice or opinion of the counsel shall be full and complete
personal protection to all of the Directors and officers in respect of any
action taken or suffered by them in good faith and in reliance on and in
accordance with such advice or opinion. In discharging their duties, Directors
and officers, when acting in good faith, may rely upon financial statements of
the Company represented to them to be correct by the Chairman or the officer of
the Company having charge of its books of account, or stated in a written report
by an independent certified public accountant fairly to present the financial
position of the Company. The Directors may rely, and shall be personally
protected in acting upon any instrument or other document believed by them to be
genuine.
10.5 Income Tax Status. Without limitation of any rights of
indemnification or non-liability of the Directors, the Directors by these Bylaws
make no commitment or representation that the Company will qualify for the
dividends paid deduction permitted by the Internal Revenue Code of 1986, as
amended, and the Rules and Regulations pertaining to real estate investment
trusts under the Internal Revenue Code of 1986, as amended, and any such failure
to qualify shall not render the Directors liable to the Shareholders or to any
other Person or in any manner operate to annul the Company.
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ARTICLE XI
MISCELLANEOUS
11.1 Competing Programs. Nothing in these Bylaws shall be
deemed to prohibit any Affiliate of the Company from dealing, or otherwise
engaging in business with, Persons transacting business with the Company or from
providing services relating to the purchase, sale, management, development or
operation of real property and receiving compensation therefor, not involving
any rebate, reciprocal arrangement or other transaction which would have the
effect of circumventing any restrictions set forth herein relating to the
dealings between the Company and its Affiliates. The Company shall not have any
right, by virtue of these Bylaws, in or to such other ventures or activities or
to the income or proceeds derived therefrom, and the pursuit of such ventures,
even if competitive with the business of the Company, shall not be deemed
wrongful or improper. No Affiliate of the Company shall be obligated to present
any particular investment opportunity to the Company, even if such opportunity
is of a character which, if presented to the Company, could be taken by the
Company; provided, however, that until substantially all the net proceeds of the
offering of the Shares have been invested or committed to investment, the
Sponsor shall be obligated to present to the Company any investment opportunity
which is of an amount and character which, if presented to the Company, would be
a suitable investment for the Company. To the extent necessary, the Sponsor
shall seek to allocate investment opportunities between the Company and other
entities based upon differences in investment policies and objectives, the
make-up of the investment portfolio of each entity, the amount of cash available
to each entity for investment financing, the estimated income tax effects of the
purchase on each entity, and the policies of each relating to leverage. Subject
to the limitations in this Section, it will be within the discretion of the
Sponsor to allocate the investment opportunities as it deems advisable. The
Sponsor shall attempt to resolve any other conflicts of interests between the
Company and others by exercising the good faith required of fiduciaries.
11.2 Corporate Seal. The Company shall have a corporate seal
in the form of a circle containing the name of the Company and such other
details as may be required by the Board of Directors.
11.3 Inspection of Bylaws. The Company shall keep at its
principal office in this Commonwealth for the transaction of business, a list of
the names and addresses of the Company's Shareholders and the original or a copy
of the Bylaws, as amended, certified by the Secretary, which shall be open to
inspection by Shareholders at any reasonable time during office hours.
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11.4 Inspection of Corporate Records. Shareholders of the
Company, or any holders of a voting trust certificate, shall have the right to
inspect the accounting books and records of the Company, and the minutes of
proceedings of the Shareholders and the Board and committees of the Board as
provided by the Virginia Stock Corporation Act.
11.5 Checks, Drafts, Etc. All checks, drafts or other orders
for payment of money, notes or other evidences of indebtedness, issued in the
name of or payable to the Company, shall be signed or endorsed by the Person or
Persons and in the manner as from time to time shall be determined by resolution
of the Board of Directors.
11.6 Contracts, Etc., How Executed. The Board of Directors,
except as provided elsewhere in these Bylaws, may authorize any officer or
officers or agent or agents to enter into any contract or execute any instrument
in the name of and on behalf of the Company. That authority may be general or
confined to specific instances. Unless so authorized by the Board of Directors
or as otherwise provided in these Bylaws, no officer, agent or employee shall
have any power or authority to bind the Company by any contract or engagement or
to pledge its credit to render it liable for any purpose or to any amount.
11.7 Representation of Shares of Other Corporations. The
Chairman or the President or, in the event of their absence or inability to
serve, any Vice President and the Secretary or Assistant Secretary of this
Company, are authorized to vote, represent and exercise, on behalf of the
Company, all rights incidental to any and all shares of any other company
registered in the name of the Company. The authority granted to such officers to
vote or represent on behalf of the Company any and all shares held by the
Company in any other company may be exercised by any authorized Person in person
or by proxy or power of attorney duly executed by the officers.
11.8 Annual Report. The Board of Directors of the company
shall cause to be sent to the Shareholders, not later than 120 days after the
close of the calendar year, and not less than 30 days before the date of the
Company's annual meeting of Shareholders as provided in Section 4.2 of these
Bylaws, an Annual Report in the form deemed appropriate by the Board of
Directors, including without limitation, any explanation of excess expenses as
set forth in Sections 5.15 and 8.5. The reports shall also disclose the ratio of
the cost of raising capital to the capital raised during the year and the
aggregate amount of the advisory fees and other fees paid during the year to the
Advisor and its Affiliates, including fees or charges paid to the Advisor and
Affiliates by a third party on behalf of the Company. The Annual Report also
shall include as required by Section 5.15 full disclosure of all material terms,
factors and
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circumstances surrounding any and all transactions involving the Company and the
Directors, Advisor and/or Affiliates thereof occurring during the year, and the
Independent Directors shall examine and comment in the report as to the fairness
of any such transactions. The Annual Report shall include a statement of assets
and liabilities and a statement of income and expense of the Company prepared in
accordance with generally accepted accounting principles. The financial
statements shall be accompanied by the report of an independent certified public
accountant. A manually signed copy of the accountant's report shall be filed
with the Directors.
11.9 Quarterly Reports. At least quarterly, the Directors
shall send interim reports to the Shareholders having the form and content as
the Directors deem proper. The quarterly reports shall disclose (i) the ratio of
the costs of raising capital during the quarter to the capital raised, and (ii)
the aggregate amount of the advisory fees and the fees paid during the quarter
to the Advisor and its Affiliates, including fees or charges paid to the Advisor
and its Affiliates by third parties on behalf of the Company. The quarterly
report shall also disclose any excess in borrowings over the level specified in
Section 8.8, along with a justification for such excess.
11.10 Other Reports. The Directors shall furnish the
Shareholders at least annually with a statement in writing advising as to the
source of dividends or distributions so distributed. If the source has not been
determined, the communication shall so state and the statement as to the source
shall be sent to the Shareholders not later than 60 days after the close of the
calendar year in which the distribution was made.
11.11 Provisions of the Company in Conflict with Law or
Regulation.
(a) The provisions of these Bylaws are severable,
and if the Directors shall determine, with the advice of counsel, that any one
or more of these provisions (the "Conflicting Provisions") are in conflict with
the REIT Provisions of the Internal Revenue Code, or with other applicable laws
and regulations, the Conflicting Provisions shall be deemed never to have
constituted a part of these Bylaws. The Directors shall have the power to amend
or revise the Bylaws (which shall include both the deletion and the addition of
provisions) to the extent necessary to bring the provisions of these Bylaws into
conformity with the REIT Provisions of the Internal Revenue Code, or any other
applicable law or regulation or the requirements of any state securities
regulator or similar official. Any such action by the Directors shall not affect
or impair any of the remaining provisions of these Bylaws or render invalid or
improper any action taken or omitted (including but not limited to the
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election of Directors) prior to the action. A certification signed by a majority
of the Directors setting forth any such action and reciting that it was duly
adopted by the Directors, or a copy of these Bylaws, with the relevant changes
made, signed by a majority of the Directors, shall be conclusive evidence of
such action when logged in the records of the Company. The Directors shall not
be liable for failure to make any determination or take any action under this
Section 11.11.
(b) If any provisions of these Bylaws shall be
held invalid or unenforceable, the invalidity or unenforceability shall attach
only to that provision and shall not in any manner affect or render invalid or
unenforceable any other provision, and these Bylaws shall be carried out as if
the invalid or unenforceable provision were not present.
11.12 Voluntary Dissolution. The Company may elect to wind up
and dissolve by the vote of Shareholders entitled to exercise a majority of the
voting power of the Company.
11.13 Distributions. The payment of distributions on Shares
shall be at the discretion of the Directors, including a majority of the
Independent Directors, and shall depend upon the earnings, cash flow and general
financial condition of the Company, and such other facts as the Directors deem
appropriate.
11.14 Shareholder Liability. The holders of the Company's
Shares shall not be personally liable on account of any obligation of the
Company.
11.15 Return of Offering Proceeds. The Directors shall have
the right and power, at any time, to return to Shareholders offering proceeds to
the extent required by applicable law, including to the extent necessary to
avoid characterization of the Company as an "investment company."
ARTICLE XII
AMENDMENTS TO BYLAWS
12.1 Amendments. These Bylaws may be amended or repealed by
the vote of Shareholders entitled to exercise a majority of the voting power of
the Company; provided, however, that any amendment to these Bylaws or any
provision hereof which would affect any rights with respect to any outstanding
Common Shares or other Securities, or diminish or eliminate any voting rights
pertaining thereto, may not be effected unless approved by the vote of the
holders of two-thirds of the outstanding Securities of the class of Securities
affected. The Board of Directors may propose any such amendment to the
Shareholders, but the Board of Directors may not amend the Bylaws or any
portion, except to the extent expressly provided in Section 11.11.
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12.2 [Reserved]
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
interests are initially owned by the Company and/or a Subsidiary Company or
Subsidiary Companies. However, the transfer described in the preceding sentence
shall not constitute an event permitting conversion of the Company's Class B
Convertible Shares.
13.2 Interpretation and Application of Bylaws. If and to the extent (i)
the Company conducts its business through Subsidiary Companies, or (ii) there
are properties which, in the absence of Subsidiary Companies, would be owned and
operated by the Company but such properties are instead owned and operated by
Subsidiary Companies, restrictions on the power of the Company to engage in
certain transactions and restrictions on the authority of Directors and officers
of the Company in these Bylaws, and in particular the restrictions contained in
Articles VIII, IX and X of these Bylaws, shall be interpreted and applied to
Subsidiary Companies in the same manner as they apply by their terms to the
Company to the extent necessary to ensure that the Bylaw provision is given the
effect intended notwithstanding that the Company's business is conducted through
Subsidiary Companies instead of by the Company directly. The Company shall
exercise any rights and powers it has as an owner or partner (directly or
indirectly) of a Subsidiary Company consistently with this provision.
13.3 Certain Shareholder Consents. If a transaction involving the
proposed sale or other transfer, whether by sale, exchange, merger,
consolidation, lease, share exchange or otherwise, by a Subsidiary Company would
require pursuant to applicable law the consent or approval of Shareholders if
the Company owned directly, and were proposing the sale or other
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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.
43
Exhibit 4.1
LOAN AGREEMENT
This LOAN AGREEMENT (hereinafter referred to as "Agreement") is made as
of this 1st day of March, 1997, by and between FIRST UNION NATIONAL BANK OF
VIRGINIA, a national banking association (the "Lender") and APPLE RESIDENTIAL
INCOME TRUST, INC., a Virginia corporation (the "Borrower").
RECITALS
Borrower has applied to Lender for a revolving loan in an outstanding
amount of principal not to exceed at any one time Ten Million Dollars
($10,000,000) to provide financing for a portion of the acquisition costs for
apartment complex acquisitions by the Borrower.
NOW, THEREFORE, in consideration of the mutual covenants as hereinafter
contained and other valuable considerations, the parties hereto covenant and
agree as follows:
ARTICLE I
DEFINITIONS
Unless the context otherwise requires, for all purposes of this
Agreement and of the other Loan Documents, all capitalized terms used in this
Agreement and in the other Loan Documents without definition shall have the
respective meanings set forth below or as otherwise set forth herein.
"Cash Available for Distribution" means all Funds from Operations (as
defined as of March 1, 1997 by the Board of Governors of the National
Association of Real Estate Investment Trusts).
"Environmental Laws" means any current or future legal requirement of
any governmental authority pertaining to (a) the protection of health, safety,
and the indoor or outdoor environment, (b) the conservation, management, or use
of natural resources and wildlife, (c) the protection or use of surface water
and groundwater, (d) the management, manufacture, possession, presence, use,
generation, transportation, treatment, storage, disposal, release, threatened
release, abatement, removal, remediation or handling of, or exposure to, any
hazardous or toxic substance or material or (e) pollution (including any release
to land surface water and groundwater) and includes, without limitation, the
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Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 USC
9601 et seq., Solid Waste Disposal Act, as amended by the Resource Conservation
and Recovery Act of 1976 and Hazardous and Solid Waste Amendment of 1984, 42 USC
6901 et seq., Federal Water Pollution Control Act, as amended by the Clean Water
Act of 1977, 33 USC 1251 et seq., Clean Air Act of 1966, as amended, 42 USC 7401
et seq., Toxic Substances Control Act of 1976, 15 USC 2601 et seq., Hazardous
Materials Transportation Act, 49 USC App. 1801 et seq., Occupational Safety and
Health Act of 1970, as amended, 29 USC 651 et seq., Oil Pollution Act of 1990,
33 USC 2701 et seq., Emergency Planning and Community Right-to-Know Act of 1986,
42 USC 11001 et seq., National Environmental Policy Act of 1969, 42 USC 4321 et
seq., Safe Drinking Water Act of 1974, as amended, 42 USC 300(f) et seq., any
analogous implementing or successor law, and any amendment, rule, regulation,
order, or directive issued thereunder.
"Hazardous Materials" means any substance, material or waste defined or
regulated in or under any Environmental Laws.
"Project" shall mean any multi-family residential apartment project,
the fee simple interest of which is owned or acquired by Borrower.
"Property" or "Properties" shall mean all Projects including all land
and improvements thereon and appurtenances thereto and all other properties or
physical assets owned or acquired by the Borrower.
"Purchase Contract" shall mean the purchase contract entered into by
the Borrower for the acquisition of a Project to be financed by the Loan.
ARTICLE II
LOAN
2.1 Amount and Purpose. Borrower agrees to borrow, and Lender agrees to
lend [subject, among other things, to the terms of this Agreement], an
outstanding principal sum at any one time not to exceed Ten Million Dollars
($10,000,000) (the "Loan"), to be advanced as hereinafter provided to finance a
portion of the purchase price for acquisitions of Projects acquired by Borrower
after the date hereof. Individual Projects being acquired shall in each instance
be approved by Lender. The Borrower shall provide Lender with basic
"underwriting" packages for each acquisition property which at a minimum shall
include: property description, title reports, operating statements, anticipated
capital expenditure budgets and such other items required by Lender as set forth
in Sections 4.5 and 4.6 hereof.
2.2 Note. To evidence the Loan, Borrower has delivered a promissory
note of Borrower payable to Lender in the face amount of $10,000,000 (the
"Note"). The Note bears interest as provided in Section 2.3 and is payable as
provided in Sections 2.3 and 2.4.
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2.3 Interest Rate. The Loan shall bear interest on the unpaid principal
balance thereof at the rate set forth in the Note. Interest on the Loan shall be
payable in arrears on the first day of each month. The Loan shall carry late
charges and shall bear interest on overdue payments as set forth in the Note.
2.4 Principal Payment. Unless sooner payable as a result of
acceleration due to the occurrence of an Event of Default, the entire principal
balance of the Loan, together with all accrued and unpaid interest, shall be
shall be due and payable on March 31, 1998. The principal of the Loan may be
prepaid in whole or in part at any time from time to time without premium or
penalty. Notwithstanding the foregoing, if the principal amount of any advance
of the Loan is not repaid within six (6) months of the date of funding by the
Lender, then upon demand by Lender, Borrower shall provide to Lender as security
for the Loan and the obligations of the Borrower under this Agreement first
mortgage liens on such Projects as determined by the Lender in its sole
discretion. Such first mortgage liens shall be provided within ten (10) business
days after such demand in form satisfactory to Lender together with mortgagee
title insurance policies in such amounts and forms and with such title insurance
companies as are satisfactory to Lender in its sole discretion.
2.5 Documentation of Loan. The documents used to evidence and to secure
the Loan, including without limitation the mortgages or deeds of trust required
to secure the Loan, shall be those documents customarily used by the Lender in
connection with loan transactions of the type, character, and size contemplated
herein and/or such other documents as the Lender and its attorneys, in their
sole discretion, may deem necessary or desirable for the Lender's protection.
All of the foregoing documents, and all other instruments which Lender and/or
its attorney shall require to close the Loan, shall be in a form prepared by
Lender's attorneys and satisfactory to Lender and its attorneys. The Note,
together with this Agreement and any and all other agreements and documents
evidencing and securing the Loan are hereinafter referred to as the "Loan
Documents".
2.6 Loan Fee. Borrower agrees to pay to Lender upon execution of this
Agreement a loan fee (the "Loan Fee") equal to $50,000.
ARTICLE III
USE OF LOAN PROCEEDS
3.1 Use of Proceeds. The proceeds of the Loan shall be used solely to
finance a portion of the purchase price paid by Borrower, or to reimburse
Borrower for cash acquisition costs incurred by Borrower (not to exceed the
contract purchase price) during the same calendar quarter for acquisition of
Projects by Borrower after the date of this Agreement.
3.2 Limitation on Advances. Notwithstanding anything to the contrary
contained in this Agreement, if the principal amount of any advance of the Loan
is not repaid within six
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(6) months of the date of funding by the Lender, Lender shall have no obligation
to make any further advances of the Loan.
ARTICLE IV
PROCEDURE FOR ADVANCES
4.1 Time of Advances. Advances of the Loan shall be made no more than
two times in any month upon a requisition by the Borrower for the cost of a
portion of the purchase price of a Project (not to exceed 100%) of such purchase
price. The amount of each advance shall be subject to the review and approval by
Lender of such requisition. All advances are to be made at the principal office
of Lender or at such other place as Lender may designate.
4.2 Application for Advance. Subject to the provisions of Article III,
the proceeds of each advance of the Loan shall be applied solely and exclusively
to payment or reimbursement of Borrower for payments of a Project in accordance
with a Purchase Contract submitted to Lender.
4.4 Receipt in Trust. Borrower covenants that it will receive all
advances hereunder as a trust fund to be applied solely for the purpose of
paying or reimbursing the costs of acquisition of a Project, but nothing herein
shall impose upon Lender any obligation to see to the proper application of such
advances by Borrower.
4.5 Conditions to Initial Advance. Lender shall not be obligated to
make the first advance until the covenants and conditions set out hereinbefore
and the following further conditions of this section shall have been satisfied:
(a) The requirements of Section 2.5 shall have been satisfied
by Borrower's execution and delivery of the Loan Documents. The Loan Documents
shall be in full force and effect. No Event of Default shall have occurred and
be continuing, and no event shall have occurred which upon the lapse of time or
giving of notice, or both would constitute an Event of Default;
(b) Corporate borrowing resolutions and corporate
organizational documents of the Borrower, both in form and substance
satisfactory to Lender, have been delivered to Lender;
(c) Receipt by Lender of an opinion letter of counsel to the
Borrower, reasonably satisfactory to Lender, that (i) upon due authorization and
execution by the parties thereto, the Loan Documents will be legal, valid and
binding instruments, enforceable against Borrower in accordance with their
respective terms; (ii) that Borrower is a Virginia corporation duly organized
and validly existing under the laws of the Commonwealth of Virginia, and has all
requisite power and authority to execute and perform its obligations under all
Loan Documents to which it is a party; (iii) that the parties who executed the
Loan
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Documents were duly authorized to do so and that the Loan Documents were duly
executed by such parties; and (iv) as to such other matters, incident to the
transactions contemplated hereby, as Lender may reasonably require;
(d) Borrower shall have complied with its obligations under
this Agreement;
(e) The Loan Fee shall have been paid by Borrower to Lender;
(f) A copy of a title insurance commitment is issued to
Borrower by a title insurer acceptable to the Lender in the amount of Borrower's
acquisition price of each Project to be financed with the Loan, which shall
commit to insure that the Borrower, upon closing, will own marketable fee simple
title to the Property, free and clear of all liens and objections and such other
matters as may be approved by the Lender (the "Approved Title Insurance
Commitment");
(g) A request for an advance or due diligence book in a form
satisfactory to Lender has been duly executed by the Borrower, approved by
Lender;
(h) Executed copies of the Purchase Contract, for each Project
to be financed with the Loan, both in form and substance satisfactory to the
Lender have been delivered to Lender;
(i) There shall be no litigation or dispute outstanding or
threatened which in Lender's sole opinion jeopardizes the continued operation of
the Project to be financed with the Loan;
(j) Lender shall have received and approved operating
statements and anticipated capital expenditure budgets for the Project to be
financed by the Loan; and
(k) Lender shall have received and approved such other
information about each Project that is to be financed with the Loan that Lender
may reasonably request from Borrower.
4.6 Conditions to Subsequent Advances. Lender shall not be obligated to
make advances after the first advance until the covenants and conditions set out
in Section 4.5 shall remain satisfied and the conditions set forth in
subsections (f) through (k), inclusive, of Section 4.5, shall have been
satisfied for each Project to be financed with the Loan. Lender shall have seven
(7) days from the submission of the materials described in subsections (f)
through (k), inclusive of Section 4.5, to approve a potential acquisition of a
Project. Should the Lender not reject the acquisition during the seven (7) day
period, Lender shall be deemed to have given its consent and shall be obligated
to fund under the terms of this Agreement. Borrower shall be obligated to obtain
Lender's approval for a proposed acquisition of a Project only if proceeds of
the Loan will be used to make such acquisition. Notwithstanding anything to the
contrary contained herein, Lender shall not be obligated to make any advance if
an
5
<PAGE>
Event of Default has occurred or if any event which, with the passage of time or
the giving of notice or both, would constitute an Event of Default, has
occurred.
4.7 No Encumbrances; No Debt. No advance shall be due or payable while
there is any lien or encumbrance upon any Property (whether financed with the
Loan or not) or while there is any other debt outstanding by the Borrower (other
than customary trade obligations), except pursuant to this Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BORROWER
5.1 Representations and Warranties. Upon execution of this Agreement
and with each request for an advance hereunder, Borrower represents and warrants
that:
(a) It is a duly organized and validly existing corporation
under the laws of the Commonwealth of Virginia, qualified to do business in all
jurisdictions where the Projects are located, and has filed all certificates and
other documents with governmental offices as required by applicable law and has
full power and authority to consummate the transactions contemplated hereby, to
own and operate the Projects and to borrow the monies requested;
(b) The financial statements, if any, heretofore delivered to
Lender, are true and correct in all respects, have been prepared in accordance
with generally accepted accounting practice, and fairly present the respective
financial conditions of the subjects thereof as of the respective dates thereof;
no materially adverse change has occurred in the financial conditions reflected
therein since the respective dates thereof; no additional borrowings have been
made by Borrower since the date thereof other than the borrowing contemplated
hereby or approved by Lender; no adverse change has occurred with respect to
Borrower's credit;
(c) There are no actions, suits or proceedings pending, or to
the knowledge of Borrower threatened, against or affecting it or any Project or
involving the validity or enforceability of the Note, any of the Loan Documents,
or before or by any government authority, except actions, suits and proceedings
fully covered by insurance or which, if adversely determined, would not in the
aggregate substantially impair the ability of Borrower to pay when due any
amounts which may become payable in respect of the Note; and, to Borrower's
knowledge, it is not in default with respect to any order, writ, injunction,
decree or demand of any court or a governmental authority;
(d) All utility services necessary for the operation thereof
for their intended purpose are available at the boundaries of the Project or
available by way of easement agreements satisfactory to Lender, including water
supply, storm and sanitary sewer facilities, electric and telephone facilities;
6
<PAGE>
(e) It is the fee simple owner of all of Property and the
Projects and all of such Property and Projects are unencumbered by any liens or
mortgages, except as reflected in the applicable Approved Title Insurance
Commitment;
(f) It will obtain for all Projects financed with the Loan
paid title insurance policies in accordance with the applicable Approved Title
Insurance Commitment;
(g) The use of all Projects complies in all material respects
with applicable zoning and environmental ordinances, regulations and restrictive
covenants affecting the Project, all use requirements of any governmental
authority having jurisdiction have been satisfied, and no material violation of
any law or regulation exists with respect thereto;
(h) At Lender's request, it will provide casualty insurance
for each Project to be financed with the Loan, the form, amount, and issuing
company of which are to be satisfactory to Lender;
(i) At Lender's request, it will provide adequate public
liability insurance for each Project to be financed with the Loan, the form,
amounts and terms thereof are to be satisfactory to the Lender;
(j) At Lender's request, it will obtain for each Project to be
financed with the Loan a current survey prepared by a certified land surveyor
showing location of actual improvements as of the date of acquisition of the
Project, containing only those matters acceptable to the Lender and containing a
certification that the Project to be financed with the Loan is not located in a
flood hazard area;
(k) There is no default on the part of Borrower under this
Agreement, the Note or any of the Loan Documents and no event has occurred and
is continuing which with notice or the passage of time or either would
constitute a default under any of the above;
(l) Each requisition, or the receipt of the funds requested
thereby, shall constitute an affirmation that the foregoing representations and
warranties of the Borrower are true and correct as of the date thereof and,
unless Lender is notified in writing to the contrary prior to the disbursement
of the advance requisitioned, will be so on the date thereof.
(m) Borrower represents that there is no litigation, legal or
administrative proceeding, investigation or other action of any nature
commenced, pending, or, to the knowledge of Borrower, threatened against,
Borrower which materially and adversely affects the Borrower and which has not
been disclosed in detail in writing to Lender and which may involve the
possibility of any judgment or liability not fully covered by insurance, or
materially and adversely affect any of the assets of the Borrower or Borrower's
right to carry on business as now conducted, or affect the continued employment
of any officer, director, or employee of Borrower; and
7
<PAGE>
(n) Borrower hereby warrants to Lender that all
representations, circumstances, accounts, reports, and all other information
supplied to Lender in connection with the Loan are true and accurate in all
material respects. Borrower agrees that such warranty shall survive the closing
of the Loan and further agrees to notify Lender of any material change in any of
the information submitted to Lender.
ARTICLE VI
COVENANTS OF BORROWER
6.1 Borrower's Covenants. Borrower further covenants with Lender as
follows:
(a) Borrower will not convey or encumber any Property in any
way without the prior written consent of Lender, which Lender may withhold in
its discretion.
(b) Borrower will receive advances of the Loan solely for the
purpose of paying the costs of acquisitions of the Projects and will apply the
advances to such payment.
(c) Borrower will, upon demand by Lender, commence and proceed
promptly and diligently to correct any structural defect in any Project.
(d) Borrower will not enter into any lease for any Project or
Property except in the ordinary course of business.
(e) Borrower will comply with all restrictive covenants
affecting any Project and upon notice from Lender of any failure to comply, will
commence and proceed promptly and diligently to bring about compliance.
(f) Borrower will keep adequate records and books of account
with respect to the Property in accordance with generally accepted accounting
principles and will permit Lender, by its agents, accountants and attorneys, to
visit and inspect the Projects and examine such records and books of account and
to discuss the affairs, finances and accounts pertaining thereto with
representatives of Borrower at such reasonable times as may be requested by
Lender and will furnish to Lender all financial statements and reports including
periodical statements of income and expense as Lender may request.
(g) Borrower will not incur any additional indebtedness (other
than customary trade obligations), nor otherwise encumber or sell any of the
Properties, during the term of the Loan, without the prior written consent of
Lender, which Lender may withhold in its discretion.
(h) Borrower will provide Lender with the following financial
information:
8
<PAGE>
a. Annual report to shareholders of Borrower for the fiscal year ending
December 31, 1996 including Form 10-K to be provided to Lender on or before
April 30, 1997.
b. Quarterly report to shareholders of Borrower to be
provided to Lender within 90 days following the
end of each fiscal quarter.
c. Quarterly operating statements (in summary format)
for each of the individual Projects and other
Property owned by Borrower within 45 days
following the end of each fiscal quarter.
d. Borrower shall provide Lender with a copy of the
prospectus related to any and all public offerings
undertaken during the term of the Loan.
(i) Borrower will not alter the character of its business from
that conducted as of the date of this Agreement or engage in any business other
than the business conducted as of the date of this Agreement.
(j) Borrower will not enter into any transaction of merger or
consolidation or liquidate, wind up or dissolve itself (or suffer any
liquidation or dissolution) or sell or agree to sell all or substantially all
its assets or foreclose or agree to purchase any other company or all or
substantially all of the assets of another Company (other than acquisition of
projects) unless approved by the Lender in its sole discretion.
(k) Borrower will not make any loans or engage in any lending
activity.
(l) Borrower will comply with all legal requirements necessary
to maintain its status as a real estate investment trust.
(m) (1) Except as would not cause or be reasonably expected to
cause a material adverse effect on the Borrower or any Property:
(i) Each of the Properties and all operations at
the Properties are in compliance with all applicable
Environmental Laws, and there is no violation of any
Environmental Law with respect to the Properties or the
businesses operated by Borrower (the "Businesses"), and
there are no conditions relating to the Businesses or
Properties that would be reasonably expected to give rise
to liability under any applicable Environmental Laws.
(ii) Borrower has not received any written notice
of, or inquiry from any governmental authority regarding,
any violation, alleged violation, non-compliance,
liability or potential liability regarding Hazardous
Materials or compliance with Environmental Laws with
regard to any of the Properties or the Businesses, nor
does Borrower have knowledge that any such notice is being
threatened.
9
<PAGE>
(iii) Hazardous Materials have not been transported
or disposed at or from any of the Properties, or
generated, treated, stored or disposed of at, on or under
any of the Properties or any other location, in each case
by, or on behalf, of Borrower, the Properties or the
Businesses in any amount reportable under the federal
Comprehensive Environmental Response, Compensation and
Liability Act or any analogous state law, except releases
in compliance with any Environmental Laws.
(iv) No judicial proceeding or governmental or
administrative action is pending or, to the knowledge of
Borrower, threatened, under any Environmental Law to which
Borrower is or will be named as a party, nor are there any
consent decrees or other decrees, consent orders,
administrative orders or other orders, or other
administrative or judicial requirements outstanding under
any Environmental Law with respect to Borrower, the
Properties or the Businesses.
(v) There has been no release or threat of
release of Hazardous Materials at or from the Properties,
or arising from or related to the operations (including,
without limitation, disposal) of Borrower in connection
with the Properties or otherwise in connection with the
Businesses, except releases in compliance with any
Environmental Laws.
(vi) None of the Properties contains, or has
previously contained, any Hazardous Materials at, on or
under the Properties in amounts or concentrations that, if
released, constitute or constituted a violation of, or
could give rise to liability under, Environmental Laws.
(vii) Borrower has not assumed any liability of any
person, entity or governmental authority under any
Environmental Law.
(2) Borrower has adopted procedures that are designed to (i)
ensure that Borrower, all of its operations and each of the Properties remains
in compliance with applicable Environmental Laws and (ii) minimize any
liabilities or potential liabilities that Borrower, any of its operations and
each of the Properties may have under applicable Environmental Laws.
(n) Other than as set forth below, Borrower will not, directly or
indirectly, declare or pay any dividends or make any other distribution upon any
shares of its capital stock of any class or make any distributions to
stockholders; provided that (i) the Borrower may make distributions, in the
aggregate, in an amount not to exceed in any calendar year one hundred percent
(100%) of Cash Available for Distribution; (ii) Borrower may pay such dividends
as are necessary to retain its status as a real estate investment trust; and
(iii) subsidiaries of the Borrower may make distributions to the Borrower.
10
<PAGE>
ARTICLE VII
DEFAULT
7.1 Events of Default. The occurrence of any of the following events,
whether voluntary or involuntary, shall constitute an "Event of Default":
(a) If there occurs any default under any other obligation of
the Borrower to the Lender beyond any applicable cure period;
(b) If Borrower assigns, or attempts to assign this Agreement,
or advances to be made hereunder, or any interest therein, or if any of the
Property be conveyed or further encumbered in any way without consent of Lender
which will not be unreasonably withheld;
(c) If Borrower shall commit any affirmative act of
insolvency, or shall file any petition or action under any bankruptcy,
insolvency, or moratorium law, or any other law or laws for the relief of, or
relating to debtors; or if there shall be filed any insolvency petition under
any bankruptcy statute against Borrower, or there shall be appointed any
receiver or trustee to take possession of any property of Borrower, and such
petition or appointment is not set aside or withdrawn or does not cease within
thirty (30) days from the date of such filing or appointment; or
(d) If Borrower fails to comply with any of the terms
covenants, provisions and agreements contained in the Note or the covenants and
provisions contained in this Agreement or any other Loan Document, and does not
cure such default within any applicable grace or curative period (but in no
event shall Lender be required to make advances during such grace or curative
period); or if any of the representations and warranties of Borrower contained
herein or in any other Loan Document is false or misleading.
7.2 Remedies Upon Default. If an Event of Default described in
subsection 7.1(c) above shall have occurred the Note shall immediately and
automatically become due and payable, the obligations of Lender to make further
advances of the Loan shall automatically terminate, and Lender shall be entitled
to take any of the actions described in (c) below without notice to Borrower. If
any other Event of Default shall have occurred, at any time thereafter, Lender
may take any one or more of the following actions by written notice to Borrower:
(a) Declare the principal of and accrued interest on the Note,
or any other notes or evidences of indebtedness of Borrower, then held by Lender
to be due and payable, both as to principal and interest, without presentment,
demand, protest or other notice of any kind, all of which are hereby expressly
waived, anything contained herein or in the Note or in such other note or
evidence of indebtedness to the contrary notwithstanding;
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<PAGE>
(b) Declare any obligation of Lender to make further advances
of the Loan terminated immediately; or
(c) Exercise any and all rights Lender may have under any of
the Loan Documents or any other instrument or agreement.
7.3 Suits for Enforcement. In case any one or more of such Events of
Default shall occur and be continuing, the holder of the Note may proceed, to
the extent permitted by law, to protect and enforce such holder's rights either
by suit in equity or by action at law, or both, whether for the specific
performance of any covenant, condition or agreement contained in this Agreement
or the Note or any other Loan Document or in aid of the exercise of any power
granted in this Agreement or the Note or any other Loan Document, or proceed to
enforce the payment of the Note or to enforce any other legal or equitable right
of the holder of the Note.
7.4 Remedies Cumulative. No right or remedy herein or in any other
agreement or instrument conferred upon Lender, or the holder of the Note is
intended to be exclusive of any other right or remedy, and each and every such
right or remedy shall be cumulative and shall be in addition to every other
right and remedy given hereunder or under any Loan Document or now or hereafter
existing at law or in equity or by statute or otherwise. Without limiting the
generality of the foregoing, if the Note or any of the other obligations of
Borrower to Lender shall not be paid when due, whether at the stated maturity
thereof, by acceleration or otherwise, Lender shall not be required to resort to
any particular security, right or remedy or to proceed in any particular order
of priority, and Lender shall have the right at any time and from time to time,
in any manner and in any order, to enforce its security interests, liens, rights
and remedies, or any of them, as Lender deems appropriate in the circumstances
and apply the proceeds of its collateral to the obligations of Borrower in any
order of priority elected by Lender.
ARTICLE VIII
MISCELLANEOUS
8.1 Expenses. Whether or not the transactions contemplated hereby shall
be consummated (except as the sole result of default by Lender under the
Agreement), Borrower agrees to pay all expenses incurred by Lender in connection
with the negotiation, preparation and administration of this Agreement
(including, without limitation, any modifications of or waivers under this
Agreement), the other Loan Documents, the borrowings hereunder, the enforcement
and preservation of the rights of Lender under or in connection with this
Agreement, the Note and the other Loan Documents, and all attorneys' fees and
disbursements incurred by Lender which arise out of or are connected, directly
or indirectly, to any transaction contemplated by this Agreement, including, but
not limited to, the fees and disbursements of LeClair Ryan, a Professional
Corporation, counsel for Lender, for services rendered to Lender in connection
with the transactions contemplated by this Agreement, and filing and recording
fees. All of such expenses shall be paid by Borrower at or before the time
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<PAGE>
of the execution of this Agreement to the extent incurred and billed and
thereafter on demand as incurred. The provisions of this Section shall survive
any termination of this Agreement, whether by reason of bankruptcy of Borrower
or otherwise.
8.2 Assignment. Lender may assign, negotiate or otherwise transfer its
rights hereunder and when so assigned, negotiated or transferred, all of the
provisions of this Agreement shall continue to apply.
8.3 Waiver. No waiver of any provision or violation of this Agreement
shall be deemed to have been made by Lender unless expressly stated by Lender in
writing. No failure by Lender to enforce any provision of this Agreement shall
be deemed a waiver thereof nor shall any waiver of any violation constitute a
waiver of any subsequent provision or such violation or any other provision.
8.4 Notices. All notices hereunder shall be in writing and shall be
deemed to have been sufficiently given or served for all purposes when presented
personally or sent by certified or registered mail to any party hereto at the
following addresses:
If to Lender: First Union National Bank of Virginia
P.O. Box 26944
Richmond, Virginia 23261
Attn: Chris B. Troutman
With a copy to: Steven D. Delaney, Esquire
LeClair Ryan
707 East Main Street
Richmond, Virginia 23219
With a copy to: Martin B. Richards
McGuire, Woods, Battle & Boothe LLP
901 East Cary Street
Richmond, Virginia 23219
If to Borrower: Apple Residential Income Trust, Inc.
306 East Main Street
Richmond, Virginia 23219
Attention: S. Jay Olander
Either party may change its address for the purposes of notice by at least ten
(10) days prior written notice given to the other party in accordance with this
section. All such notices, demands, requests and other communications shall be
deemed to have been given upon the earlier of (i) delivery at the appropriate
address specified above, whether in person, by express courier or by mail, or
(ii) two business days after the postmark date of mailing. Rejection or other
refusal to accept or the inability to deliver because of a changed address of
which no
13
<PAGE>
notice was given shall not invalidate the effectiveness of any notice, demand,
request or other communication.
8.5 Amendment. Neither this Agreement nor any provisions hereof may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought.
8.6 Time of Essence. Time is of the essence to this Agreement.
8.7 Successors and Assigns. Whenever in this Agreement any of the
parties hereto is referred to, such reference shall be deemed to include the
successors and assigns of such party, subject to the provisions hereof. All
covenants, agreements, representations and warranties by or on behalf of
Borrower which are contained or incorporated in this Agreement or by any Loan
Document shall inure to the benefit of the successors and assigns of Lender and
any holder(s) of the Note. Except for the parties hereto and their respective
successors and assigns, no other party shall be entitled to the benefits of this
Agreement or to rely thereon.
8.8 Construction and Service of Process. This Agreement and all the
Loan Documents shall be governed by and construed and enforced in accordance
with the laws of Virginia. The parties consent that service of process in any
action or proceeding in connection with this Agreement, the Note, or any of the
other Loan Documents may be made upon any party by mailing a copy of the summons
to such party, by registered mail, at its address to be used for the giving of
notices under this Agreement.
8.9 Rules of Construction. When the identity of the parties hereto or
the circumstances make it appropriate, the masculine gender includes the
feminine and/or neuter and the singular number includes the plural. Section
headings are for convenience only and shall not affect the interpretation or
construction of this Agreement or any other Loan Documents.
8.10 Severability. If any term of this Loan Agreement, or the
application thereof to any person or circumstance, shall to any extent be
invalid or unenforceable, the remainder of this Agreement or the application of
such term to persons or circumstances other than those to which it is invalid or
unenforceable shall not be affected thereby, and each term of this Agreement
shall be valid and enforceable to the fullest extent permitted by law.
8.11 Counterparts. This Loan Agreement may be executed in any number of
counterparts each of which shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
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<PAGE>
IN WITNESS WHEREOF, Lender and Borrower have and each has caused its
name to be hereunto signed all as of the day and year first above written.
LENDER:
FIRST UNION NATIONAL BANK OF VIRGINIA
By: /s/ Chris B. Troutman
----------------------------------
Title: Vice President
---------------------------------
BORROWER:
APPLE RESIDENTIAL INCOME TRUST, INC., a
Virginia corporation
By: /s/ Glade M. Knight
------------------------------------
Title: President
---------------------------------
15
Exhibit 4.2
THIS AMENDMENT TO LOAN AGREEMENT (this "Amendment"), is made as of this
first day of August, 1997, by and among APPLE RESIDENTIAL INCOME TRUST, INC., a
Virginia corporation (the "Borrower") and FIRST UNION NATIONAL BANK OF VIRGINIA,
a national banking association (the "Bank").
RECITALS
A. The Bank has made a revolving loan to the Borrower in an outstanding
principal amount not to exceed $10,000,000.00 at any one time (the "Loan")
pursuant to the terms of a Loan Agreement dated as of March 1, 1997, by and
between the Borrower and the Bank (the "Loan Agreement"), which loan is
currently evidenced by a Promissory Note of the Borrower dated March 1, 1997, in
the principal amount of $10,000,000.00, payable to the order of the Bank (the
"Note"). Capitalized terms used herein without definition which are defined in
the Loan Agreement, as amended hereby, shall have the same meaning as provided
therefor in the Loan Agreement, as amended hereby, unless the context otherwise
requires.
B. The Borrower and the Bank desire to modify and amend the Note and the
Loan Agreement and other Loan Documents to increase the maximum principal amount
of the Loan and the Note to $20,000,000.00 and to modify the Loan Documents as
otherwise provided herein.
AGREEMENT
NOW, THEREFORE, that for and in consideration of the sum of Ten Dollars
($10.00) cash in hand paid, and other good and valuable consideration, receipt
and sufficiency whereof is hereby acknowledged, the parties hereto do agree as
follows:
ARTICLE I
AMENDMENTS
Section 1.1. LOAN AGREEMENT.
The Loan Agreement is hereby modified as follows:
A. The first sentence of Section 2.1 of the Loan Agreement is hereby
deleted in its entirety and the following is substituted in lieu thereof:
2.1 Amount and Purpose. Borrower agrees to borrow, and Lender agrees
to lend [subject, among other things, to the terms of this Agreement], an
outstanding principal amount at any one time not to exceed Twenty Million
Dollars ($20,000,000.00), to be advanced as hereinafter provided to finance
a portion of the purchase price for acquisitions of Projects acquired by
Borrower after the date hereof.
<PAGE>
B. The first sentence of Section 2.2 of the Loan Agreement is hereby
deleted in its entirety and the following is substituted in lieu thereof:
2.2 Note. To evidence the Loan, Borrower has delivered a promissory
note of Borrower payable to Lender in the face amount of $20,000,000.00
(the "Note").
C. In addition to the $50,000.00 loan fee specified in Paragraph 2.6 of the
Loan Agreement, upon Borrower's execution of this Amendment, Borrower agrees to
immediately pay Bank an additional loan fee of $33,333.00 (representing a
$50,000.00 loan fee pro rated from the date hereof through March 31, 1998) and
the term "Loan Fee" as defined in Section 2.6 of the Loan Agreement is hereby
amended to include such amount in addition to the original $50,000.00 loan fee
specified in such Section.
D. The notice address provided for Lender in Section 8.4 of the Loan
Agreement is hereby changed to the following:
If to Lender: Mr. John Schissel
Vice President
First Union National Bank
One First Union Center, DC-6
Charlotte, North Carolina 28288-0166
With a copy to: Steven D. Delaney, Esquire
LeClair Ryan
707 East Main Street
Richmond, Virginia 23219
Section 1.2. NOTE.
The Note shall be amended and restated to reflect the new $20,000,000.00
maximum outstanding principal amount of the Loan.
Section 1.3. OTHER LOAN DOCUMENTS AND MODIFICATIONS.
All references in the Loan Documents to the Loan Agreement, the Note and
the other Loan Documents shall refer, respectively, to the Loan Agreement, the
Note and the other Loan Documents, all as amended by this Amendment.
2
<PAGE>
ARTICLE II
ACKNOWLEDGMENTS AND CONFIRMATIONS
2.1 BORROWER.
A. The Borrower does hereby confirm and reaffirm its representations,
warranties and covenants contained in the Loan Documents as if made as of the
date of this Amendment.
B. The Borrower does hereby acknowledge and assert that as of the date
hereof there are no defenses whatsoever to the obligations represented by the
Note or any of the other Loan Documents, as amended hereby.
C. The Borrower acknowledges that the principal balance of the Note as
of July 31, 1997 was $6,442,605.73.
ARTICLE III
MISCELLANEOUS
3.1 NO OTHER MODIFICATION. Except as expressly modified herein, all of the
terms, agreements, covenants and provisions of the Loan Documents shall remain
in full force and effect, and the margin of each page of the Note shall be
legended as follows:
This Note has been amended and restated by a Promissory Note made by
Borrower payable to the order of the Lender in the principal amount of
$20,000,000.00 dated as of August 1, 1997, to which reference is hereby
made.
3.2 SEVERABILITY. In the event that any one or more of the covenants,
agreements, terms or provisions contained in the Note, Loan Agreement or other
Loan Documents, all as amended hereby, shall be invalid, illegal or
unenforceable in any respect, the validity of the remaining covenants,
agreements, terms and provisions contained in the such documents, shall be in no
way affected, prejudiced or disturbed thereby.
3.3 SUCCESSORS AND ASSIGNS. This Amendment shall bind and inure to the
benefit of the parties hereto, their heirs, executors, successors and assigns.
3
<PAGE>
3.4 COUNTERPARTS. This Amendment may be executed in any number of
couterparts, each of which shall constitute an original and all of which taken
together shall constitute one and the same agreement.
3.5 RULES OF CONSTRUCTION. When the identity of one of the parties hereto
or the circumstances make it appropriate, the masculine gender includes the
feminine and/or neuter and the singular number includes the plural. Section
headings are for convenience only and shall not affect the interpretation or
construction of this Amendment.
WITNESS the following signatures and seals.
BORROWER:
APPLE RESIDENTIAL INCOME TRUST, INC.
a Virginia corporation
By:/s/ Glade M. Knight
-------------------------------------
Name: Glade M. Knight
-----------------------------------
Title: President
----------------------------------
BANK:
FIRST UNION NATIONAL BANK OF VIRGINIA, a
national banking association
By: /s/ John A. Schissel
-------------------------------------
Name: John A. Schissel
-----------------------------------
Title: Vice President
----------------------------------
4
<PAGE>
STATE OF Virginia
CITY OF Richmond
The foregoing instrument was acknowledged before me in the aforesaid
jurisdiction this 4th day of August, 1997, on behalf of Apple Residential
Income Trust, Inc., a Virginia corporation by Glade M. Knight, its President.
/s/ Jacquelyn B. Owens
----------------------------------------
Notary Public
My commission expires: 6/30/99
----------------------------
STATE OF North Carolina
------------------------
COUNTY OF Mecklenburg
------------------
The foregoing instrument was acknowledged before me in the aforesaid
jurisdiction this 4th day of August, 1997, on behalf of First Union National
Bank of Virginia, a national banking association, by John A. Schissel, its Vice
President.
/s/ Jane E. Owens
----------------------------------------
Notary Public
My commission expires: March 29, 2000
----------------------------
5
Exhibit 4.3
AMENDED AND RESTATED PROMISSORY NOTE
From
APPLE RESIDENTIAL INCOME TRUST, INC.
a Virginia corporation
to the Order of
FIRST UNION NATIONAL BANK OF VIRGINIA,
a national banking association
Date: August 1, 1997
<PAGE>
Richmond, Virginia $20,000,000.00
August 1, 1997
AMENDED AND RESTATED PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned APPLE RESIDENTIAL INCOME TRUST,
INC., a Virginia corporation (the "Borrower") promises to pay to the order of
FIRST UNION NATIONAL BANK OF VIRGINIA, a national banking association, and its
successors and assigns (the "Lender") at the Lender's offices at One James
Center, Richmond, Virginia 23219, or at such other place as the Lender may from
time to time designate, the principal sum of TWENTY MILLION AND 00/100 DOLLARS
($20,000,000.00), pursuant to the provisions of this promissory note (the
"Promissory Note") and certain documents and writings executed and delivered to
the Lender by the Borrower and other signatory parties (the "Loan Documents") in
connection with the obligation evidenced herein (the "Loan"), together with
interest thereon at the rate hereinafter specified and any and all other sums
which may be owing to the Lender by the Borrower under this Promissory Note, on
the following terms:
1. Interest Rate. For the period from the date hereof until all sums
due hereunder, whether principal, interest, penalties, fees or other sums have
been paid in full, interest shall accrue on the disbursed and unpaid principal
balance of this Promissory Note at a floating rate equal to the interest rate
obtained by adding two hundred (200) basis points to the One Month LIBOR Rate
(as hereinafter defined) in effect each Determination Date (as hereinafter
defined) during the Term (as hereinafter defined) of this Promissory Note. As
used herein, "One Month LIBOR Rate" for any Determination Date shall mean the
offered rate per annum for deposits in U.S. dollars for thirty (30) day periods
which appears on the Telerate Page 3750 as of 11:00 a.m., London time, on the
day which is the first London business day prior to such Determination Date. If
such rate does not appear on the Telerate Page 3750, the rate for that day will
be the arithmetic mean of the rates quoted by two major banks in New York City
selected by the Lender, at approximately 11:00 a.m., Richmond, Virginia time,
for loans in U.S. dollars to prime banks in the London interbank market for
thirty (30) day periods commencing on that day and in an amount approximately
equal to the outstanding principal amount of this Promissory Note. As used
herein, "Determination Date" shall mean initially the date of this Promissory
Note and, thereafter, the last business day of the month preceding the month for
which interest is calculated. The interest rate for August, 1997, shall be based
on the One Month LIBOR Rate on the initial Determination Date. Beginning on the
first month after the date of this Promissory Note, the interest rate of this
Promissory Note shall be adjusted on the first day of each month calculated on
the basis of One Month LIBOR Rate for the immediately preceding Determination
Date until this Promissory Note is paid in full.
2. Calculation of Interest. Interest shall be calculated on the basis
of a three hundred sixty (360) days per year factor applied to the number of
actual days elapsed.
<PAGE>
3. Term. The term (the "Term") of this Promissory Note shall be from
the date of this Promissory Note to March 31, 1998 (the "Maturity Date"), which
Maturity Date is subject to acceleration as set forth herein.
4. Repayment. The Borrower shall make monthly payments of all accrued
and unpaid interest (through the last day of the previous month), as above set
forth, on the first day of each month during the Term, commencing on the first
day of the month following the date of this Promissory Note, until the Maturity
Date, or such earlier date arising by acceleration. At the Maturity Date, the
principal balance of all sums due under this Promissory Note and the other Loan
Documents, together with all accrued and unpaid interest, late fees and
penalties, shall be due and payable in full.
5. Application of Payments. All payments made hereunder shall be
applied first to penalties, including outstanding loan fees, if any, and next to
accrued and unpaid interest, and then to principal or, during any default by the
Borrower, in such other order or proportion as the Lender, in its discretion,
may determine.
6. Manner and Method of Payment. All payments called for in this
Promissory Note shall be made in lawful money of the United States of America.
If made by check, draft, or other payment instrument, such check, draft, or
other payment instrument shall represent immediately available funds. In the
Lender's discretion, provided the Borrower has failed to pay when due a monthly
payment more than twice in any calendar year, any payment made by check, draft,
or other payment instrument shall not be considered to have been made until such
time as the funds represented thereby have been collected by the Lender. Should
any payment date fall on a nonbanking day, the Borrower shall make the payment
on the last banking day preceding such payment date.
7. Prepayment. The Borrower may prepay this Promissory Note in whole at
any time or in part from time to time without penalty, premium or additional
interest.
8. Late Payment Penalty. Should any payment of interest, or any other
sum due monthly hereunder be received by the Lender more than ten (10) days
after its due date, the Borrower shall pay a late payment penalty equal to five
percent (5%) of the amount of the payment then due.
9. Acceleration Upon Default. Upon the failure to pay any amount when
due under this Promissory Note and the continuation of such default for a period
of fifteen (15) days following receipt of written notice of such default or
refusal of delivery of such notice given pursuant to the terms of this
Promissory Note or upon any default under any other Loan Document beyond any
applicable cure period, the Lender may, in the Lender's sole and absolute
discretion and without further notice or demand, declare the entire unpaid
balance of principal plus accrued interest and any other sums due hereunder
immediately due and payable.
10. Default Interest Rate. Upon the failure to pay any amount when due
under this Promissory Note, or upon any default under any other Loan Document,
the Lender may, after the
2
<PAGE>
lapse of any applicable cure period, in addition to any other remedy the Lender
may exercise, raise the rate of interest accruing on the disbursed unpaid
principal balance by three (3) percentage points above the rate of interest
otherwise applicable, until such default is cured (if so permitted by the
Lender), or until this Promissory Note, and all sums due hereunder, are paid in
full.
11. Interest Rate After Judgment. If judgment is entered against the
Borrower on this Promissory Note, the amount of the judgment so entered shall
bear interest at the highest rate authorized under this Promissory Note as of
the date of entry of the judgment, except as may be otherwise required by law.
12. Expenses of Collection. Should this Promissory Note be referred to
an attorney for collection following a default by the Borrower and its failure
to cure within any applicable cure period, the Borrower shall pay all of the
Lender's costs, fees and expenses (including reasonable attorneys' fees incurred
at the attorney's normal hourly rates) resulting from such referral, even if
judgment has not been confessed or suit filed.
13. Waivers by the Borrower. The Borrower waives presentment, notice of
dishonor and protest, notice of intention to accelerate the maturity hereof and
notice of the actual acceleration of the maturity hereof.
14. Extensions of Maturity. The Borrower hereby agrees that the
Maturity Date, or any payment due hereunder, may be extended at any time or from
time to time by the Lender without releasing, discharging, or affecting the
liability of such party.
15. Commercial Loan. The Borrower represents and warrants that the debt
evidenced hereby is a loan made for the acquisition or conduct of a business or
investment within the meaning ascribed to those terms under Section 6.1-330.75
of the Code of Virginia, as amended. The Borrower further warrants that all loan
proceeds will be used solely to carry on a business or commercial enterprise.
16. Loan Agreement. This proceeds of the Loan are to be advanced in
accordance with the terms and provisions of a certain Loan Agreement dated as of
March 1, 1997, as amended by an Amendment to Loan Agreement of even date
herewith between the Borrower and the Lender (collectively, the "Loan
Agreement").
17. Estoppel Certificate. The Borrower agrees to furnish to the Lender
at any time and from time to time, within fifteen (15) days after a written
request by the Lender, a written estoppel certificate, duly executed and
acknowledged, setting forth the amount then due under this Promissory Note, and
whether any claim, offset or defense then is known to exist under this
Promissory Note.
18. Joint and Several Liability. In the event there exists more than
one person described by the term "Borrower," the liabilities and obligations of
each such person hereunder shall be joint and several liabilities and
obligations.
3
<PAGE>
19. Assignability. This Promissory Note may be assigned by the Lender
or any subsequent holder of this Promissory Note at any time and from time to
time.
20. Notices. Any notice or demand required or permitted in connection
with this Promissory Note shall be in writing and made by hand delivery, by
overnight courier service for next day delivery or by registered or certified
mail, return receipt requested, postage prepaid, addressed to the Lender or the
Borrower at the appropriate address set forth below or to such other address as
may be hereafter specified by written notice by the Lender or the Borrower, and
shall be considered given upon the earlier of (i) delivery at the appropriate
address specified above, whether in person, by express courier or by mail, or
(ii) two business days after the postmark date of mailing. Rejection or other
refusal to accept or the inability to deliver because of a changed address of
which no notice was given shall not invalidate the effectiveness of any notice,
demand, request or other communication.
If to the Lender:
Mr. John Schissel
Vice President
First Union National Bank
One First Union Center, DC-6
Charlotte, North Carolina 28288-0166
With a copy to:
LeClair Ryan
707 East Main Street
Richmond, Virginia 23219
Attention: Steven D. Delaney, Esquire
With a copy to:
McGuire, Woods, Battle & Boothe LLP
901 East Cary Street
Richmond, Virginia 23219
Attention: Martin B. Richards
If to the Borrower:
Apple Residential Income Trust, Inc.
306 East Main Street
Richmond, Virginia 23219
Attention: S. J. Olander
4
<PAGE>
21. Governing Law. This Promissory Note shall be strictly governed by
and construed under the laws of the Commonwealth of Virginia, and the
undersigned expressly acknowledges that this Promissory Note was executed and
delivered to the Lender within the geographic boundaries of the Commonwealth of
Virginia. Jurisdiction and venue in the enforcement or interpretation of this
Promissory Note shall be appropriate in any court of competent jurisdiction in
the Commonwealth of Virginia, or in the United States District Court for the
Eastern District of Virginia, if jurisdiction exists, and the undersigned
expressly consents thereto.
22. Tense and Gender. As used herein, the term "Borrower" includes the
singular and the plural and refers to all genders.
23. Binding Nature. This Promissory Note shall inure to the benefit of
and be enforceable by the Lender and the Lender's successors and assigns and any
other person to whom the Lender may grant an interest in the Borrower's
obligations to the Lender, and shall be binding and enforceable against the
Borrower and the Borrower's successors and assigns.
24. Invalidity of Any Part. If any provision or part of any provision
of this Promissory Note shall for any reason be held invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Promissory Note and this
Promissory Note shall be construed as if such invalid, illegal or unenforceable
provision or part hereof had never been contained herein, but only to the extent
of its invalidity, illegality or unenforceability.
25. Disclosure of Information. The Borrower hereby authorizes the
Lender to disclose any and all information in its possession with regard to the
Borrower, the Loan or any collateral securing the Loan, including but not
limited to, financial statements, tax returns, credit reports, payment
histories, leases, project revenues and any and all other related information,
to: (i) any assignee or contemplated assignee of this Promissory Note; and (ii)
any appraiser hired to do an appraisal of any collateral securing this
Promissory Note; provided, however, Lender shall endeavor to obtain an agreement
from such parties to keep such information confidential.
26. WAIVER OF JURY TRIAL. THE BORROWER WAIVES THE RIGHT TO A TRIAL BY
JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE LOAN OR THIS
PROMISSORY NOTE. THIS WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE
BY THE BORROWER AND THE BORROWER ACKNOWLEDGES THAT EXCEPT FOR LENDER'S AGREEMENT
TO LIKEWISE WAIVE ITS RIGHTS TO A TRIAL BY JURY NEITHER THE LENDER NOR ANY
PERSON ACTING ON BEHALF OF THE LENDER HAS MADE ANY REPRESENTATIONS OF FACT TO
INDUCE THIS WAIVER OF TRIAL BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS
EFFECT. THE BORROWER FURTHER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED (OR HAS
HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS PROMISSORY NOTE
AND ALL OTHER LOAN DOCUMENTS AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT
LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE
OPPORTUNITY TO DISCUSS THIS WAIVER
5
<PAGE>
WITH COUNSEL. THE BORROWER FURTHER ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS
THE MEANING AND RAMIFICATIONS OF THIS WAIVER PROVISION AND AS EVIDENCE OF THIS
FACT SIGNS THIS PROMISSORY NOTE BELOW.
27. Amendment and Restatement. This Note hereby amends and restates, in
its entirety that certain prior Promissory Note made by Borrower to the order of
the Lender, dated March 1, 1997 and in the original principal amount of Ten
Million Dollars ($10,000,000.00).
IN WITNESS WHEREOF, the Borrower has executed this Promissory
Note under seal as of the 1st day of August, 1997, with the specific intention
that this Promissory Note constitute an instrument under seal.
BORROWER:
APPLE RESIDENTIAL INCOME TRUST, INC., a
Virginia corporation
[CORPORATE SEAL] By: /s/ Glade M. Knight
----------------------------------
Title: President
-------------------------------
Attest: /s/ S.J. Olander
----------------------
Title: Secretary
-----------------------
6
Exhibit 10.12
APPLE LIMITED, INC.
ARTICLES OF INCORPORATION
ARTICLE I
NAME
The name of the Corporation is Apple Limited, Inc.
ARTICLE II
PURPOSE
The Corporation is organized to engage in any lawful business not
required by the Virginia Stock Corporation Act to be stated in the Articles of
Incorporation.
ARTICLE III
AUTHORIZED SHARES
3.1 Number and Designation. The number and designation of shares that
the Corporation shall have authority to issue and the par value per share are as
follows:
Class Number of Shares Par Value
----- ---------------- ---------
Common 5,000 $1.00
3.2 Preemptive Rights. No holder of outstanding shares shall have any
preemptive right with respect to (i) any shares of any class of the Corporation,
whether now or hereafter authorized, (ii) any warrants, rights or options to
purchase any such shares, or (iii) any obligations convertible into any such
shares or into warrants, rights or options to purchase any such shares.
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<PAGE>
3.3 Voting; Distributions. The holders of Common Shares shall have
unlimited voting rights and are entitled to receive the net assets of the
Corporation upon the liquidation, dissolution or winding up of the affairs of
the Corporation.
ARTICLE IV
REGISTERED OFFICE AND REGISTERED AGENT
The address of the initial registered office of the Corporation, which
is located in the City of Richmond, Virginia, is McGuire, Woods, Battle &
Boothe, L.L.P. 901 East Cary Street, One James Center, Richmond, Virginia 23219.
The initial registered agent of the Corporation is Martin B. Richards, whose
business office is identical with the registered office and who is a resident of
Virginia and a member of the Virginia State Bar.
ARTICLE V
LIMIT ON LIABILITY AND INDEMNIFICATION
5.1 Definitions. For purposes of this Article the following
definitions shall apply:
(i) "Corporation" means this Corporation only and no
predecessor entity or other legal entity.
(ii) "expenses" include counsel fees, expert witness fees, and
costs of investigation, litigation, and appeal, as well as any amounts
expended in asserting a claim for indemnification;
(iii) "liability" means the obligation to pay a judgment,
settlement, penalty, fine, or other such obligation, including, without
limitation, any excise tax assessed with respect to an employee benefit
plan;
-2-
<PAGE>
(iv) "legal entity" means a corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise;
(v) "predecessor entity" means a legal entity the existence of
which ceased upon its acquisition by the Corporation in a merger or
otherwise; and
(vi) "proceeding" means any threatened, pending or completed
action, suit, proceeding or appeal whether civil, criminal,
administrative or investigative and whether formal or informal.
5.2 Limit on Liability. In every instance in which the Virginia Stock
Corporation Act, as it exists on the date hereof or may hereafter be amended,
permits the limitation or elimination of liability of directors or officers of a
corporation to the corporation or its shareholders, the directors and officers
of this Corporation shall not be liable to the Corporation or its shareholders.
5.3 Indemnification of Directors and Officers. The Corporation shall
indemnify any individual who is, was or is threatened to be made a party to a
proceeding (including a proceeding by or in the right of the Corporation or by
or on behalf of its shareholders) because such individual is or was a director
or officer of the Corporation or because such individual is or was serving the
Corporation, or any other legal entity in any capacity at the request of the
Corporation while a director or officer of the Corporation, against all
liabilities and reasonable expenses incurred in the proceeding except such
liabilities and expenses as are incurred because of such individual's willful
misconduct or knowing violation of the criminal law. Service as a director or
officer of a legal entity controlled by the Corporation shall be deemed service
at the request of the Corporation. The determination that indemnification under
this
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<PAGE>
Section 5.3 is permissible and the evaluation as to the reasonableness of
expenses in a specific case shall be made, in the case of a director, as
provided by law, and in the case of an officer, as provided in Section 5.4 of
this Article; provided, however, that if a majority of the directors of the
Corporation has changed after the date of the alleged conduct giving rise to a
claim for indemnification, such determination and evaluation shall, at the
option of the person claiming indemnification, be made by special legal counsel
agreed upon by the Board of Directors and such person. Unless a determination
has been made that indemnification is not permissible, the Corporation shall
make advances and reimbursements for expenses incurred by a director or officer
in a proceeding upon receipt of an undertaking from such director or officer to
repay the same if it is ultimately determined that such director or officer is
not entitled to indemnification. Such undertaking shall be an unlimited,
unsecured general obligation of the director or officer and shall be accepted
without reference to such director's or officer's ability to make repayment. The
termination of a proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent shall not of itself create a
presumption that a director or officer acted in such a manner as to make such
director or officer ineligible for indemnification. The Corporation is
authorized to contract in advance to indemnify and make advances and
reimbursements for expenses to any of its directors or officers to the same
extent provided in this Section 5.3.
5.4 Indemnification of Others. The Corporation may, to a lesser extent
or to the same extent that it is required to provide indemnification and make
advances and reimbursements for expenses to its directors and officers pursuant
to Section 5.3, provide indemnification and make advances and reimbursements for
expenses to its employees and agents, the directors,
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<PAGE>
officers, employees and agents of its subsidiaries and predecessor entities, and
any person serving any other legal entity in any capacity at the request of the
Corporation, and may contract in advance to do so. The determination that
indemnification under this Section 5.4 is permissible, the authorization of such
indemnification and the evaluation as to the reasonableness of expenses in a
specific case shall be made as authorized from time to time by general or
specific action of the Board of Directors, which action may be taken before or
after a claim for indemnification is made, or as otherwise provided by law. No
person's rights under Section 5.3 of this Article shall be limited by the
provisions of this Section 5.4.
5.5 Miscellaneous. The rights of each person entitled to
indemnification under this Article shall inure to the benefit of such person's
heirs, executors and administrators. Special legal counsel selected to make
determinations under this Article may be counsel for the Corporation.
Indemnification pursuant to this Article shall not be exclusive of any other
right of indemnification to which any person may be entitled, including
indemnification pursuant to a valid contract, indemnification by legal entities
other than the Corporation and indemnification under policies of insurance
purchased and maintained by the Corporation or others. However, no person shall
be entitled to indemnification by the Corporation to the extent such person is
indemnified by another, including an insurer. The Corporation is authorized to
purchase and maintain insurance against any liability it may have under this
Article or to protect any of the persons named above against any liability
arising from their service to the Corporation or any other legal entity at the
request of the Corporation regardless of the Corporation's power to indemnify
against such liability. The provisions of this Article shall not be deemed to
preclude the Corporation from entering into contracts otherwise
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<PAGE>
permitted by law with any individuals or legal entities, including those named
above. If any provision of this Article or its application to any person or
circumstance is held invalid by a court of competent jurisdiction, the
invalidity shall not affect other provisions or applications of this Article,
and to this end the provisions of this Article are severable.
5.6 Amendments. The provisions of this Article shall be applicable from
and after its adoption even though some or all of the underlying conduct or
events relating to a proceeding may have occurred before its adoption. No
amendment, modification or repeal of this Article shall diminish the rights
provided hereunder to any person arising from conduct or events occurring before
the adoption of such amendment, modification or repeal.
Dated: November 19, 1997
By: /s/ Martin B. Richards
--------------------------------
Martin B. Richards, Incorporator
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Exhibit 10.13
APPLE LIMITED, INC.
BYLAWS
ARTICLE I
MEETINGS OF SHAREHOLDERS
1.1 PLACE AND TIME OF MEETINGS. Meetings of shareholders shall be held
at such place, either within or without the Commonwealth of Virginia, and at
such time as may be provided in the notice of the meeting and approved by the
President or the Board of Directors.
(A) ANNUAL MEETING. The annual meeting of shareholders shall
be held on the first Monday in April of each year or on such date as may be
designated by resolution of the Board of Directors from time to time for the
purpose of electing directors and conducting such other business as may properly
come before the meeting.
(B) SPECIAL MEETINGS. Special meetings of the shareholders may
be called by the President or the Board of Directors and shall be called by the
Secretary upon demand of shareholders as required by law. Only business within
the purpose or purposes described in the notice for a special meeting of
shareholders may be conducted at the meeting.
(C) RECORD DATES. The record date for determining shareholders
entitled to demand a special meeting is the date the first shareholder signs the
demand that the meeting be held.
Except as is provided in the preceding paragraph, the Board of
Directors may fix, in advance, a record date to make a determination of
shareholders for any purpose, such date to be not more than 70 days before the
meeting or action requiring a determination of
<PAGE>
shareholders. If no such record date is set, then the record date shall be the
close of business on the day before the date on which the first notice is given.
When a determination of shareholders entitled to notice of or to vote
at any meeting of shareholders has been made, such determination shall be
effective for any adjournment of the meeting unless the Board of Directors fixes
a new record date, which it shall do if the meeting is adjourned to a date more
than 120 days after the date fixed for the original meeting.
1.2 NOTICE OF MEETINGS. Written notice stating the place, day and hour
of each meeting of shareholders and, in case of a special meeting, the purpose
or purposes for which the meeting is called shall be given not less than 10 nor
more than 60 days before the date of the meeting (except when a different time
is required in these Bylaws or by law) either personally or by mail, telephone,
telegraph, teletype, telecopy or other form of wire or wireless communication,
or by private courier to each shareholder of record entitled to vote at such
meeting. If mailed, such notice shall be deemed to be effective when deposited
in first class United States mail with postage thereon prepaid and addressed to
the shareholder at his address as it appears on the share transfer books of the
Corporation. If given in any other manner, such notice shall be deemed to be
effective (i) when given personally or by telephone, (ii) when sent by
telegraph, teletype, telecopy or other form of wire or wireless communica tion
or (iii) when given to a private courier to be delivered.
If a meeting is adjourned to a different date, time or place, notice
need not be given if the new date, time or place is announced at the meeting
before adjournment. However, if a new record date for an adjourned meeting is
fixed, notice of the adjourned meeting shall be given to shareholders as of the
new record date unless a court provides otherwise.
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<PAGE>
1.3 WAIVER OF NOTICE; ATTENDANCE AT MEETING. A shareholder may waive
any notice required by law, the Articles of Incorporation or these Bylaws before
or after the date and time of the meeting that is the subject of such notice.
The waiver shall be in writing, be signed by the shareholder entitled to the
notice and be delivered to the Secretary for inclusion in the minutes or filing
with the corporate records.
A shareholder's attendance at a meeting (i) waives objection to lack of
notice or defective notice of the meeting unless the shareholder, at the
beginning of the meeting, objects to holding the meeting or transacting business
at the meeting and (ii) waives objection to consideration of a particular matter
at the meeting that is not within the purpose or purposes described in the
meeting notice unless the shareholder objects to considering the matter when it
is presented.
1.4 QUORUM AND VOTING REQUIREMENTS. Unless otherwise required by law, a
majority of the votes entitled to be cast on a matter constitutes a quorum for
action on that matter. Once a share is represented for any purpose at a meeting,
it is deemed present for quorum purposes for the remainder of the meeting and
for any adjournment of that meeting unless a new record date is or shall be set
for that adjourned meeting. If a quorum exists, action on a matter, other than
the election of directors, is approved if the votes cast favoring the action
exceed the votes cast opposing the action unless a greater number of affirmative
votes is required by law. Directors shall be elected by a plurality of the votes
cast by the shares entitled to vote in the election at a meeting at which a
quorum is present. Less than a quorum may adjourn a meeting.
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<PAGE>
1.5 ACTION WITHOUT MEETING. Action required or permitted to be taken at
a meeting of the shareholders may be taken without a meeting and without action
by the Board of Directors if the action is taken by all the shareholders
entitled to vote on the action. The action shall be evidenced by one or more
written consents describing the action taken, signed by all the shareholders
entitled to vote on the action and delivered to the Secretary for inclusion in
the minutes or filing with the corporate records. Action taken by unanimous
consent shall be effective according to its terms when all consents are in the
possession of the Corporation unless the consent specifies a different effective
date, in which event the action taken shall be effective as of the date
specified therein provided that the consent states the date of execution by each
shareholder. A shareholder may withdraw a consent only by delivering a written
notice of withdrawal to the Corporation prior to the time that all consents are
in the possession of the Corporation.
If not otherwise fixed pursuant to the provisions of Section 1.4, the
record date for determining shareholders entitled to take action without a
meeting is the date the first shareholder signs the consent described in the
preceding paragraph.
ARTICLE II
DIRECTORS
2.1 GENERAL POWERS. The Corporation shall have a Board of Directors.
All corporate powers shall be exercised by or under the authority of, and the
business and affairs of the Corporation managed under the direction of, its
Board of Directors, subject to any limitation set forth in the Articles of
Incorporation.
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<PAGE>
2.2 NUMBER, TERM AND ELECTION. The number of directors of the
Corporation shall be no less than one (1) and no more than five (5). This number
may be changed from time to time by amendment to these Bylaws to increase or
decrease by 30 percent or less the number of directors last elected by the
shareholders, but only the shareholders may increase or decrease the number by
more than 30 percent. A decrease in number shall not shorten the term of any
incumbent director. Each director shall hold office until his death,
resignation, retirement or removal or until his successor is elected.
Except as provided in Section 2.3 of this Article, the directors (other
than initial directors) shall be elected by the holders of the common shares at
the annual meeting of shareholders and those persons who receive the greatest
number of votes shall be deemed elected even though they do not receive a
majority of the votes cast. No individual shall be named or elected as a
director without his prior consent.
2.3 REMOVAL; VACANCIES. The shareholders may remove one or more
directors, with or without cause, if the number of votes cast for such removal
constitutes a majority of the votes entitled to be cast at an election of
directors. A director may be removed by the shareholders only at a meeting
called for the purpose of removing him and the meeting notice must state that
the purpose, or one of the purposes of the meeting, is removal of the director.
A vacancy on the Board of Directors, including a vacancy resulting from
the removal of a director or an increase in the number of directors, may be
filled by (i) the shareholders, (ii) the Board of Directors or (iii) the
affirmative vote of a majority of the remaining directors though less than a
quorum of the Board of Directors and may, in the case of a resignation that will
become effective at a specified later date, be filled before the vacancy occurs,
but the new
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<PAGE>
director may not take office until the vacancy occurs.
2.4 ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of
Directors, which shall be considered a regular meeting, shall be held
immediately following each annual meeting of shareholders for the purpose of
electing officers and carrying on such other business as may properly come
before the meeting. The Board of Directors may also adopt a schedule of
additional meetings which shall be considered regular meetings. Regular meetings
shall be held at such times and at such places, within or without the
Commonwealth of Virginia, as the President or the Board of Directors shall
designate from time to time. If no place is designated, regular meetings shall
be held at the principal office of the Corporation.
2.5 SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called by the President or a majority of the directors of the Corporation and
shall be held at such times and at such places, within or without the
Commonwealth of Virginia, as the person or persons calling the meetings shall
designate. If no such place is designated in the notice of a meeting, it shall
be held at the principal office of the Corporation.
2.6 NOTICE OF MEETINGS. No notice need be given of regular meetings of
the Board of Directors.
Notices of special meetings of the Board of Directors shall be given to
each director in person or delivered to his residence or business address (or
such other place as he may have directed in writing) not less than twenty-four
(24) hours before the meeting by mail, messenger, telecopy, telegraph, or other
means of written communication or by telephoning such notice to him. Any such
notice shall set forth the time and place of the meeting and state the purpose
for which it is called.
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<PAGE>
2.7 WAIVER OF NOTICE; ATTENDANCE AT MEETING. A director may waive any
notice required by law, the Articles of Incorporation or these Bylaws before or
after the date and time stated in the notice and such waiver shall be equivalent
to the giving of such notice. Except as provided in the next paragraph of this
section, the waiver shall be in writing, signed by the director entitled to the
notice and filed with the minutes or corporate records.
A director's attendance at or participation in a meeting waives any
required notice to him of the meeting unless the director, at the beginning of
the meeting or promptly upon his arrival, objects to holding the meeting or
transacting business at the meeting and does not thereafter vote for or assent
to action taken at the meeting.
2.8 QUORUM; VOTING. A majority of the number of directors fixed in
these Bylaws shall constitute a quorum for the transaction of business at a
meeting of the Board of Directors. If a quorum is present when a vote is taken,
the affirmative vote of a majority of the directors present is the act of the
Board of Directors. A director who is present at a meeting of the Board of
Directors or a committee of the Board of Directors when corporate action is
taken is deemed to have assented to the action taken unless (i) he objects, at
the beginning of the meeting or promptly upon his arrival, to holding it or
transacting specified business at the meeting or (ii) he votes against or
abstains from the action taken.
2.9 TELEPHONIC MEETINGS. The Board of Directors may permit any or all
directors to participate in a regular or special meeting by or conduct the
meeting through the use of any means of communication by which all directors
participating may simultaneously hear each other during the meeting. A director
participating in a meeting by this means is deemed to be present in person at
the meeting.
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<PAGE>
2.10 ACTION WITHOUT MEETING. Action required or permitted to be taken
at a meeting of the Board of Directors may be taken without a meeting if the
action is taken by all members of the Board. The action shall be evidenced by
one or more written consents stating the action taken, signed by each director
either before or after the action is taken and included in the minutes or filed
with the corporate records. Action taken under this section shall be effective
when the last director signs the consent unless the consent specifies a
different effective date, in which event the action taken is effective as of the
date specified therein, provided the consent states the date of execution by
each director.
2.11 COMPENSATION. The Board of Directors may fix the compensation of
directors and may provide for the payment of all expenses incurred by them in
attending meetings of the Board of Directors.
ARTICLE III
OFFICERS
3.1 OFFICERS. The officers of the Corporation shall be a President, a
Secretary, and a Treasurer, and, in the discretion of the Board of Directors,
one or more Vice Presidents and such other officers as may be deemed necessary
or advisable to carry on the business of the Corporation. Any two or more
offices may be held by the same person.
3.2 ELECTION; TERM. Officers shall be elected at the annual meeting of
the Board of Directors and may be elected at such other time or times as the
Board of Directors shall deter mine. They shall hold office, unless removed,
until the next annual meeting of the Board of Directors or until their
successors are elected. Any officer may resign at any time upon
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<PAGE>
written notice to the Board of Directors and such resignation shall be effective
when notice is delivered unless the notice specifies a later effective date.
3.3 REMOVAL OF OFFICERS. The Board of Directors may remove any officer
at any time, with or without cause.
3.4 DUTIES OF OFFICERS. The President shall be the Chief Executive
Officer of the Corporation. He and the other officers shall have such powers and
duties as generally pertain to their respective offices as well as such powers
and duties as may be delegated to them from time to time by the Board of
Directors. The Chief Executive Officer, if he is present, shall be chairman of
all meetings of the shareholders, the Board of Directors and any committee of
which he is a member.
ARTICLE IV
SHARE CERTIFICATES
4.1 FORM. Shares of the Corporation shall, when fully paid, be
evidenced by certificates containing such information as is required by law and
approved by the Board of Directors. Certificates shall be signed by the
President and the Secretary and may (but need not) be sealed with the seal of
the Corporation. The seal of the Corporation and any or all signatures on a
share certificate may be facsimile. If any officer who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer before such certificate is issued it may be issued by the
Corporation with the same effect as if he were such officer on the date of
issue.
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<PAGE>
4.2 TRANSFER. The Board of Directors may make rules and regulations
concerning the issue, registration and transfer of certificates representing the
shares of the Corporation. Transfers of shares and of the certificates
representing such shares shall be made upon the books of the Corporation by
surrender of the certificates representing such shares accompanied by written
assignments given by the owners or their attorneys-in-fact.
4.3 RESTRICTIONS ON TRANSFER. A lawful restriction on the transfer or
registration of transfer of shares is valid and enforceable against the holder
or a transferee of the holder if the restriction complies with the requirements
of law and its existence is noted conspicuously on the front or back of the
certificate representing the shares. Unless so noted, a restriction is not
enforceable against a person without knowledge of the restriction.
4.4 LOST OR DESTROYED SHARE CERTIFICATES. The Corporation may issue a
new share certificate in the place of any certificate theretofore issued which
is alleged to have been lost or destroyed and may require the owner of such
certificate, or his legal representative, to give the Corporation a bond, with
or without surety, or such other agreement, undertaking or security as the Board
of Directors shall determine is appropriate, to indemnify the Corporation
against any claim that may be made against it on account of the alleged loss or
destruction or the issuance of any such new certificate.
ARTICLE V
MISCELLANEOUS PROVISIONS
5.1 FISCAL YEAR. The fiscal year of the Corporation shall be determined
in the discretion of the Board of Directors, but in the absence of any such
determination it shall be
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<PAGE>
the calendar year.
5.2 AMENDMENTS. These Bylaws may be amended or repealed, and new Bylaws
may be made at any regular or special meeting of the Board of Directors. Bylaws
made by the Board of Directors may be repealed or changed and new Bylaws may be
made by the shareholders, and the shareholders may prescribe that any Bylaw made
by them shall not be altered, amended or repealed by the Board of Directors.
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Exhibit 10.14
APPLE GENERAL, INC.
ARTICLES OF INCORPORATION
ARTICLE I
NAME
The name of the Corporation is Apple General, Inc.
ARTICLE II
PURPOSE
The Corporation is organized to engage in any lawful business not
required by the Virginia Stock Corporation Act to be stated in the Articles of
Incorporation.
ARTICLE III
AUTHORIZED SHARES
3.1 Number and Designation. The number and designation of shares that
the Corporation shall have authority to issue and the par value per share are as
follows:
Class Number of Shares Par Value
----- ---------------- ---------
Common 5,000 $1.00
3.2 Preemptive Rights. No holder of outstanding shares shall have any
preemptive right with respect to (i) any shares of any class of the Corporation,
whether now or hereafter authorized, (ii) any warrants, rights or options to
purchase any such shares, or (iii) any obligations convertible into any such
shares or into warrants, rights or options to purchase any such shares.
<PAGE>
3.3 Voting; Distributions. The holders of Common Shares shall have
unlimited voting rights and are entitled to receive the net assets of the
Corporation upon the liquidation, dissolution or winding up of the affairs of
the Corporation.
ARTICLE IV
REGISTERED OFFICE AND REGISTERED AGENT
The address of the initial registered office of the Corporation, which
is located in the City of Richmond, Virginia, is McGuire, Woods, Battle &
Boothe, L.L.P. 901 East Cary Street, One James Center, Richmond, Virginia 23219.
The initial registered agent of the Corporation is Martin B. Richards, whose
business office is identical with the registered office and who is a resident of
Virginia and a member of the Virginia State Bar.
ARTICLE V
LIMIT ON LIABILITY AND INDEMNIFICATION
5.1 Definitions. For purposes of this Article the following
definitions shall apply:
(i) "Corporation" means this Corporation only and no
predecessor entity or other legal entity.
(ii) "expenses" include counsel fees, expert witness fees, and
costs of investigation, litigation, and appeal, as well as any amounts
expended in asserting a claim for indemnification;
(iii) "liability" means the obligation to pay a judgment,
settlement, penalty, fine, or other such obligation, including, without
limitation, any excise tax assessed with respect to an employee benefit
plan;
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<PAGE>
(iv) "legal entity" means a corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise;
(v) "predecessor entity" means a legal entity the existence of
which ceased upon its acquisition by the Corporation in a merger or
otherwise; and
(vi) "proceeding" means any threatened, pending or completed
action, suit, proceeding or appeal whether civil, criminal,
administrative or investigative and whether formal or informal.
5.2 Limit on Liability. In every instance in which the Virginia Stock
Corporation Act, as it exists on the date hereof or may hereafter be amended,
permits the limitation or elimination of liability of directors or officers of a
corporation to the corporation or its shareholders, the directors and officers
of this Corporation shall not be liable to the Corporation or its shareholders.
5.3 Indemnification of Directors and Officers. The Corporation shall
indemnify any individual who is, was or is threatened to be made a party to a
proceeding (including a proceeding by or in the right of the Corporation or by
or on behalf of its shareholders) because such individual is or was a director
or officer of the Corporation or because such individual is or was serving the
Corporation, or any other legal entity in any capacity at the request of the
Corporation while a director or officer of the Corporation, against all
liabilities and reasonable expenses incurred in the proceeding except such
liabilities and expenses as are incurred because of such individual's willful
misconduct or knowing violation of the criminal law. Service as a director or
officer of a legal entity controlled by the Corporation shall be deemed service
at the request of the Corporation. The determination that indemnification under
this
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<PAGE>
Section 5.3 is permissible and the evaluation as to the reasonableness of
expenses in a specific case shall be made, in the case of a director, as
provided by law, and in the case of an officer, as provided in Section 5.4 of
this Article; provided, however, that if a majority of the directors of the
Corporation has changed after the date of the alleged conduct giving rise to a
claim for indemnification, such determination and evaluation shall, at the
option of the person claiming indemnification, be made by special legal counsel
agreed upon by the Board of Directors and such person. Unless a determination
has been made that indemnification is not permissible, the Corporation shall
make advances and reimbursements for expenses incurred by a director or officer
in a proceeding upon receipt of an undertaking from such director or officer to
repay the same if it is ultimately determined that such director or officer is
not entitled to indemnification. Such undertaking shall be an unlimited,
unsecured general obligation of the director or officer and shall be accepted
without reference to such director's or officer's ability to make repayment. The
termination of a proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent shall not of itself create a
presumption that a director or officer acted in such a manner as to make such
director or officer ineligible for indemnification. The Corporation is
authorized to contract in advance to indemnify and make advances and
reimbursements for expenses to any of its directors or officers to the same
extent provided in this Section 5.3.
5.4 Indemnification of Others. The Corporation may, to a lesser extent
or to the same extent that it is required to provide indemnification and make
advances and reimbursements for expenses to its directors and officers pursuant
to Section 5.3, provide indemnification and make advances and reimbursements for
expenses to its employees and agents, the directors,
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<PAGE>
officers, employees and agents of its subsidiaries and predecessor entities, and
any person serving any other legal entity in any capacity at the request of the
Corporation, and may contract in advance to do so. The determination that
indemnification under this Section 5.4 is permissible, the authorization of such
indemnification and the evaluation as to the reasonableness of expenses in a
specific case shall be made as authorized from time to time by general or
specific action of the Board of Directors, which action may be taken before or
after a claim for indemnification is made, or as otherwise provided by law. No
person's rights under Section 5.3 of this Article shall be limited by the
provisions of this Section 5.4.
5.5 Miscellaneous. The rights of each person entitled to
indemnification under this Article shall inure to the benefit of such person's
heirs, executors and administrators. Special legal counsel selected to make
determinations under this Article may be counsel for the Corporation.
Indemnification pursuant to this Article shall not be exclusive of any other
right of indemnification to which any person may be entitled, including
indemnification pursuant to a valid contract, indemnification by legal entities
other than the Corporation and indemnification under policies of insurance
purchased and maintained by the Corporation or others. However, no person shall
be entitled to indemnification by the Corporation to the extent such person is
indemnified by another, including an insurer. The Corporation is authorized to
purchase and maintain insurance against any liability it may have under this
Article or to protect any of the persons named above against any liability
arising from their service to the Corporation or any other legal entity at the
request of the Corporation regardless of the Corporation's power to indemnify
against such liability. The provisions of this Article shall not be deemed to
preclude the Corporation from entering into contracts otherwise
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<PAGE>
permitted by law with any individuals or legal entities, including those named
above. If any provision of this Article or its application to any person or
circumstance is held invalid by a court of competent jurisdiction, the
invalidity shall not affect other provisions or applications of this Article,
and to this end the provisions of this Article are severable.
5.6 Amendments. The provisions of this Article shall be applicable from
and after its adoption even though some or all of the underlying conduct or
events relating to a proceeding may have occurred before its adoption. No
amendment, modification or repeal of this Article shall diminish the rights
provided hereunder to any person arising from conduct or events occurring before
the adoption of such amendment, modification or repeal.
Dated: December 3, 1997
By: /s/ Martin B. Richards
--------------------------------
Martin B. Richards, Incorporator
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Exhibit 10.15
APPLE GENERAL, INC.
BYLAWS
ARTICLE I
MEETINGS OF SHAREHOLDERS
1.1 PLACE AND TIME OF MEETINGS. Meetings of shareholders shall be held
at such place, either within or without the Commonwealth of Virginia, and at
such time as may be provided in the notice of the meeting and approved by the
President or the Board of Directors.
(A) ANNUAL MEETING. The annual meeting of shareholders shall
be held on the first Monday in April of each year or on such date as may be
designated by resolution of the Board of Directors from time to time for the
purpose of electing directors and conducting such other business as may properly
come before the meeting.
(B) SPECIAL MEETINGS. Special meetings of the shareholders may
be called by the President or the Board of Directors and shall be called by the
Secretary upon demand of shareholders as required by law. Only business within
the purpose or purposes described in the notice for a special meeting of
shareholders may be conducted at the meeting.
(C) RECORD DATES. The record date for determining shareholders
entitled to demand a special meeting is the date the first shareholder signs the
demand that the meeting be held.
Except as is provided in the preceding paragraph, the Board of
Directors may fix, in advance, a record date to make a determination of
shareholders for any purpose, such date to be not more than 70 days before the
meeting or action requiring a determination of
<PAGE>
shareholders. If no such record date is set, then the record date shall be the
close of business on the day before the date on which the first notice is given.
When a determination of shareholders entitled to notice of or to vote
at any meeting of shareholders has been made, such determination shall be
effective for any adjournment of the meeting unless the Board of Directors fixes
a new record date, which it shall do if the meeting is adjourned to a date more
than 120 days after the date fixed for the original meeting.
1.2 NOTICE OF MEETINGS. Written notice stating the place, day and hour
of each meeting of shareholders and, in case of a special meeting, the purpose
or purposes for which the meeting is called shall be given not less than 10 nor
more than 60 days before the date of the meeting (except when a different time
is required in these Bylaws or by law) either personally or by mail, telephone,
telegraph, teletype, telecopy or other form of wire or wireless communication,
or by private courier to each shareholder of record entitled to vote at such
meeting. If mailed, such notice shall be deemed to be effective when deposited
in first class United States mail with postage thereon prepaid and addressed to
the shareholder at his address as it appears on the share transfer books of the
Corporation. If given in any other manner, such notice shall be deemed to be
effective (i) when given personally or by telephone, (ii) when sent by
telegraph, teletype, telecopy or other form of wire or wireless communica tion
or (iii) when given to a private courier to be delivered.
If a meeting is adjourned to a different date, time or place, notice
need not be given if the new date, time or place is announced at the meeting
before adjournment. However, if a new record date for an adjourned meeting is
fixed, notice of the adjourned meeting shall be
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<PAGE>
given to shareholders as of the new record date unless a court provides
otherwise.
1.3 WAIVER OF NOTICE; ATTENDANCE AT MEETING. A shareholder may waive
any notice required by law, the Articles of Incorporation or these Bylaws before
or after the date and time of the meeting that is the subject of such notice.
The waiver shall be in writing, be signed by the shareholder entitled to the
notice and be delivered to the Secretary for inclusion in the minutes or filing
with the corporate records.
A shareholder's attendance at a meeting (i) waives objection to lack of
notice or defective notice of the meeting unless the shareholder, at the
beginning of the meeting, objects to holding the meeting or transacting business
at the meeting and (ii) waives objection to consideration of a particular matter
at the meeting that is not within the purpose or purposes described in the
meeting notice unless the shareholder objects to considering the matter when it
is presented.
1.4 QUORUM AND VOTING REQUIREMENTS. Unless otherwise required by law, a
majority of the votes entitled to be cast on a matter constitutes a quorum for
action on that matter. Once a share is represented for any purpose at a meeting,
it is deemed present for quorum purposes for the remainder of the meeting and
for any adjournment of that meeting unless a new record date is or shall be set
for that adjourned meeting. If a quorum exists, action on a matter, other than
the election of directors, is approved if the votes cast favoring the action
exceed the votes cast opposing the action unless a greater number of affirmative
votes is required by law. Directors shall be elected by a plurality of the votes
cast by the shares entitled to vote in the election at a meeting at which a
quorum is present. Less than a quorum may adjourn a meeting.
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<PAGE>
1.5 ACTION WITHOUT MEETING. Action required or permitted to be taken at
a meeting of the shareholders may be taken without a meeting and without action
by the Board of Directors if the action is taken by all the shareholders
entitled to vote on the action. The action shall be evidenced by one or more
written consents describing the action taken, signed by all the shareholders
entitled to vote on the action and delivered to the Secretary for inclusion in
the minutes or filing with the corporate records. Action taken by unanimous
consent shall be effective according to its terms when all consents are in the
possession of the Corporation unless the consent specifies a different effective
date, in which event the action taken shall be effective as of the date
specified therein provided that the consent states the date of execution by each
shareholder. A shareholder may withdraw a consent only by delivering a written
notice of withdrawal to the Corporation prior to the time that all consents are
in the possession of the Corporation.
If not otherwise fixed pursuant to the provisions of Section 1.4, the
record date for determining shareholders entitled to take action without a
meeting is the date the first shareholder signs the consent described in the
preceding paragraph.
ARTICLE II
DIRECTORS
2.1 GENERAL POWERS. The Corporation shall have a Board of Directors.
All corporate powers shall be exercised by or under the authority of, and the
business and affairs of the Corporation managed under the direction of, its
Board of Directors, subject to any limitation set forth in the Articles of
Incorporation.
2.2 NUMBER, TERM AND ELECTION. The number of directors of the
Corporation shall
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<PAGE>
be no less than one (1) and no more than five (5). This number may be changed
from time to time by amendment to these Bylaws to increase or decrease by 30
percent or less the number of directors last elected by the shareholders, but
only the shareholders may increase or decrease the number by more than 30
percent. A decrease in number shall not shorten the term of any incumbent
director. Each director shall hold office until his death, resignation,
retirement or removal or until his successor is elected.
Except as provided in Section 2.3 of this Article, the directors (other
than initial directors) shall be elected by the holders of the common shares at
the annual meeting of shareholders and those persons who receive the greatest
number of votes shall be deemed elected even though they do not receive a
majority of the votes cast. No individual shall be named or elected as a
director without his prior consent.
2.3 REMOVAL; VACANCIES. The shareholders may remove one or more
directors, with or without cause, if the number of votes cast for such removal
constitutes a majority of the votes entitled to be cast at an election of
directors. A director may be removed by the shareholders only at a meeting
called for the purpose of removing him and the meeting notice must state that
the purpose, or one of the purposes of the meeting, is removal of the director.
A vacancy on the Board of Directors, including a vacancy resulting from the
removal of a director or an increase in the number of directors, may be filled
by (i) the shareholders, (ii) the Board of Directors or (iii) the affirmative
vote of a majority of the remaining directors though less than a quorum of the
Board of Directors and may, in the case of a resignation that will become
effective at a specified later date, be filled before the vacancy occurs, but
the new director may not take office until the vacancy occurs.
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<PAGE>
2.4 ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of
Directors, which shall be considered a regular meeting, shall be held
immediately following each annual meeting of shareholders for the purpose of
electing officers and carrying on such other business as may properly come
before the meeting. The Board of Directors may also adopt a schedule of
additional meetings which shall be considered regular meetings. Regular meetings
shall be held at such times and at such places, within or without the
Commonwealth of Virginia, as the President or the Board of Directors shall
designate from time to time. If no place is designated, regular meetings shall
be held at the principal office of the Corporation.
2.5 SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called by the President or a majority of the directors of the Corporation and
shall be held at such times and at such places, within or without the
Commonwealth of Virginia, as the person or persons calling the meetings shall
designate. If no such place is designated in the notice of a meeting, it shall
be held at the principal office of the Corporation.
2.6 NOTICE OF MEETINGS. No notice need be given of regular meetings of
the Board of Directors.
Notices of special meetings of the Board of Directors shall be given to
each director in person or delivered to his residence or business address (or
such other place as he may have directed in writing) not less than twenty-four
(24) hours before the meeting by mail, messenger, telecopy, telegraph, or other
means of written communication or by telephoning such notice to him. Any such
notice shall set forth the time and place of the meeting and state the purpose
for which it is called.
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<PAGE>
2.7 WAIVER OF NOTICE; ATTENDANCE AT MEETING. A director may waive any
notice required by law, the Articles of Incorporation or these Bylaws before or
after the date and time stated in the notice and such waiver shall be equivalent
to the giving of such notice. Except as provided in the next paragraph of this
section, the waiver shall be in writing, signed by the director entitled to the
notice and filed with the minutes or corporate records.
A director's attendance at or participation in a meeting waives any
required notice to him of the meeting unless the director, at the beginning of
the meeting or promptly upon his arrival, objects to holding the meeting or
transacting business at the meeting and does not thereafter vote for or assent
to action taken at the meeting.
2.8 QUORUM; VOTING. A majority of the number of directors fixed in
these Bylaws shall constitute a quorum for the transaction of business at a
meeting of the Board of Directors. If a quorum is present when a vote is taken,
the affirmative vote of a majority of the directors present is the act of the
Board of Directors. A director who is present at a meeting of the Board of
Directors or a committee of the Board of Directors when corporate action is
taken is deemed to have assented to the action taken unless (i) he objects, at
the beginning of the meeting or promptly upon his arrival, to holding it or
transacting specified business at the meeting or (ii) he votes against or
abstains from the action taken.
2.9 TELEPHONIC MEETINGS. The Board of Directors may permit any or all
directors to participate in a regular or special meeting by or conduct the
meeting through the use of any means of communication by which all directors
participating may simultaneously hear each other during the meeting. A director
participating in a meeting by this means is deemed to be present in person at
the meeting.
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<PAGE>
2.10 ACTION WITHOUT MEETING. Action required or permitted to be taken
at a meeting of the Board of Directors may be taken without a meeting if the
action is taken by all members of the Board. The action shall be evidenced by
one or more written consents stating the action taken, signed by each director
either before or after the action is taken and included in the minutes or filed
with the corporate records. Action taken under this section shall be effective
when the last director signs the consent unless the consent specifies a
different effective date, in which event the action taken is effective as of the
date specified therein, provided the consent states the date of execution by
each director.
2.11 COMPENSATION. The Board of Directors may fix the compensation of
directors and may provide for the payment of all expenses incurred by them in
attending meetings of the Board of Directors.
ARTICLE III
OFFICERS
3.1 OFFICERS. The officers of the Corporation shall be a President, a
Secretary, and a Treasurer, and, in the discretion of the Board of Directors,
one or more Vice Presidents and such other officers as may be deemed necessary
or advisable to carry on the business of the Corporation.
Any two or more offices may be held by the same person.
3.2 ELECTION; TERM. Officers shall be elected at the annual meeting of
the Board of Directors and may be elected at such other time or times as the
Board of Directors shall determine. They shall hold office, unless removed,
until the next annual meeting of the Board of Directors or until their
successors are elected. Any officer may resign at any time upon written notice
to the Board of Directors and such resignation shall be effective
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<PAGE>
when notice is delivered unless the notice specifies a later effective date.
3.3 REMOVAL OF OFFICERS. The Board of Directors may remove any officer
at any time, with or without cause.
3.4 DUTIES OF OFFICERS. The President shall be the Chief Executive
Officer of the Corporation. He and the other officers shall have such powers and
duties as generally pertain to their respective offices as well as such powers
and duties as may be delegated to them from time to time by the Board of
Directors. The Chief Executive Officer, if he is present, shall be chairman of
all meetings of the shareholders, the Board of Directors and any committee of
which he is a member.
ARTICLE IV
SHARE CERTIFICATES
4.1 FORM. Shares of the Corporation shall, when fully paid, be
evidenced by certificates containing such information as is required by law and
approved by the Board of Directors. Certifi cates shall be signed by the
President and the Secretary and may (but need not) be sealed with the seal of
the Corporation. The seal of the Corporation and any or all signatures on a
share certificate may be facsimile. If any officer who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer before such certificate is issued it may be issued by the
Corporation with the same effect as if he were such officer on the date of
issue.
4.2 TRANSFER. The Board of Directors may make rules and regulations
concerning the issue, registration and transfer of certificates representing the
shares of the Corporation. Transfers of shares and of the certificates
representing such shares shall be made upon the books of the
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<PAGE>
Corporation by surrender of the certificates representing such shares
accompanied by written assignments given by the owners or their
attorneys-in-fact.
4.3 RESTRICTIONS ON TRANSFER. A lawful restriction on the transfer or
registration of transfer of shares is valid and enforceable against the holder
or a transferee of the holder if the restriction complies with the requirements
of law and its existence is noted conspicuously on the front or back of the
certificate representing the shares. Unless so noted, a restriction is not
enforceable against a person without knowledge of the restriction.
4.4 LOST OR DESTROYED SHARE CERTIFICATES. The Corporation may issue a
new share certificate in the place of any certificate theretofore issued which
is alleged to have been lost or destroyed and may require the owner of such
certificate, or his legal representative, to give the Corporation a bond, with
or without surety, or such other agreement, undertaking or security as the Board
of Directors shall determine is appropriate, to indemnify the Corporation
against any claim that may be made against it on account of the alleged loss or
destruction or the issuance of any such new certificate.
ARTICLE V
MISCELLANEOUS PROVISIONS
5.1 FISCAL YEAR. The fiscal year of the Corporation shall be determined
in the discretion of the Board of Directors, but in the absence of any such
determination it shall be the calendar year.
5.2 AMENDMENTS. These Bylaws may be amended or repealed, and new Bylaws
may be made at any regular or special meeting of the Board of Directors. Bylaws
made by the Board of Directors may be repealed or changed and new Bylaws may be
made by the
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<PAGE>
shareholders, and the shareholders may prescribe that any Bylaw made by them
shall not be altered, amended or repealed by the Board of Directors.
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Exhibit 10.16
CERTIFICATE OF LIMITED PARTNERSHIP
OF
APPLE LIMITED PARTNERSHIP
Apple General, Inc., a Virginia corporation, is the general partner of
Apple Limited Partnership (the "Partnership").
The General Partner submits this Certificate of Limited Partnership for
filing in the office of the Virginia State Corporation Commission in accordance
with ss. 50-73.11 of the Virginia Revised Uniform Limited Partnership Act (the
"Act"):
1. The name of the Partnership is Apple Limited Partnership.
2. (a) The post office and street address of the office of the
Partnership at which the records of the Partnership required to be maintained by
ss. 50-73.8 of the Act shall be kept is as follows:
306 East Main Street
Richmond, Virginia 23219
(b) The registered agent of the Partnership is Martin B.
Richards, who is a resident of Virginia and a member of the Virginia State Bar.
The post office address of the registered agent is c/o McGuire, Woods, Battle &
Boothe, L.L.P., One James Center, 901 East Cary Street, Richmond, Virginia
23219. This address is in the City of Richmond, Virginia.
3. The name and post office address of the General Partner are as
follows:
Apple General, Inc.
(a Virginia corporation)
306 East Main Street
Richmond, Virginia 23219
4. The Partnership shall be dissolved and its affairs wound up on
December 31, 2100 or at such earlier time as is required by law or the agreement
of limited partnership of the Partnership.
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<PAGE>
IN WITNESS WHEREOF, the General Partner has executed this Certificate
of Limited Partnership as of December 8, 1997.
APPLE GENERAL, INC.
By: /s/ Stanley J. Olander, Jr.
---------------------------
Name: Stanley J. Olander, Jr.
Title: Vice President
2
<PAGE>
AMENDMENT TO THE
CERTIFICATE OF LIMITED PARTNERSHIP
OF
APPLE LIMITED PARTNERSHIP]
(the "Partnership")
The undersigned general partner of the Partnership (the "General
Partner") submits this Amendment to the Certificate of Limited Partnership of
the Partnership for filing in the office of the Virginia State Corporation
Commission in accordance with ss. 50-73.12 of the Virginia Revised Uniform
Limited Partnership Act (the "Act"):
1. The name of the Partnership is Apple Limited Partnership.
2. The Partnership's identification number is L014527-8. The filing
date of the Partnership's initial certificate of limited partnership was
December 10, 1997.
3. The name of the Partnership is changed to Apple REIT Limited
Partnership.
IN WITNESS WHEREOF, the General Partner has executed this Amendment to
the Certificate of Limited Partnership of the Partnership as of December 17,
1997.
APPLE GENERAL, INC.
By:/s/ Stanley J. Olander, Jr.
---------------------------
Name: Stanley J. Olander, Jr.
Title: Vice President
3
Exhibit 10.17
LIMITED PARTNERSHIP AGREEMENT
OF
APPLE REIT LIMITED PARTNERSHIP
This LIMITED PARTNERSHIP AGREEMENT (the "Partnership Agreement"), is
made as of December 10, 1997, by and between Apple General, Inc., a Virginia
corporation, the general partner ("General Partner") and Apple Limited, Inc., a
Virginia corporation, the limited partner ("Limited Partner" and together with
the General Partner, the "Partners").
INTRODUCTION
A. The General Partner and the Limited Partner have agreed to form a
limited partnership (the "Partnership") pursuant to the provisions of the
"Virginia Revised Uniform Limited Partnership Act" (the "Act"). The existence of
the Partnership shall commence upon the filing of a certificate of limited
partnership with the Virginia State Corporation Commission (the "Commission").
B. The rights, duties and obligations of the Partners shall be governed
by the Act except as otherwise provided in this Partnership Agreement. The term
"Person," as used herein, means an individual or an entity.
ARTICLE I
ORGANIZATIONAL MATTERS
1.1 NAME. The name of the Partnership is Apple REIT Limited
Partnership. The Partnership was originally formed under the name "Apple Limited
Partnership" and the name of the Partnership was changed to "Apple REIT Limited
Partnership" effective December 19, 1997.
1.2 PURPOSE. The Partnership is formed to hold real estate and other
assets and to engage in any and all activities related or incidental thereto or
agreed to by the Partners from time to time provided, however, such activities
shall be limited to and conducted in such a manner as to permit Apple
Residential Income Trust, Inc. (the "Apple REIT") at all times to qualify as a
real estate investment trust ("REIT") under sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code").
1.3 FILINGS.
(a) The Partnership has filed with the Commission a
certificate of limited partnership (the "Certificate") pursuant to Va Code ss.
50-73.11.
(b) The Certificate designates 306 East Main Street, Richmond,
Virginia 23219 as the principal office (the "Principal Office") of the
Partnership. It designates c/o McGuire, Woods, Battle & Boothe, L.L.P., One
James Center, 901 East Cary Street, Richmond, Virginia 23219 as its registered
office (the "Registered Office") and Martin B. Richards, Esq., at that address,
as its registered agent (the "Registered Agent").
<PAGE>
ARTICLE II
MANAGEMENT
2.1 THE GENERAL PARTNER. The General Partner shall have the sole and
exclusive right, duty and power to manage the business of the Partnership,
including, without limitation, the right and power to:
(i) acquire, hold, sell, maintain, encumber, improve,
develop or lease Partnership property, real or personal, and any
interest therein on such terms and conditions as the General Partner
deems advisable;
(ii) borrow money on behalf of the Partnership,
secure any such borrowings with Partnership assets, and repay the same
at any time or from time to time;
(iii) establish investment accounts for the
Partnership and deposit and withdraw funds in or from such accounts;
(iv) assign, compromise or release any claim of, or
debt due, the Partnership;
(v) institute and defend actions at law or in equity
on behalf of the Partnership and consent to arbitrate any disputes or
controversies of the Partnership;
(vi) engage and retain accountants, lawyers and other
professional persons to perform services for the Partnership, and
purchase such goods and other services as may be required to conduct
the business of the Partnership; and
(vii) enter into such contracts and perform such
other acts as may be necessary to further the business of the
Partnership.
2.2 LIMITATIONS ON POWER AND AUTHORITY. Notwithstanding anything to the
contrary in this Partnership Agreement, the General Partner's rights, authority
and power are subject to and limited by certain provisions of the Bylaws of the
Apple REIT (including Article XIII therein) and actions described in such Bylaws
(including such Article) may only be undertaken in compliance with the
provisions thereof, including the obtaining of any consents referred to therein.
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<PAGE>
ARTICLE III
LIMITED PARTNERS
3.1 PARTICIPATION IN MANAGEMENT. The Limited Partner shall not
participate in the management or control of the business of the Partnership, and
shall have no power to sign for or bind the Partnership.
ARTICLE IV
CAPITAL; PROFITS AND LOSSES; COMPENSATION; DISTRIBUTIONS
4.1 CAPITAL CONTRIBUTIONS. Each of the Partners has contributed to the
capital of the Partnership the property set forth on Schedule A. The Partners
shall not be required to make any additional capital contributions except as
required by law. No Partner shall have any right to require the return of all or
any part of its capital, or to receive interest with respect thereto.
4.2 CAPITAL ACCOUNTS. A separate capital account ("Capital Account")
shall be maintained for each Partner. The value of each Capital Account shall be
the sum of the cash contributions to the account, the agreed upon value of
contributions of property to the account and the share of Partnership profits
allocated to the account, less all distributions made from the account and the
share of Partnership losses allocated to the account.
4.3 PROFITS AND LOSSES. The net profits and net losses of the
Partnership for any period (except for the profits and losses upon dissolution)
shall be credited or charged to the Capital Accounts of the Partners in the
percentages set forth on Schedule A under the heading "Partners' Percentages"
(as the same may be amended from time to time, the "Partners' Percentages").
4.4 DISTRIBUTIONS. Any cash which, in the opinion of the General
Partner, is not reasonably required for the operation of the business of the
Partnership or for Partnership reserves (other than amounts distributed upon
dissolution) shall be distributed to the Partners in accordance with the
Partners' Percentages not less frequently than each calendar quarter. Other
distributions of assets may be made from time to time in the same manner.
4.5 REIT DISTRIBUTIONS. Notwithstanding anything to the contrary in
this Agreement, the General Partner shall cause the Partnership to distribute
amounts sufficient to enable the Apple REIT to pay its shareholders dividends
that will allow the Apple REIT to (i) meet the distribution requirement for
qualification as a REIT as set forth in Section 857(a)(1) of the Code and (ii)
avoid any federal income or excise tax liability imposed by the Code.
4.6 LOANS. A loan by a Partner to the Partnership shall not be
considered a capital contribution and shall be repaid as debt of the
Partnership.
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<PAGE>
ARTICLE V
INDEMNIFICATION
5.1 INDEMNIFICATION.
(a) The Partnership shall indemnify each Partner (and each
director and officer of a Partner) who was, is or is threatened to be made a
party to any action, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, and whether formal or informal (a
"Proceeding"), (i) solely by reason of being or having been a Partner or a
director or officer of a Partner or (ii) as a result of having served at the
request of the Partnership as a fiduciary for an employee benefit or other plan
related to the business of the Partnership, against any liability and reasonable
expenses (including reasonable attorney's fees), incurred as a result of such
Proceeding, except such liabilities and expenses which are incurred as a result
of a breach of this Partnership Agreement, willful misconduct or a knowing
violation of the law.
(b) The Partnership shall promptly make advances or
reimbursements for reasonable expenses (including attorney's fees) incurred by
any Partner or a director or officer of a Partner claiming indemnification under
this Article unless it has been determined that such Partner, director or
officer is not entitled to indemnification. Advances or reimbursements made in
advance of any such determination shall be conditioned upon receipt from the
Partner, director or officer claiming indemnification of a written undertaking
to repay the amount of such advances or reimbursements if it is ultimately
determined that such Partner, director or officer is not entitled to
indemnification.
ARTICLE VI
EVENTS OF DISSOLUTION
6.1 EVENTS OF DISSOLUTION. The Partnership shall be dissolved:
(i) upon the election of the General Partner;
(ii) at such time as there is no General Partner
serving unless, within 90 days, the Limited Partner consents to
continue the business of the Partnership and appoints one or more
General Partners;
(iii) upon automatic cancellation of the certificate
of limited partnership for failure to pay annual registration fees,
unless steps to obtain reinstatement are promptly taken; or
(iv) by judicial decree.
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<PAGE>
ARTICLE VII
DISSOLUTION, WINDING UP AND TERMINATION
7.1 GENERAL. Upon dissolution without continuation, the business of the
Partnership shall be wound up by the General Partner or, if there is no General
Partner, by a representative designated by the Limited Partner (either or which
of whom is hereinafter referred to as the "Liquidating Representative"). The
Liquidating Representative shall proceed with reasonable promptness to liquidate
the business and assets of the Partnership and may determine whether and to
which Partners properties should be distributed in kind. Partnership assets
shall be distributed in the following order:
(i) to creditors of the Partnership, including
Partners who are creditors, in the order of priority provided by law;
(ii) to the creation of such reserves for
contingencies as the Liquidating Representative may deem necessary or
advisable;
(iii) to the Limited Partner to the extent of its
contribution to capital;
(iv) to the General Partner to the extent of its
contribution to capital;
(v) to the partners, General and Limited, according
to their Capital Account balances, after all adjustments.
ARTICLE VIII
MISCELLANEOUS
8.1 BOOKS OF ACCOUNT AND RECORDS. The Partnership shall keep complete
books of account at the Principal Office which shall be open to examination by
the Partners, the Apple REIT and their authorized representatives during normal
business hours. The books shall be kept on a cash or accrual basis, as
determined by the General Partner.
8.2 TAX COMPLIANCE. Notwithstanding anything to the contrary contained
in this Partnership Agreement, all actions taken in the conduct of the business
of the Partnership, or on its dissolution, shall comply with the provisions of
Section 704 of the Internal Revenue Code of 1986, as amended, and the
Regulations thereunder (the "Code"). The General Partner shall be the "Tax
Matters Partner" required by the Code.
8.3 POWER OF ATTORNEY. The Limited Partner hereby appoints the General
Partner its attorney-in-fact, or agent, to execute, acknowledge, deliver and
file in its name any document required by law to be filed by the Partnership or
such Partner with any governmental body or agency. Any such appointment is a
special power, coupled with an interest, and shall remain in
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<PAGE>
effect as long as the Partner granting it has any interest in the Partnership or
remains responsible for any obligations under this Partnership Agreement.
8.4 COUNTERPARTS. This Partnership Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
8.5 AMENDMENTS. This Partnership Agreement may be amended only with the
consent of the General Partner and the Limited Partner.
8.6 THIRD PARTIES; SUCCESSORS AND ASSIGNS. The agreements contained
herein are for the benefit of the parties hereto and their permitted successors
and assigns and are not for the benefit of any third parties, including, without
limitation, creditors of the Partnership.
8.7 HEADINGS. The section headings herein are for convenience only and
shall not affect the interpretation of this Partnership Agreement.
8.8 INTERPRETATION. This Partnership Agreement is executed and
delivered in the Commonwealth of Virginia and shall be construed and enforced in
accordance with the laws of such state without giving effect to its choice of
law rules.
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<PAGE>
WITNESS the following signatures.
GENERAL PARTNER
Apple General, Inc.
By: /s/ Glade M. Knight
------------------
Title: President
------------------
LIMITED PARTNER:
Apple Limited, Inc.
By: /s/ Glade M. Knight
------------------
Title: President
------------------
-7-
<PAGE>
SCHEDULE A
GENERAL PARTNER
Name and Capital Partners'
Business Address Contribution Percentage
Apple General, Inc. One percent (1%) 1%
306 East Main Street undivided interest
Richmond, Virginia 23219 in the property
described on Exhibit A
LIMITED PARTNER
Name and Capital Partners'
Business Address Contribution Percentage
Apple Limited, Inc. Ninety-nine percent 99%
306 East Main Street (99%) undivided interest
Richmond, Virginia 23219 in the property
described on Exhibit A
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<PAGE>
EXHIBIT A
The apartment properties (including all real and personal property
associated therewith) formerly owned by Apple Residential Income Trust, Inc. and
commonly known and described as:
Number
Name Location of Units
---- -------- --------
Brookfield ..................... Dallas, TX 232
Eagle Crest .................... Irving, TX 484
Tahoe .......................... Arlington, TX 240
Mill Crossing .................. Arlington, TX 184
Polo Run ....................... Arlington, TX 224
Wildwood ....................... Euless, TX 120
Toscana ........................ Dallas, TX 192
Arbors on Forest Ridge ......... Bedford, TX 210
Pace's Cove .................... Dallas, TX 328
Remington Hills ................ Irving, TX 362
Copper Crossing ................ Fort Worth, TX 200
All of the above properties were conveyed to the Partnership by Deeds
dated as of December 29, 1997 with Apple General, Inc. and Apple Limited, Inc.
as grantors, and Apple REIT Limited Partnership as grantee.
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EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 26, 1997 in Post-Effective Amendment No. 5 to
the Registration Statement (Form S-11 No. 333-10635) and related Prospectus of
Apple Residential Income Trust, Inc. for the registration of 25,166,666.67
shares of its common stock.
Richmond, Virginia Ernst & Young LLP
January 30, 1998
EXHIBIT 23.3
L.P. MARTIN & COMPANY, P.C.
4132 INNSLAKE DRIVE
GLEN ALLEN, VIRGINIA 23060
PHONE: 804-346-2626
FAX: 804-346-9311
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We hereby consent to the inclusion of the following reports prepared by us
in the Registration Statement on Form S-11 (File No. 333-10635) of Apple
Residential Income Trust, Inc. filed with the Securities and Exchange Commission
by Apple Residential Income Trust, Inc., and in the Prospectus (including
supplements thereto) included therein and to the references to us under
"Experts" therein:
(1) Our report dated March 19, 1997 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Brookfield Apartments for the twelve-month
period ended December 31, 1996, (2) our report dated March 27, 1997 with respect
to the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Eagle Crest
Apartments for the twelve-month period ended December 31, 1996, (3) our report
dated April 11, 1997 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Tahoe Apartments for the twelve-month period ended
December 31, 1996, (4) our report dated April 29, 1997 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Mill Crossing
Apartments for the twelve-month period ended January 31, 1997, (5) our report
dated May 21, 1997 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Polo Run Apartments for the twelve-month period ended February 28,
1997, (6) our report dated June 4, 1997 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Wildwood Apartments for the twelve-month
period ended February 28, 1997, (7) our report dated June 4, 1997 with respect
to the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Toscana Apartments
for the twelve-month period ended February 28, 1997, (8) our report dated June
4, 1997 with respect to the statement of income and direct operating expenses
exclusive of items not comparable to the proposed future operations of the
property The Arbors on Forest Ridge Apartments for the twelve-month period ended
February 28, 1997, (9) our report dated July 22, 1997 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Paces Cove
Apartments for the twelve-month period ended May 31, 1997, (10) our report dated
September 24, 1997 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Chaparosa Apartments for the twelve-month period ended June 30,
1997, (11) our report dated September 24, 1997 with respect to the statement of
income and direct operating expenses exclusive of items not comparable to the
proposed future operations of the property Riverhill Apartments for the
twelve-month period ended June 30, 1997, and (12) our report dated December 16,
1997 with respect to the statement of income and direct operating expenses
exclusive of items not comparable to the proposed future operations of the
property Copper Crossing Apartments for the twelve-month period ended October
31, 1997.
Richmond, Virginia /s/ L. P. Martin & Co., P.C.
January 29, 1998
