AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1998
FILE NO. -
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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:
Martin B. Richards, McGuire, Woods, Battle & Boothe LLP
One James Center, 901 East Cary Street, Richmond, Virginia 23219
-------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.[X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[ ]_______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]_______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE AGGREGATE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE REGISTRATION FEE
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Common Shares ........................ 5,000,000 Shares $ 10.00 $50,000,000 $14,750
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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APPLE RESIDENTIAL INCOME TRUST, INC.
CROSS REFERENCE SHEET
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ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
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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
Liability
4. Determination of Offering Price ............... Risk Factors -- Arbitrary Share Offering Prices
5. Dilution ...................................... Risk Factors -- Potential Dilution; Summary of
Organizational Documents -- Issuance of Securities
6. Selling Security Holders ...................... Not Applicable
7. Plan of Distribution .......................... Plan of Distribution
8. Use of Proceeds ............................... Estimated Use of Proceeds
9. Selected Financial Data ....................... Not Applicable
10. Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................... Management's Discussion and Analysis of Financial
Condition
11. General Information as to Registrant .......... Summary of the Offering; Business and Properties;
Management
12. Policy with Respect to Certain Activities...... Summary of the Offering; Investment Objectives
and Policies; Summary of Organizational
Documents; Reports to Shareholders
13. Investment Policies of Registrant ............. Summary of the Offering; Investment Objectives
and Policies
14. Description of Real Estate .................... Business and Properties
15. Operating Data ................................ Business and Properties
16. Tax Treatment of Registrant and its
Security Holders .............................. Summary of the Offering; Federal Income Tax
Considerations; Investment by Tax-Exempt Entities
17. Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters ........................... Distribution Policy
18. Description of Registrant's Securities ........ Summary of the Offering; Description of Capital
Stock
19. Legal Proceedings ............................. Business and Properties -- Legal Proceedings
20. Security Ownership of Certain Beneficial
Owners and Management ......................... Principal and Management Stockholders
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ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
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21. Directors and Executive Officers ........... Management
22. Executive Compensation ..................... Compensation; Management
23. Certain Relationships and Related
Transactions ............................... Summary of the Offering; Compensation; Conflicts
of Interest; Management; The Advisor and its
Affiliates
24. Selection, Management and Custody of
Registrant's Investments ................... Summary of the Offering; Compensation; Conflicts
of Interest; Investment Objectives and Policies;
Management; The Advisor and its Affiliates
25. Policies with Respect to Certain
Transactions ............................... Investment Objectives and Policies; Conflicts of
Interest
26. Limitation of Liability .................... Risk Factors; Summary of Organizational
Documents
27. Financial Statements and Information ....... Index to Financial Statements
28. Interests of Named Experts and Counsel...... Legal Opinions
29. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities ................................ Risk Factors; Summary of Organizational
Documents
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APPLE RESIDENTIAL INCOME TRUST, INC.
COMMON SHARES (THE "SHARES")
$10 PER SHARE
MINIMUM INVESTMENT--$5,000
Apple Residential Income Trust, Inc. (the "Company") is a Virginia
corporation which has elected to be treated as a real estate investment trust
("REIT") for federal income tax purposes. The Company invests primarily in
existing residential apartment communities in Texas and plans to invest in
existing residential communities in the southwestern region of the United
States. Generally, the Company intends to hold its properties on an all-cash
(unleveraged) basis, and to hold its properties for an indefinite length of
time. As of the date of this prospectus, the Company owns 24 residential
apartment communities in Texas (the "Properties").
Cornerstone Realty Income Trust, Inc. ("Cornerstone") provides the
day-to-day management for the Company and its properties. Apple Residential
Advisors, Inc. ("ARA") and Apple Residential Management Group, Inc. ("ARMG")
originally contracted with the Company to provide these services but, with the
approval of the Company, Cornerstone entered into subcontracts with ARA and ARMG
effective March 1, 1997. Under these subcontracts, Cornerstone agreed to provide
to the Company the services ARA and ARMG previously agreed to provide, in
exchange for the compensation the Company previously agreed to pay ARA and ARMG.
Cornerstone also provides property acquisition and disposition services to the
Company. Prior to March 1, 1997, Apple Realty Group, Inc. ("ARG") provided these
services. Effective March 1, 1997, Cornerstone acquired all of the assets of ARG
(consisting principally of ARG's contract with the Company). Pursuant to this
acquisition, Cornerstone has assumed ARG's obligations to the Company in
exchange for the compensation the Company previously agreed to pay ARG.
Cornerstone is a REIT originally organized by Glade M. Knight, the Chairman of
the Board and President of the Company. Mr. Knight is also the Chairman of the
Board and President of Cornerstone, and the sole holder of common shares of ARA,
ARMG and ARG. Cornerstone, ARA, ARMG and ARG may be deemed to be affiliates of
each other. Accordingly, Cornerstone is sometimes referred to herein as "the
Advisor"; Cornerstone, ARA, ARMG and ARG are sometimes referred to herein as
"the Advisor and its Affiliates."
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 Cornerstone has 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 Shareholders' interests are subject to dilution through the conversion of
Class B Convertible Shares held by Glade M. Knight, Debra A. Jones and
Stanley J. Olander, Jr., and through the possible exercise under limited
circumstances of certain options held by Mr. 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 There is no assurance that the Company will operate successfully or achieve
its objectives.
o 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.
o Certain private partnerships sponsored by persons related to ARG have
experienced adverse business developments, including bankruptcy
reorganizations. See "The Advisor and its Affiliates -- Prior Performance
of Cornerstone and Partnerships Sponsored by Affiliates of ARG."
All of the Shares offered hereby are being sold by the Company. It is
expected that approximately 86.5% 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)
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Per Share ................. $ 10 $ 0.75 $ 9.25
Total Offering(4) ......... $50,000,000 $3,750,000 $46,250,000
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(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 $1,750,000 for the entire
offering (including the Marketing Expense Allowance referred to in (2)).
See "Estimated Use of Proceeds."
(4) The Company estimates that approximately 80,000 Shares ($800,000 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 September 22, 1998
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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).
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.
FORWARD-LOOKING STATEMENTS
This Prospectus thereto contains 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". Although the Company believes that the assumptions underlying the
forward-looking statements contained in this Prospectus are reasonable, any of
the assumptions could be inaccurate, and therefore there can be no assurance
that the forward-looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included in this Prospectus, 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.
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TABLE OF CONTENTS
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PAGE
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AVAILABLE INFORMATION .................................... i
SUMMARY OF THE OFFERING .................................. 1
RISK FACTORS ............................................. 10
Absence of Public Trading Market ......................... 10
Uncertainty Regarding Return of Investment ............... 10
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
Potential Dilution of Shareholders' Interests ............ 12
Uncertainty Regarding Revenues and Expenses .............. 13
Competition for Properties and Tenants ................... 14
Risk of Insufficient Cash Available for Distribution ..... 14
No Assurance of Success .................................. 14
Lack of Diversification .................................. 15
Delay in Investment in Real Property ..................... 15
Possible Borrowing; Debt Financing May Reduce
Cash Flow and Increase Risk of Default ................ 15
Prior Performance Difficulties of Certain Affiliates...... 16
Environmental Problems and Liabilities ................... 16
Uninsured Losses ......................................... 17
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
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Transactions with Affiliates and Related Parties 24
Competition by the Company with Affiliates ............ 25
Competition for Management Services ................... 25
Lack of Separate Representation ....................... 25
INVESTMENT OBJECTIVES AND POLICIES 25
General ............................................... 25
Investment Criteria ................................... 27
Types of Investments .................................. 28
Diversification ....................................... 29
Joint Venture Investments ............................. 29
Borrowing Policies .................................... 29
Management of Properties .............................. 30
Reserves .............................................. 31
Sale and Refinancing Policies ......................... 31
Changes in Objectives and Policies .................... 33
DISTRIBUTION POLICY ...................................... 33
BUSINESS AND PROPERTIES .................................. 34
Business .............................................. 34
Legal Proceedings ..................................... 35
Regulation ............................................ 35
Acquisition Lines of Credit ........................... 36
Property Acquisition and Management Compensation ...... 37
Properties Owned by the Company ....................... 38
OWNERSHIP OF ASSETS IN SUBSIDIARY
PARTNERSHIPS .......................................... 87
General ............................................... 87
Reorganization ........................................ 88
Subsequent Property Acquisitions ...................... 88
Effect of Use of Subsidiary Partnership and By-
law Amendments ...................................... 89
MANAGEMENT ............................................... 90
Directors and Officers ................................ 90
Committees of Directors ............................... 91
Director Compensation ................................. 92
Indemnification and Insurance ......................... 92
Officer Compensation .................................. 92
Stock Incentive Plans ................................. 92
The Incentive Plan .................................... 93
Directors' Plan ....................................... 94
Stock Option Grants ................................... 95
Award Agreement to Mr. Knight ......................... 95
THE ADVISOR AND ITS AFFILIATES ........................... 97
General ............................................... 97
The Advisory Agreement ................................ 97
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The Property Acquisition/Disposition Agreement ......... 98
The Property Management Agreement ...................... 99
Developments Including Cornerstone Realty
Income Trust, Inc. .................................. 99
Prior Performance of Cornerstone and
Partnerships Sponsored by Affiliates of ARG ......... 100
PRINCIPAL AND MANAGEMENT STOCKHOLDERS .................. 103
FEDERAL INCOME TAX CONSEQUENCES ........................ 104
Federal Income Taxation of the Company .............. 104
Requirements for Qualification as a REIT ............ 105
Organizational Requirements ....................... 105
Income Tests ...................................... 105
Asset Tests ....................................... 107
Annual Distribution Requirement ................... 107
Failure to Qualify as a REIT ...................... 108
Federal Income Taxation of the Shareholders ......... 108
Investment by Tax-Exempt Entities ................... 109
Changes Made by the Taxpayer Relief Act of 1997 ..... 110
Foreign Investors ................................... 110
Foreign Shareholders .............................. 110
Backup Withholding .................................. 112
State and Local Taxes ............................... 112
INVESTMENT BY TAX-EXEMPT ENTITIES ...................... 112
Unrelated Business Taxable Income ................... 112
ERISA Considerations ................................ 112
CAPITALIZATION ......................................... 114
SELECTED FINANCIAL DATA ................................ 115
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ........................... 116
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For the Six Months Ended June 30, 1998 ............... 116
Results of Operations ............................. 116
Liquidity and Capital Resources ................... 117
For the Year Ended December 31, 1997 ................ 118
Results of Operations ............................. 118
Liquidity and Capital Resources ................... 118
Impact of Year 2000 ................................. 120
Impact of Inflation ................................. 120
PLAN OF DISTRIBUTION ................................... 120
DESCRIPTION OF CAPITAL STOCK ........................... 122
General ............................................. 122
Repurchase of Shares and Restrictions on
Transfer .......................................... 122
Facilities for Transferring Shares .................. 124
SUMMARY OF ORGANIZATIONAL
DOCUMENTS ........................................... 124
Board of Directors .................................. 124
Responsibility of Board of Directors, Advisor,
Officers and Employees ............................ 125
Issuance of Securities .............................. 126
Redemption and Restrictions on Transfer ............. 126
Amendment ........................................... 127
Shareholder Liability ............................... 127
SALES LITERATURE ....................................... 127
REPORTS TO SHAREHOLDERS ................................ 127
LEGAL OPINIONS ......................................... 128
EXPERTS ................................................ 128
EXPERIENCE OF PRIOR PROGRAMS ........................... 130
GLOSSARY ............................................... 135
INDEX TO FINANCIAL STATEMENTS OF
THE COMPANY ......................................... F-1
SUBSCRIPTION AGREEMENT.................................. Exhibit A
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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 has elected 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). As the
context requires, the term "Company" used herein shall be deemed to include
Apple Residential Income Trust, Inc. and its subsidiaries: Apple General, Inc.,
Apple Limited, Inc., Apple REIT Limited Partnership, Apple REIT II Limited
Partnership, Apple REIT III Limited Partnership, Apple REIT IV Limited
Partnership, Apple REIT V Limited Partnership, and Apple REIT VI Limited
Partnership. See "Ownership of Assets in Subsidiary Partnerships."
PREVIOUS SHARE OFFERING. Pursuant to a Prospectus dated November 19, 1996,
as supplemented, the Company conducted a public offering of Shares during the
period from January 1997 through the date of this Prospectus (the "Initial
Offering"). As of September 15, 1998, the Company had closed the sale to
investors of 2,084,444 Shares at $9 per Share, and 21,308,630 Shares at $10 per
Share, representing aggregate gross proceeds to the Company of $231,846,301, and
proceeds net of selling commissions and marketing expense allowance of
$209,037,641. These totals include 417,778 Shares purchased by Cornerstone
Realty Income Trust, Inc. ("Cornerstone"), as described below under
"Developments Involving Cornerstone Realty Income Trust, Inc. -- Authorization
For Additional Share Issuance."
There is currently no established public market in which the Company's
Shares are traded. The Company's transfer agent and registrar is First Union
National Bank.
As of September 15, 1998, there were approximately 10,482 shareholders of
the Company's Shares, and there were 23,393,074 Shares outstanding.
DEVELOPMENTS INVOLVING CORNERSTONE REALTY INCOME TRUST, INC. There are
certain material relationships between the Company and Cornerstone.
Authorization for Additional Share Issuance. On February 10, 1997, in
response to a request from 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 continued during the Company's Initial Offering, and the
purchase price for such Shares under such right was the current public offering
price less the Selling Commissions and Marketing Expense Allowance payable with
respect thereto. On September 17, 1998, the Company's Board of Directors decided
to extend this right to Cornerstone through the offering made by this Prospectus
(the "Offering") on the same terms and conditions as previously authorized
during the Company's Initial Offering. Shares sold to Cornerstone pursuant to
this right are in addition to, and not part of, the Initial Offering, or this
Offering.
The Company has elected to grant to Cornerstone this ongoing right because
it has determined that the issuance of Shares in this manner represents 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.
On April 25, 1997, Cornerstone exercised the right described above and
purchased 417,778 Shares of the Company for approximately $3.76 million.
Cornerstone owns approximately 2.1% of the Shares of the Company outstanding on
June 30, 1998.
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Possible Acquisition of the Company by Cornerstone. As described, 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. Cornerstone later informed the
Company that it had, 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, Cornerstone told the Company that it expects to reevaluate the
desirability of seeking to acquire the Company by the end of 1998.
Providing of Certain Services by Cornerstone. As described under "The
Advisor and its Affiliates," Cornerstone provides the day-to-day management for
the Company and its properties. Apple Residential Advisors, Inc. ("ARA") and
Apple Residential Management Group, Inc. ("ARMG") originally contracted with the
Company to provide these services, but, with the approval of the Company,
Cornerstone entered into subcontracts with ARA and ARMG effective March 1, 1997.
Under these subcontracts, Cornerstone agreed to provide to the Company the
services ARA and ARMG previously agreed to provide, in exchange for the
compensation the Company previously agreed to pay ARA and ARMG. For the period
prior to March 1, 1997, the Company paid to ARMG a management fee plus
reimbursement of certain expenses in the amount of $52,375, and paid to ARA an
advisory fee in the amount of $14,894. For the period from March 1, 1997 through
December 31, 1997, the Company paid to Cornerstone $822,934 in management and
advisory fees, and $213,961 in certain reimbursable items. For the six months
ended June 30, 1998, the Company paid to Cornerstone $817,954 in management and
advisory fees and in certain reimbursable items.
Cornerstone also provides property acquisition and disposition services to
the Company. Prior to March 1, 1997, Apple Realty Group, Inc. ("ARG") provided
these services. Effective March 1, 1997, Cornerstone acquired all of the assets
of ARG (consisting principally of ARG's contract with the Company). Pursuant to
this acquisition, Cornerstone assumed ARG's obligations to the Company in
exchange for the compensation the Company previously agreed to pay ARG. For the
period prior to March 1, 1997, the Company paid to ARG fees in the amount of
$624,382. For the period from March 1, 1997 through December 31, 1997, and for
the six months ended June 30, 1998, the Company paid to Cornerstone
approximately $1,115,566 and $874,600, respectively, for property acquisition
and disposition services. Accordingly, Cornerstone is sometimes referred to
herein as "the Advisor"; Cornerstone, ARA, ARMG and ARG are sometimes referred
to herein as "the Advisor and its Affiliates."
THE OFFERING. The Shares are offered at $10 per Share.
The Offering 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
2
<PAGE>
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.
Because there is no minimum number of Shares required to be sold in the
Offering made by this Prospectus, the prospective investors' payments for Shares
are not required to be held by an escrow agent or in an escrow account. However,
the Company expects, as an administrative convenience, to place prospective
investors' subscription funds in a separate interest bearing account for
disbursement to the Company in a block at a "closing." Disbursement of such
funds to the Company is not subject to any conditions pertaining to the receipt
of a minimum amount of Offering proceeds.
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 interest bearing account each investor's share of net
interest on such 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 Managing Dealer or Selected Dealer at least five days before the
applicable closing. Subject to the foregoing, an investor's subscription funds
may remain in such interest bearing account for an indefinite period of time.
The minimum investment for investors is $5,000 (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 (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 80,000
Shares ($800,000 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."
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
3
<PAGE>
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.
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 their 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, is also
a Director, Chairman of the Board and President of Cornerstone, and also
owns all the common shares of ARA, ARMG and ARG. 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 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, Debra
A. Jones or Stanley J. Olander, Jr. converts his or her Class B Convertible
Shares into Common Shares. See "Principal and Management Stockholders." In
addition, Shareholders may experience dilution if Mr. Knight exercises
certain options (the "Award Options") which under certain circumstances (a
"Triggering Event") may be exercised for less than the fair market value of
the Common Shares as of the date of the grant of the Award Options. See
"Management -- Award Agreement to Mr. Knight."
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.
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<PAGE>
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 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.
o The Company may experience delays in finding suitable properties to
acquire, which could adversely impact the Company's profitability.
o Although not anticipated, except on the limited interim basis or where
special circumstances exist as described under "Business and
Properties-Properties Owned by the Company" and "Ownership of Assets in
Subsidiary Partnerships -- Subsequnent Property Acquisitions," 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 Certain private partnerships sponsored by Affiliates of ARG have
experienced certain adverse business developments (bankruptcy
reorganizations and/or property foreclosures). See "The Advisor and its
Affiliates -- Prior Performance of Cornerstone and Partnerships Sponsored
by Affiliates of ARG."
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 price has 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.
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 the expenses and fees
described in clauses (i) and (iii) of the preceding sentence will aggregate 13%
of the gross offering proceeds, that the amount available to invest in
properties will be 86.5% 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. Officers of the Company are, however, eligible to
receive stock options and restricted stock from the Company. See "Management --
The Incentive Plan, -- Award Agreement to Mr. Knight" and "Principal and
Management Stockholders." Com-
5
<PAGE>
pensation 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 from the Initial Offering
and this Offering.) See "The Advisor and its Affiliates -- The Advisory
Agreement."
Assuming the total Offering amount ($50,000,000) is sold, the Total
Contributions would be $300,000,000 and the annual Asset Management Fee
would be between $300,000 and $750,000. 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 The Advisor manages the Company's properties and receives a property
management fee equal to 5% of the monthly gross revenues of the properties.
In addition, the Company will reimburse the Advisor for its expenses,
including salaries and related overhead expenses, associated with
accounting and financial reporting services rendered by the Advisor under
the property management agreements.
o Cornerstone serves as the real estate broker in connection with the
Company's purchases and sales of properties, and receives 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 Cornerstone, such
amount will decrease the amount of the Company's obligation to Cornerstone.
Notwithstanding any adjustments to the fees owned by the Company to
Cornerstone, Cornerstone 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.
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.
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.
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<PAGE>
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 invests primarily in existing residential apartment
communities in Texas and plans to invest in existing residential apartment
communities in 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.
Currently, there is no public market for the Shares, and 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 January 1997 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 of financing its operations.
Therefore, it may purchase and has purchased, 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. See
"Ownership of Assets in Subsidiary Partnership -- Subsequent Property
Acquisitions." 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 substantial "front-end"
fees (that is, fees paid directly from funds received
7
<PAGE>
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 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 86.5% of the gross proceeds of the
offering are available for investment in properties, revenues may be reduced by
13.5% 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.
The distributions for the first, second, third and fourth quarters of 1997
were $.00 per Share, $.20 per Share $.20 per Share, and $.20 per Share,
respectively. Of the $.60 per Share distribution in 1997, 0% thereof represented
a return of capital and the balance represented ordinary dividend income.
The distributions for the first, and second quarters of 1998 were $.203 per
Share, and $.204 per Share, respectively. On an annual basis, this distribution
would be $.82 per Share. At the end of each year, the Company will determine,
and will report to Shareholders, the portions of the year's distributions which
represent ordinary dividend income and a return of capital, respectively. The
Company anticipates the funds available for distribution will exceed earnings
and profits due to non-cash expenses, primarily depreciation and amortization,
to be incurred by the Company. See "Distribution Policy."
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.
The Company owns the following apartment properties (the "Properties") as
of the date of this Prospectus (see "Business and Properties" for additional
information):
<TABLE>
<CAPTION>
NUMBER OF DATE OF
NAME LOCATION UNITS ACQUISITION
- ---------------------------------------------- ------------------- ----------- ------------
<S> <C> <C> <C>
Brookfield ................................... Dallas, TX 232 1-28-97
Eagle Crest .................................. Irving, TX 484 1-30-97
Aspen Hill (formerly Tahoe) .................. Arlington, TX 240 1-31-97
Mill Crossing ................................ Arlington, TX 184 2-21-97
Polo Run ..................................... Arlington, TX 224 3-31-97
Wildwood ..................................... Euless, TX 120 3-31-97
Toscana ...................................... Dallas, TX 192 3-31-97
Arbors on Forest Ridge ....................... Bedford, TX 210 4-25-97
Pace's Cove .................................. Dallas, TX 328 6-24-97
Remington Hills .............................. Irving, TX 362 8-6-97
Copper Crossing .............................. Fort Worth, TX 200 11-24-97
Main Park .................................... Duncanville, TX 192 2-4-98
Timberglen ................................... Dallas, TX 304 2-13-98
Copper Ridge ................................. Fort Worth, TX 200 3-31-98
Silver Brook (formerly Bitter Creek) ......... Grand Prairie, TX 472 5-8-98
Summer Tree .................................. North Dallas, TX 232 6-2-98
Park Village ................................. Bedford, TX 238 7-1-98
Cottonwood Crossing .......................... Arlington, TX 200 7-9-98
Pace's Point ................................. Lewisville, TX 300 7-17-98
Pepper Square ................................ North Dallas, TX 144 7-17-98
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF DATE OF
NAME LOCATION UNITS ACQUISITION
- --------------------------- ------------------- ---------- ------------
<S> <C> <C> <C>
Emerald Oaks .............. Grapevine, TX 250 7-24-98
Hayden's Crossing ......... Grand Prairie, TX 170 7-24-98
Newport ................... Austin, TX 200 7-24-98
Estrada Oaks .............. Irving, TX 248 7-27-98
</TABLE>
FEDERAL INCOME TAX CONSEQUENCES. The Company has elected 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."
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 September 15, 1998, there were
23,393,074 Common Shares of the Company issued and outstanding. Of the 200,000
authorized Class B Convertible Shares, Glade M. Knight holds 170,000, and Debra
A. Jones and Stanley J. Olander, Jr. each holds 15,000. See "Principal and
Management Stockholders." Mr. Knight also holds Award Options exercisable
immediately to purchase 355,111 Common Shares. See "Management -- Award
Agreement to Mr. Knight."
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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<PAGE>
RISK FACTORS
INVESTMENT IN THE SHARES INVOLVES VARIOUS RISKS. NO ASSURANCE CAN BE GIVEN
THAT THE INVESTMENT OBJECTIVES OF THE COMPANY WILL BE ACHIEVED. IN ADDITION TO
THE INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS, INVESTORS SHOULD
CONSIDER THE FOLLOWING RISKS BEFORE MAKING A DECISION TO PURCHASE THE SHARES.
ABSENCE OF PUBLIC TRADING MARKET
Currently, there is 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 January 1997, 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) 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 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.
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.
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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.
("Cornerstone" or "the Advisor") 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, if the Company defaults on its obligation
to grant to Cornerstone 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, 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 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 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 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. 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
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 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.
COMPENSATION TO THE ADVISOR AND ITS AFFILIATES IS PAYABLE BEFORE DISTRIBUTIONS
AND WILL REDUCE INVESTORS' RETURN
The Advisor, Apple Residential Management Group, Inc. ("ARMG"), Apple
Residential Advisors, Inc. ("ARA") and Apple Realty Group, Inc. ("ARG")
(collectively, "the Advisor and its Affiliates") may 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 substantial "front-end" fees and
expenses to sell the Shares, and acquire properties, 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 man-
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agement that a direct owner would incur), which will reduce cash available for
distribution to Shareholder. Thus, for example, if only 86.5% of the gross
proceeds of the offering are available for investment in properties revenues may
be reduced by 13.5% 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.
The Advisor 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, the Advisor 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. The Advisor receives a
property management fee which is a percentage of gross revenues from each
property owned by the Company. It could, therefore, have an incentive to
recommend that the Company retain a property, rather than dispose of it, so that
it can continue to receive its property management compensation. The Advisor
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.
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. Debra A. Jones and Stanley J. Olander, Jr. also hold certain
Class B Convertible Shares. See "Principal and Management Stockholders." The
conversion by such persons of such Class B Convertible Shares into Common Shares
will result in dilution of the Shareholders' interests.
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Mr. Knight also holds options to purchase Common Shares (the "Award
Options") which under certain circumstances (a "Triggering Event") may be
exercised for less than the fair market value of the Common Shares as of the
date of the grant of the Award Options. See "Management -- Award Agreement to
Mr. Knight." The exercise by Mr. Knight of the Award Options following a
Triggering Event 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.
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.
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The Company's investments are 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.
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.
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.
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.
NO ASSURANCE OF SUCCESS
There is no assurance that the Company will operate successfully or achieve
its objectives.
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LACK OF DIVERSIFICATION
Although the Company intends to invest in existing residential apartment
communities throughout Texas and the southwestern region of the United States,
currently all but one of the Company's Properties are located in the Dallas/Fort
Worth Consolidated Metropolitan Statistical area. The operations of the
Properties and therefore the profitability of the Company may be negatively
impacted by adverse economic developments in the Dallas/Forth Worth area. The
concentration of Properties in the Dallas/ Forth Worth area may expose the
Company to greater risks of adverse economic developments than would be present
if the Company owned properties in more states and markets.
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.
POSSIBLE BORROWING; DEBT FINANCING MAY REDUCE CASH FLOW AND INCREASE RISK OF
DEFAULT.
The Company generally 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," unless special circumstances
exist such as the identification of desirable properties which have either
favorable interest rates or debt which is not prepayable. For example, the
Company paid for Pace's Point Apartments, Pepper Square Apartments, Emerald Oaks
Apartments, Hayden's Crossing Apartments and Newport Apartments, through
combinations of cash and the assumption of preexisting mortgage loans. These
acquisitions are described under "Business and Properties -- Properties Owned by
the Company" and "Ownership of Assets in Subsidiary Partnerships -- Subsequent
Property Acquisitions." 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 rates 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
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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
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.
PRIOR PERFORMANCE DIFFICULTIES OF CERTAIN AFFILIATES
Certain private partnerships previously organized by Affiliates of ARG 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 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 its Affiliates -- Prior Performance of
Cornerstone and Partnerships Sponsored by Affiliates of ARG." 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.
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
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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.
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.
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 LLP, 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 its 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
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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.
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.
18
<PAGE>
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.
ARBITRARY SHARE OFFERING PRICES
The per-Share offering price ($10) has 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.
ADVISOR AND AFFILIATES MAY PURCHASE AND VOTE SHARES
The Advisor and its Affiliates may purchase 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 its Affiliates. See "Management -- Stock
Incentive Plans."
Any such purchaser would possess the same voting power per Share as any
other purchaser. While it is not expected that the Advisor and its Affiliates
will purchase a substantial number of Shares, they will be permitted to vote any
Shares purchased by them in the same manner as other Shareholders.
ACCUMULATION RESTRICTIONS
The Company's Bylaws generally prohibit ownership of more than 9.8% of the
Company's outstanding Shares by one investor. See "Summary of Organizational
Documents -- Redemption and Restrictions on Transfer." That restriction is
designed to ensure that the Company does not violate certain share accumulation
restrictions imposed by the Code on REITs. The provisions restricting
concentrations of Share ownership also may have the effect of deterring the
acquisition of, or a change in, control of the Company. In addition, certain
states may impose investor suitability standards on the transfer of Shares.
JOINT VENTURE INVESTMENTS -- RISKS OF CONFLICTING INTERESTS AND IMPASSE
Under certain circumstances, the Company might participate with an entity
(including Affiliates of the Advisor) in jointly acquiring an investment
property. Any joint venture investment of the Company would be subject to the
same conditions, limitations and restrictions applicable to a Company investment
not undertaken as a joint venture, and the use of a joint venture structure
would not itself be designed to alter or expand the investment objectives and
policies of the Company. Investment through a joint venture could, for example,
permit the Company to invest in a property which is too large for the Company to
acquire by itself.
The investment by the Company through a joint venture could subject the
Company to risks not otherwise present, although the Company will endeavor to
structure any joint venture investment so as to minimize the number and
magnitude of risks not generally associated with a Company investment. Risks not
otherwise present could, however, include the possibility that the joint venture
participant will have economic interests different from the Company and that the
participant might be in a position to take actions contrary to the instructions
of the Company or contrary to the interests of the Company. In addition, in
joint venture investments there is a potential risk of impasse on decisions if
neither joint venture participant controls the venture. Conversely, if the
Company has a right of first refusal to purchase a joint venture participant's
interest, there is a potential risk that it may not have the resources to do so.
19
<PAGE>
ESTIMATED USE OF PROCEEDS
The Company intends to invest the net proceeds of this offering (the
"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."
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, the Company expects that 86.5% 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 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."
The following table reflects the intended application of the proceeds from
the sale of the Common Shares.
<TABLE>
<CAPTION>
% OF GROSS
AMOUNT PROCEEDS
-------------- -----------
<S> <C> <C>
Gross Proceeds (1) ............................................ $50,000,000 100.00%
Less: .........................................................
Organizational and Offering Expenses (2) .................... 500,000 1.00%
Selling Commissions (3) ..................................... 3,750,000 7.50%
Marketing Expense Allowance (3) ............................. 1,250,000 2.50%
----------- ------
Net Proceeds after Offering Costs ............................. $44,500,000 89.00%
Less Acquisition Fees and Expenses (4) ........................ 1,000,000 2.00%
----------- ------
Proceeds Available for Investment and Working Capital ......... $43,500,000 87.00%
Less Working Capital Reserve (5) .............................. 250,000 0.50%
----------- ------
Net Amount Available for Investment in Properties (6) ......... $43,250,000 86.50%
=========== ======
</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.
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<PAGE>
(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. Officers of the
Company are, however, eligible to receive stock options and restricted stock
from the Company. See "Management -- The Incentive Plan, -- Award Agreement to
Mr. Knight" and "Principal and Management Stockholders."
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 Maximum
Offering is sold, the Selling Commissions would be $3,750,000 and the Marketing
Expense Allowance would be $1,250,000. 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
The Advisor Real Estate Commission for acquiring 2% of the proceeds of the offering used
the Company's properties to pay the purchase prices of the prop-
erties purchased by the Company. (3)
OPERATIONAL PHASE
The Advisor Asset Management Fee for managing Annual fee ranging from 0.1% of Total
the Company's day-to-day operations Contributions to 0.25% of Total Con-
tributions (payable quarterly) -- cur-
rently, up to $625,000 per year; a
maximum of $750,000 per year if the
Maximum Offering is sold. (4)
The Advisor Property Management Fee and expense 5% of the monthly gross revenues of
reimbursement for managing the Com- the properties plus expense reimburse-
pany's properties ment. (5)
The Advisor Reimbursement for costs and expenses Amount is indeterminate.
incurred on behalf of the Company, as
described in Note (6)
DISPOSITION PHASE
The Advisor Real Estate Commission for selling the Up to 2% of the gross sales prices of
Company's properties the properties sold by the Company. (7)
ALL PHASES
The Advisor 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,
Cornerstone 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, Cornerstone 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;
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.
On September 17, 1998, the Company's Board of Directors authorized the
Company to agree to and enter into an Amendment to the Property
Acquisition/Disposition Agreement dated the same date providing for the
payment of the two percent (2%) fee on the indebtedness assumed by the
Company with the purchase of Pace's Point Apartments, Pepper Square
Apartments, Emerald Oaks Apartments, Hayden's Crossing Apartments and
Newport Apartments. See "Business and Properties -- Properties Owned by the
Company" and "The Advisor and its Affiliates -- The Property
Acquisition/Disposition Agreement." If the person from whom the Company
purchases or to whom
22
<PAGE>
the Company sells a property pays any fee to Cornerstone, such amount will
decrease the amount of the Company's obligation to Cornerstone. See "The
Advisor and its Affiliates -- The Property Acquisition/Disposition
Agreement."
(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, 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 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%. Assuming the Maximum Offering
($50,000,000) is sold, the annual Asset Management Fee would be between
$300,000 and $750,000. See "The Advisor and its Affiliates."
(5) 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. The Advisor 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 the Advisor 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, the Advisor 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 its Affiliates -- The Advisory Agreement," but the amount of
reimbursement is not otherwise limited.
(7) Under the Property Acquisition/Disposition Agreement described in note (3),
Cornerstone 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 its Affiliates -- Developments Involving Cornerstone
Realty Income Trust, 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.
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 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
The Board of Directors consists of four members, three of whom are
Independent Directors. At all times, a majority of the Board of Directors must
be Independent Directors. 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
24
<PAGE>
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. 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 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 LLP, 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 LLP 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
25
<PAGE>
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
(iii) emphasizing regular maintenance and periodic renovations, including
additions to amenities.
The Company has in the past made, and in the future likely will 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 the Company
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.
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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 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.
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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.
The Advisor will receive a 2% real estate commission upon each purchase by
the Company of a property. See "The Advisor and its Affiliates -- The Property
Acquisition/Disposition Agreement."
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 invests 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.
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
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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 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,
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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
- -- 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.
MANAGEMENT OF PROPERTIES
Day-to-day property management services for the Company's residential
properties will be provided by the Advisor, subject to review by the Board of
Directors. For such services, the Advisor will receive a monthly Property
Management Fee equal to 5% of the monthly gross revenues of the properties. The
Company intends that the Advisor will also be responsible for the accounting and
financial reporting responsibilities for each of the properties the Company
acquires. The Advisor 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 the Advisor 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 the Advisor 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
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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.
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.
Currently, the Company expects that within approximately three (3) years
from January 1997, 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. Cornerstone is a
Virginia corporation which is a public real estate investment trust. Cornerstone
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 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 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 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, any such Sale of the
Company to Cornerstone would require the consent of a majority of both the
entire Board of
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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 must offer cash if it wishes to exercise its right
of first refusal. If the third party offers property other than cash,
Cornerstone will be permitted to offer property of a like character with the
same value. The value of the property offered by the third party and Cornerstone
will be the market value if the property has a readily ascertainable market
value (such as listed stock), and otherwise will be determined in good faith by
agreement of the boards of directors of the Company and Cornerstone, or if such
boards are unable to agree, by the average of two appraisals undertaken by two
qualified independent appraisers, one selected by each board of directors.
If the Company defaults in its obligation to grant to Cornerstone 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 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 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 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 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. 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, there can be no assurance that a sale by the Company to Cornerstone
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.
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
- -- Possible Borrowing; Debt Financing May Reduce Cash Flow and Increase Risk of
Default."
Under its Property Acquisition/Disposition Agreement with the Company,
Cornerstone may receive a 2% real estate commission upon each sale by the
Company of a property. Cornerstone will not be entitled to any disposition fee
in connection with a sale of a property by the Company to Cornerstone or any
Affiliate of Cornerstone 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 Cornerstone 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 its Affiliates -- The Property
Acquisition/Disposition Agreement."
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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 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 distributions for the first, second, third and fourth quarters of 1997
were $.00 per Share, $.20 per Share, $.20 per Share, and $.20 per Share,
respectively. Of the $.60 per Share distribution in 1997, 0% thereof represented
a return of capital and the balance represented ordinary dividend income.
The distributions for the first and second quarters of 1998 were $.203 per
Share and $.204 per Share, respectively. On an annual basis, this distribution
would be $.82 per Share. At the end of each year, the Company will determine,
and will report to Shareholders, the portions of the year's distributions which
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represent ordinary dividend income and a return of capital, respectively. The
Company anticipates the funds available for distribution will exceed earnings
and profits due to non-cash expenses, primarily depreciation and amortization,
to be incurred by the Company.
The Company has in the past, and expects in the future, 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.
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." Except for five properties (Pace's Point Apartments, Pepper Square
Apartments, Emerald Oaks Apartments, Hayden's Crossing Apartments and Newport
Apartments) which were acquired through combinations of cash and the assumption
of their preexisting mortgage loans, and the limited interim borrowing described
under "Business and Properties -- Properties Owned by the Company," 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.
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 January 1997, 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.
34
<PAGE>
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 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 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 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.
35
<PAGE>
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.
ACQUISITION LINES OF CREDIT
The Company's Board of Directors will, from time to time, 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 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 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
36
<PAGE>
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.
In 1997 the Board of Directors authorized, and the Company obtained, an
unsecured line of credit, which was designed to facilitate the timely
acquisition of properties deemed attractive by management. The unsecured line of
credit the ("Unsecured Line of Credit") was from First Union National Bank. The
Unsecured Line of Credit was used to facilitate several property acquisitions in
1997, as described under "Property Acquisitions" herein, and all amounts
borrowed under the Unsecured Line of Credit were subsequently repaid using
proceeds from the sale of Shares.
As of the date of this Prospectus, the documents evidencing the Unsecured
Line of Credit have not been amended to extend the original maturity date or to
reflect the reorganization transactions described below in this Prospectus under
"Ownership of Assets in Subsidiary Partnerships." Unless and until such
documents are so amended, with the consent of the lender, the Unsecured Line of
Credit will not be available for further use by the Company.
The Company has also obtained a line of credit from First Union National
Bank in the amount of $1 million for general corporate purposes.
PROPERTY ACQUISITION AND MANAGEMENT COMPENSATION
Each Property will be managed by the Advisor 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 the Advisor for its expenses, including salaries and
related overhead expenses, associated with accounting and financial reporting
services rendered by the Advisor 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 Cornerstone a
property acquisition fee of two percent (2%) of the purchase prices of the
Properties. See "Compensation."
37
<PAGE>
PROPERTIES OWNED BY THE COMPANY
As of the date of this Prospectus, the Company owns the following
properties (the "Properties"):
<TABLE>
<CAPTION>
NUMBER OF DATE OF
NAME LOCATION UNITS ACQUISITION
---- -------- --------- -------------
<S> <C> <C> <C>
Brookfield Dallas, TX 232 1-28-97
Eagle Crest Irving, TX 484 1-30-97
Aspen Hill (formerly Tahoe) Arlington, TX 240 1-31-97
Mill Crossing Arlington, TX 184 2-21-97
Polo Run Arlington, TX 224 3-31-97
Wildwood Euless, TX 120 3-31-97
Toscana Dallas, TX 192 3-31-97
Arbors on Forest Ridge Bedford, TX 210 4-25-97
Pace's Cove Dallas, TX 328 6-24-97
Remington Hills Irving, TX 362 8-6-97
Copper Crossing Fort Worth, TX 200 11-24-97
Main Park Duncanville, TX 192 2-4-98
Timberglen Dallas, TX 304 2-13-98
Copper Ridge Fort Worth, TX 200 3-31-98
Silver Brook (formerly Bitter Creek) Grand Prairie, TX 472 5-8-98
Summer Tree North Dallas, TX 232 6-2-98
Park Village Bedford, TX 238 7-1-98
Cottonwood Crossing Arlington, TX 200 7-9-98
Pace's Point Lewisville, TX 300 7-17-98
Pepper Square North Dallas, TX 144 7-17-98
Emerald Oaks Grapevine, TX 250 7-24-98
Hayden's Crossing Grand Prairie, TX 170 7-24-98
Newport Austin, TX 200 7-24-98
Estrada Oaks Irving, TX 248 7-27-98
</TABLE>
In connection with each of its Property acquisitions, the Company obtains a
Phase I Environment Report and such additional environmental reports and surveys
as are necessitated by such preliminary report. Based on such reports, the
Company is not aware of any environmental situations requiring remediation at
its Properties, which have not been or are not currently being remediated as
necessary.
Additional information on the Properties is provided below.
38
<PAGE>
BROOKFIELD APARTMENTS
DALLAS, TEXAS
On January 28, 1997, the Company purchased the Brookfield Apartments, a
232-unit apartment complex having an address of 4060 Preferred Place, Dallas,
Texas (the "Property").
The seller was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $5,458,485, which was paid entirely in cash
using proceeds from the sale of Shares. Title to the Property was conveyed to
the Company by limited warranty deed.
LOCATION. The following information is based in part upon information
provided by the Dallas Chamber of Commerce.
The Property is located in south Dallas, within the Dallas/Fort Worth
Consolidated Metropolitan Statistical area, or as it is called locally, "The
Metroplex." The Dallas/Fort Worth Metroplex is in the north-central part of
Texas and is composed of nine counties. The 1996 population of The Metroplex was
approximately 4,400,000. Dallas is the second largest city in the state, behind
Houston.
The economy of the Dallas/Fort Worth area is complex and diversified. Key
economic factors include a large manufacturing base (including as products
military hardware, electronics, automobiles, industrial equipment, oil-field
parts, food products and chemicals), banking, insurance services,
communications, oil and gas production and air transportation. Major employers
in the area include Texas Instruments, Southwestern Bell, General Motors, J. C.
Penney, NationsBank and Vought Aircraft Company.
The Metroplex is also an established transportation center for the nation.
The Dallas/Fort Worth International Airport occupies approximately 17,800 acres
of land between the two cities. It is the largest commercial airport in the
United States in terms of land area, and is the fourth busiest airport in the
world, with 1,700 daily arrivals and departures.
The area also has a well-established system of interstate highways and
supporting secondary routes. The Metroplex is located at the hub of Interstates
35, 45, 20 and 30. Two outer loops, Interstate 635 in Dallas and Interstate 820
in Fort Worth, surround the respective cities.
The many institutions of higher learning in the area include Southern
Methodist University, the University of Texas at Dallas, the University of Texas
at Arlington, the University of North Texas, and Texas Christian University.
The Property is located in a well-established area of Dallas near the Red
Bird Mall. The area is characterized by various retail centers, restaurants and
businesses. Downtown Dallas is an approximately 15-minute drive from the
Property. The Property is an approximately 25-minute drive from Dallas/Fort
Worth International Airport.
DESCRIPTION OF THE PROPERTY. The Property consists of 232 garden-style
apartments located in 15 two- and three-story buildings on approximately seven
acres of land. The Property was completed in 1984.
The Company believes that the Property has generally been well maintained
and is generally in good condition. However, the Company currently has budgeted
approximately $350,000 (and as of June 30, 1998 had expended approximately
$321,000) for repairs and improvements, including clubhouse renovation,
painting, wood replacement, parking lot repair, interior upgrades (including new
appliances) and pool improvements.
39
<PAGE>
The Property offers seven different unit types. The unit mix and rents
being charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- -------- ---- ---------- -------
<S> <C> <C> <C>
39 One bedroom, one bath 578 $450
9 One bedroom, one bath (view) 578 460
36 One bedroom, one bath w/sunroom 658 470
12 One bedroom, one bath w/sunroom (view) 658 480
24 One bedroom, one bath w/WD connections 669 485
48 One bedroom, one bath w/WD connections,
FP, bookshelves 661 495
64 Two bedrooms, two baths w/WD connections,
FP, bookshelves 913 650
</TABLE>
The apartments provide a combined total of approximately 165,000 square
feet of net rentable area.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased gradually. As an
example, a two-bedroom, two-bath apartment rented for $520 in 1993, $530 in
1994, $545 in 1995, $565 in 1996, and $650 in 1997. The average effective annual
rental per square foot at the Property for 1993, 1994, 1995, 1996 and 1997 was
$7.11, $7.24, $7.45, $7.72 and $8.12, respectively.
The buildings are wood frame construction with a combination of brick
veneer and masonite hardboard exteriors on reinforced concrete slab foundations.
Roofs are sloped fiberglass shingles on plywood.
The Property has an outdoor swimming pool with a large deck, a hot tub, a
controlled access entrance and exit gate, and covered parking for approximately
232 vehicles. The Property also includes a clubhouse with a leasing office.
There is also uncovered paved parking for residents.
Apartment units have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. Each apartment unit has a television hook-up,
miniblinds, drapes on sliding glass doors and individually controlled heating
and air-conditioning unit. Each kitchen is equipped with a refrigerator/freezer
with ice maker, electric range and oven, dishwasher and garbage disposal. Also,
as indicated in the table above, some units have a wood-burning fireplace, a
utility area with washer/dryer connections, bookshelves, ceiling fans or a
sunroom. The owner of the Property pays for cold water, sewer service, gas usage
for hot water and trash removal. Tenants pay for their electricity service,
which includes cooking, lighting, heating and air-conditioning.
There are at least 10 apartment properties which compete with the Property.
All offer similar amenities and generally have rents that are higher when
compared with those of the Property. Based on a recent market survey, the
Advisor estimates that occupancy in nearby competing properties averaged
approximately 95% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 92% in 1992, 93% in 1993, 93% in 1994, 94% in
1995 and 97% in 1996. Based in part on information provided by the seller,
physical occupancy in 1997 averaged 99%. On June 30, 1998, the Property was 96%
occupied. The residents are a mix of blue-collar and white-collar workers,
students and retired persons.
40
<PAGE>
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE RATE TAX
------------ --------- ---- ---
<S> <C> <C> <C>
County of Dallas ......... $5,605,190 $ 0.44307 $ 24,834.92
City of Dallas ........... 5,605,190 2.11213 118,388.90
-------------
Total ................... $ 143,223.82
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $4,531,091 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Internal Revenue Code of 1986, as amended (the
"Code"). Amounts to be spent by the Company on repairs and improvements will be
treated for tax purposes as permitted by the Code based on the nature of the
expenditures.
The Advisor and the Company believe that the Property is and will be
continue to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Apple Realty Group, Inc. a property acquisition fee
equal to 2% of the purchase price of the Property, or $109,170. Cornerstone
Realty Income Trust, Inc. will serve as property manager for the Property and
for its services will be paid by the Company a monthly management fee equal to
5% of the gross revenues of the Property plus reimbursement of certain expenses.
EAGLE CREST I & II APARTMENTS
IRVING, TEXAS
On January 30, 1997, the Company purchased the Eagle Crest I & II
Apartments, a 484-unit apartment complex having an address of 4013 West
Northgate, Irving, Texas (the "Property").
The seller was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $15,650,000, which the Company paid entirely
in cash using proceeds from the sale of Shares. Title to the Property was
conveyed to the Company by limited warranty deed.
LOCATION. See above under "Brookfield Apartments" for a description of the
greater Dallas/Fort Worth Consolidated Metropolitan Statistical Area, which
includes Irving, Texas.
Irving is approximately eight miles west of the Dallas central business
district and approximately 25 miles east of downtown Fort Worth. Irving is a
relatively young city with a majority of its development occurring during the
latter half of this century. The location of Irving between Dallas and Fort
Worth, and near Dallas/Fort Worth International Airport, has enabled it to
garner a large portion of the area's recent commercial and industrial
development.
Irving is the site of Las Colinas, one of the nation's largest
master-planned real estate developments. The development occupies approximately
12,500 acres and includes residential developments, office space, research,
distribution and light industrial facilities, four golf courses, the Las Colinas
Sports Club and an equestrian center.
Las Colinas is targeted to large employers and is the home of numerous
regional and national businesses. The Irving employment sector is primarily
white-collar. Significant employers in Las Colinas include Exxon, GTE, Aetna,
Abbott Laboratories, Boeing, US Sprint, Computer Associates, Allstate Insurance,
Zale Jewelers and the Federal Home Loan Bank Board. In addition, Columbia/HCA
Health Care Corporation recently signed an agreement to buy approximately 28
acres in the development. The plans for the land include a community hospital
with medical office complex and a full-service acute-care facility.
41
<PAGE>
Irving has a well-defined highway system. The city is connected to Dallas
by State Highway 114 on the northeast, State Highway 183 in its central portion
and Interstate 30 on the south.
The Property is located off of Belt Line Road in Irving. The immediate
neighborhood includes other multi-family communities, and residential,
commercial and retail development. The Property is conveniently located near
restaurants, businesses, schools, and churches, and is readily accessible from
Highways 161 and 183. The Property is an approximately 5-minute drive from
Dallas/Fort Worth International Airport.
DESCRIPTION OF THE PROPERTY. The Property consists of 484 apartment units
in 31 two- and three-story buildings on approximately 18 acres of land. There
are 296 apartment units in Phase I, which was built in 1983, and 188 apartment
units in Phase II, which was built in 1985.
The Company believes that the Property has generally been well maintained
and is generally in good condition. However, the Company currently has budgeted
approximately $1,255,000 (and as of June 30, 1998 had expended approximately
$1,235,000) for repairs and improvements, including clubhouse renovations,
structural repair of shrink/swell soil conditions, painting, wood replacement,
interior upgrades (including new appliances), parking lot resurfacing,
landscaping and pool improvements.
The Property offers a wide range of units types. The unit mix and rents
being charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
QUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
-------- ---- ------------ ------
<S> <C> <C> <C>
116 One bedroom, one bath 698 $555
120 One bedroom, one bath 796 580
4 One bedroom, one bath, sunroom, bar 798 615
48 One bedroom, one bath 896 660
24 Two bedrooms, one bath 912 660
63 Two bedrooms, two baths 1023 710
80 Two bedrooms, two baths 1089 750
1 Two bedrooms, two baths, sunroom 1123 770
4 Two bedrooms, two baths, sunroom, bar 1189 810
21 Two bedrooms, two baths 1124 790
3 Two bedrooms, two baths, sunroom 1224 850
</TABLE>
The apartments provide a combined total of approximately 429,000 square
feet of net rentable area.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased gradually. As an
example, a one-bedroom, one-bath apartment rented for $445 in 1993, $445 in
1994, $469 in 1995, $485 in 1996, and $550 in 1997. The average effective annual
rental per square foot at the Property for 1993, 1994, 1995, 1996 and 1997 was
$7.17, $7.17, $7.56, $7.81 and $8.00, respectively.
The buildings are wood frame construction with a combination of brick
veneer and masonite hardboard siding on reinforced concrete slab foundations.
Roofs are sloped fiberglass shingles over plywood.
The Property has three outdoor swimming pools, two jacuzzis, three laundry
facilities, a fitness building, gas grills and ice machines. The Property also
has a clubhouse with a leasing office. There is ample paved parking for
residents.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, double stainless
steel sink, a dishwasher and garbage disposal. All apartment units include
washer/dryer connections for full-sized appliances. Some apartment units feature
additional amenities, such as linen closets, a fireplace with mantle, ceiling
fans, a pantry closet, a dry bar, an entertainment center, vaulted ceilings, a
sunroom
42
<PAGE>
and greenhouse windows. The owner of the Property pays for cold water, gas for
hot water, sewer service, and trash removal. The tenants pay for their
electricity usage, which includes cooking, lighting, heating and
air-conditioning.
There are at least four apartment properties which compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in nearby competing properties averaged
approximately 97% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 95% in 1992, 94% in 1993, 95% in 1994, 95% in
1995 and 97% in 1996. Based in part on information provided by the seller,
physical occupancy in 1997 averaged 94%. On June 30, 1998, the Property was 95%
occupied. The tenants are a mix of white-collar and blue-collar workers.
The following tables set forth the 1997 real estate tax information on the
Property:
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 (approximately $13,168,390 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will be
continue to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Apple Realty Group, Inc. a property acquisition fee
equal to 2% of the purchase price of the Property, or $313,000. Cornerstone
Realty Income Trust, Inc. will serve as property manager for the Property and
for its services will be paid by the Company a monthly management fee equal to
5% of the gross revenues of the Property plus reimbursement of certain expenses.
ASPEN HILL APARTMENTS
ARLINGTON, TEXAS
On January 31, 1997, the Company purchased the Tahoe Apartments, a 240-unit
apartment complex having an address of 2308 Fair Oaks Drive, Arlington, Texas
(the "Property"). The Company has renamed the Property the "Aspen Hill
Apartments."
43
<PAGE>
The seller was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $5,690,560, which was paid entirely in cash
using proceeds from the sale of Shares. Title to the Property was conveyed to
the Company by limited warranty deed.
LOCATION. See above under "Brookfield Apartments" for a description of the
greater Dallas/Fort Worth Consolidated Metropolitan Statistical Area, which
includes Arlington, Texas.
The Property is located in the city of Arlington, which is located between
Dallas and Fort Worth. Arlington is approximately 13 miles east of the Fort
Worth Central Business district and approximately 20 miles west of the Dallas
Central Business District.
Owing in large part to its location between Dallas and Fort Worth,
Arlington has become a focus of business development in the area. Major
employers include General Motors, National Semiconductor, Johnson & Johnson,
Doskocil Manufacturing Company and Arlington Memorial Hospital. The area is also
the site of several large warehousing and distribution companies whose primary
market is the Metroplex.
The University of Texas at Arlington has an enrollment of approximately
23,000 students. Arlington also serves as a major medical center for its own
population and for residents of outlying communities as well. Arlington Memorial
Hospital has a staff of approximately 1,680 and HCA South Arlington Medical
Center has approximately 640 employees, making both of them among the largest
employers in the city.
The immediate area surrounding the Property consists of other multifamily
housing, residential, commercial and retail development. The Property is
conveniently located near restaurants, businesses, schools and churches, and is
readily accessible from Interstate 20 and Interstate 30.
DESCRIPTION OF THE PROPERTY. The Property consists of 240 garden-style
apartment units in 18 two- and three-story buildings on approximately 9.8 acres
of land. The Property was built in 1979.
The Company believes that the Property has generally been well maintained
and is generally in good condition. However, the Company currently has budgeted
approximately $1,350,000 (and as of June 30, 1998 had expended approximately
$1,288,000) for repairs and improvements including clubhouse renovation,
retaining wall repairs, landscaping, exterior painting and exterior siding
replacement, interior upgrades (including new appliances), parking lot
resurfacing and landscaping.
The Property offers five different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
-------- ---- ------------ --------
<S> <C> <C> <C>
64 One bedroom, one bath 480 $435
64 One bedroom, one bath 575 465
48 One bedroom, one bath 634 500
32 Two bedrooms, two baths 941 665
32 Two bedrooms, two baths 1,027 720
</TABLE>
The apartments provide a combined total of approximately 161,000 square
feet of net rentable area.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
one bedroom, one bath apartment rented for $345 in 1993, $365 in 1994, $394 in
1995, $404 in 1996, and $430 in 1997. The average effective annual rental per
square foot at the Property for 1993, 1994, 1995, 1996 and 1997 was $6.91,
$7.31, $7.89, $8.09 and $8.44, respectively.
The buildings are wood frame construction with a combination of brick
veneer and masonite hardboard exteriors on reinforced concrete slab foundations.
Roofs are sloped fiberglass shingles over plywood.
44
<PAGE>
The Property has an outdoor swimming pool, a hot tub, two laundry
facilities, a fitness center, a sand volleyball court and covered parking for
approximately 32 vehicles. The Property also has a clubhouse with a leasing
office. There is also uncovered paved parking for residents.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up, miniblinds, vertical blinds and an individually controlled heating and
air-conditioning unit. Each kitchen is equipped with a refrigerator/freezer with
icemaker, electric range and oven, dishwasher, microwave and garbage disposal.
Some units have a wood-burning fireplace and washer/dryer connections. The owner
of the Property pays for cold water, sewer service, natural gas for hot water
and trash removal. Tenants pay for their electricity service, which includes
cooking, lighting, heating and air-conditioning.
There are at least four apartment properties which compete with the
Property. All offer similar amenities and generally have rents that are higher
when compared with those of the Property. Based on a recent telephone survey,
the Advisor estimates that occupancy in nearby competing properties averaged
approximately 92% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 94% in 1992, 93% in 1993, 95% in 1994, 89% in
1995 and 94% in 1996. Based in part on information provided by the seller,
physical occupancy in 1997 averaged 91%. On June 30, 1998, the Property was 89%
occupied. The tenants are a mix of white-collar and blue-collar workers.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE RATE TAX
------------ -------- ---- ----
<S> <C> <C> <C>
County of Tarrant ......... $5,451,821 $ 1.995196 $ 108,774.52
City of Arlington ......... 5,451,821 0.638000 34,782.62
-------------
Total .................... $ 143,557.14
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $4,812,374 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Apple Realty Group, Inc. a property acquisition fee
equal to 2% of the purchase price of the Property, or $113,800. Cornerstone
Realty Income Trust, Inc. will serve as property manager for the Property and
for its services will be paid by the Company a monthly management fee equal to
5% of the gross revenues of the Property plus reimbursement of certain expenses.
MILL CROSSING APARTMENTS
ARLINGTON, TEXAS
On February 21, 1997, the Company purchased the Mill Crossing Apartments, a
184-unit apartment complex having an address of 2713 North Collins, Arlington,
Texas (the "Property").
The seller was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $4,544,121, which was paid entirely in cash
using proceeds from the sale of Shares. Title to the Property was conveyed to
the Company by limited warranty deed.
45
<PAGE>
LOCATION. The Property is located in the city of Arlington, Texas, which is
part of "The Metroplex." For information on The Metroplex, see "Brookfield
Apartments" herein. For information on Arlington, see "Tahoe Apartments" herein.
The immediate area surrounding the Property consists of other multifamily
housing, residential, commercial and retail development. The Property is
conveniently located near restaurants, businesses, schools and churches, and is
readily accessible from Interstate 20 and Interstate 30.
DESCRIPTION OF THE PROPERTY. The Property consists of 184 garden-style
apartment units in 14 two-story buildings on approximately eight acres of land.
The Property was built in 1979.
The Company believes that the Property has generally been well maintained
and is generally in good condition. However, the Company currently has budgeted
approximately $525,000 (and as of June 30, 1998 had expended approximately
$505,000) for repairs and improvements, including painting, clubhouse
renovations, parking lot repair, interior upgrades (including new appliances),
landscaping and pool improvements.
The Property offers several different unit types. The unit mix and rents
being charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
-------- ---- ------------ --------
<S> <C> <C> <C>
24 Efficiency 452 $405
48 One bedroom/one bath 553 445
24 One bedroom/one bath downstairs 652 480
24 One bedroom/one bath upstairs 652 490
24 Two bedrooms/two baths downstairs 860 630
24 Two bedrooms/two baths upstairs 860 650
8 Two bedrooms/two baths 1,075 750
8 Two bedrooms/two baths/view 1,075 760
</TABLE>
The apartments provide a combined total of approximately 127,000 square
feet of net rentable area.
Leases at the Property are generally for terms of one year or less. Average
rental rates of the past five years have generally increased. As an example, a
one bedroom, one bath apartment rented for $360 in 1993, $380 in 1994, $385 in
1995, $395 in 1996 and $425 in 1997. The average effective annual rental per
square foot at the Property for 1993, 1994, 1995, 1996 and 1997 was $6.95,
$7.33, $7.43 $7.62 and $8.34, respectively.
The buildings are wood frame construction with a combination of brick
veneer and masonite hardboard exteriors on reinforced concrete slab foundations.
Roofs are sloped fiberglass shingles over plywood.
The Property has an outdoor swimming pool, clubhouse with leasing office,
and two laundry facilities. There is ample paved parking for the tenants.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up, miniblinds and an individually controlled heating and air conditioning
unit. Each kitchen is equipped with a refrigerator/freezer, electric range and
oven, dishwasher, microwave and garbage disposal. Certain units also feature a
wood-burning fireplace, bookshelves or vaulted ceilings, and all two-bedroom
units have washer/dryer connections for full-sized appliances. The owner of the
Property pays for cold water, natural gas for hot water, sewer service and trash
removal. Tenants pay for their electricity usage, which includes cooking,
lighting, heating and air conditioning.
There are at least six apartment properties that compete with the Property.
All offer similar amenities and generally have rents that are higher when
compared with those at the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in nearby competing properties averaged
approximately 92% at June 30, 1998.
46
<PAGE>
According to information provided by the seller, physical occupancy at the
Property averaged approximately 92% in 1992, 93% in 1993, 94% in 1994, 93% in
1995 and 94% in 1996. Based in part on information provided by the seller,
physical occupancy in 1997 averaged 93%. On June 30, 1998, the Property was 92%
occupied. The tenants are a mix of white-collar and blue-collar workers.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE TAX RATE TAX
------------ --------- -------- ----
<S> <C> <C> <C>
County of Tarrant ......... $4,200,000 $ 1.995196 $ 83,798.24
City of Arlington ......... 4,200,000 0.638000 26,796.00
------------
Total .................... $ 110,594.24
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $3,921,032 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Apple Realty Group, Inc. a property acquisition fee
equal to 2% of the purchase price of the Property, or $90,882. Cornerstone
Realty Income Trust, Inc. will serve as property manager for the Property and
for its services will be paid by the Company a monthly management fee equal to
5% of the gross revenues of the Property plus reimbursement of certain expenses.
POLO RUN APARTMENTS
ARLINGTON, TEXAS
On March 31, 1997, the Company purchased the Polo Run Apartments, a
224-unit apartment complex having an address of 901 Greenway Glen Drive,
Arlington, Texas (the "Property").
The seller was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $6,858,974, which was paid entirely using the
Unsecured Line of Credit. The Company subsequently repaid this borrowed amount
using proceeds from the sale of Shares. Title to the Property was conveyed to
the Company by limited warranty deed.
LOCATION. The Property is located off of Road to Six Flags in Arlington,
Texas, which is part of "The Metroplex." For information on The Metroplex, see
"Brookfield Apartments" herein. For information on Arlington, see "Tahoe
Apartments" herein.
The immediate area surrounding the Property consists of other multi-family
housing and residential, commercial and retail development. The Property is
located near restaurants, businesses, schools and churches, and is readily
accessible from Interstates 20 and 30. The Property is an approximately 20- to
25-minute drive from both downtown Dallas and downtown Fort Worth, as well as
the Dallas/Fort Worth International Airport.
DESCRIPTION OF THE PROPERTY. The Property consists of 224 garden-style
apartment units located in 23 two-story buildings on approximately 9.2 acres of
land. The Property was completed in 1984.
The Company believes that the Property has generally been well maintained
and is generally in very good condition. However, the Company currently has
budgeted approximately $500,000 (and as of June 30, 1998 had expended
approximately $471,000) for repairs and improvements, including painting, siding
repairs, pool renovations, clubhouse renovations and interior upgrades
(including new appliances).
47
<PAGE>
The Property offers four units types. The unit mix and rents being charged
new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
-------- ---- ------------ -------
<S> <C> <C> <C>
56 One bedroom, one bathroom w/fireplace 656 $505
16 One bedroom, one bathroom w/fireplace and dining
room 720 550
88 Two bedrooms, two bathrooms w/fireplace and dining
room 913 640
64 Two bedrooms, two bathrooms w/fireplace, dining
room and vanity 981 660
</TABLE>
The apartments provide a combined total of approximately 191,000 square
feet of net rentable area.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
two-bedroom, two-bath apartment rented for $495 in 1993, $510 in 1994, $530 in
1995, $560 in 1996, and $620 in 1997. The average effective annual rental per
square foot at the Property for 1993, 1994, 1995, 1996 and 1997 was $6.55,
$6.75, $7.01, $7.41 and $7.64, respectively.
The buildings are wood frame construction with combination brick veneer and
masonite hardboard exteriors on reinforced concrete slab foundations. Roofs are
sloped fiberglass shingled on plywood.
The Property has two outdoor swimming pools and a clubhouse with weight
room, party room (with full bar and kitchen), billiards, steam rooms and a
leasing office. There is ample paved parking for tenants.
Apartment units have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. Each apartment unit has a cable television
hook-up, miniblinds and an individually controlled heating and air conditioning
unit. Each kitchen is equipped with a refrigerator/freezer, electric range and
oven, microwave oven, dishwasher and garbage disposal. Each unit also includes a
wood-burning fireplace and a washer and dryer. The owner of the Property pays
for cold water, sewer service, gas usage for hot water and trash removal.
Tenants pay for their electricity service, which includes cooking, lighting,
heating and air conditioning.
There are at least six apartment properties which compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in nearby competing properties averaged
approximately 95% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 94% in 1992, 95% in 1993, 93% in 1994, 94% in
1995 and 96% in 1996. Based in part on information provided by the seller,
physical occupancy in 1997 averaged 94%. On June 30, 1998, the Property was 95%
occupied. The residents are a mix of white-collar and blue-collar workers,
students and retired persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
------------ -------------- ---- ----
<S> <C> <C> <C>
County of Tarrant ......... $5,173,615 $ 1.995196 $ 103,223.77
City of Arlington ......... 5,173,615 0.638000 33,007.66
-------------
Total .................... $ 136,231.43
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $6,264,984 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
48
<PAGE>
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc. a property
acquisition fee equal to 2% of the purchase price of the Property, or $137,179.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
WILDWOOD APARTMENTS
EULESS, TEXAS
On March 31, 1997, the Company purchased the Wildwood Apartments, a
120-unit apartment complex having an address of 200 West Bear Creek, Euless,
Texas (the "Property").
The seller was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $3,963,519, which was paid entirely using the
Unsecured Line of Credit. The Company subsequently repaid such borrowing on the
Unsecured Line of Credit using proceeds from the sale of Shares. Title to the
Property was conveyed to the Company by limited warranty deed.
LOCATION. The Property is located in Euless, within Tarrant County, which
is a part of "The Metroplex." For information on The Metroplex see "Brookfield
Apartments" herein.
The Property is located in the northern portion of Euless. Euless is
located between Dallas and Fort Worth, approximately 17 miles east of the Fort
Worth central business district and approximately 20 miles west of the Dallas
central business district.
The immediate area surrounding the Property consists of other multi-family
housing and residential, commercial and retail development. The Property is
located near restaurants, businesses, schools and churches.
DESCRIPTION OF THE PROPERTY. The Property consists of 120 garden-style
apartments located in 10 two-story buildings on approximately 10 acres of land.
The Property was built in 1984.
The Company believes that the Property has generally been well maintained
and is generally in very good condition. However, the Company currently has
budgeted approximately $324,000 (and as of June 30, 1998 had expended
approximately $287,000) for certain repairs and improvements, including
painting, siding repair, pool renovations and clubhouse renovations.
The Property offers eight different unit types. The unit mix and rents
being charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
-------- ---- ---------- --------
<S> <C> <C> <C>
17 One bedroom, one bathroom 525 $510
7 One bedroom, one bathroom (upgraded) 525 510
12 One bedroom, one bathroom 650 564
12 One bedroom, one bathroom (upgraded) 650 564
13 One bedroom, one bathroom 750 625
19 One bedroom, one bathroom (upgraded) 750 625
16 Two bedrooms, two bathrooms 900 795
24 Two bedrooms, two bathrooms 1,000 845
</TABLE>
The apartments provide a combined total of approximately 90,000 square feet
of net rentable area.
49
<PAGE>
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example a
one-bedroom, one-bath apartment rented for $340 in 1993, $355 in 1994, $395 in
1995, $420 in 1996, and $469 in 1997. The average effective annual rental per
square foot at the Property for 1993, 1994, 1995, 1996 and 1997 was $6.96,
$7.27, $8.09, $8.60 and $9.32, respectively.
The buildings are wood frame construction with a combination of brick
veneer and wood siding on concrete slab foundations. Roofs are pitched and
covered with composition shingles.
The Property has an outdoor swimming pool with a waterfall, a jacuzzi,
covered picnic areas, a playground, a sand volleyball court, basketball courts,
a laundry room and a health club. The Property also has a clubhouse. There is
ample paved parking for tenants, and there are 124 covered parking spaces.
Apartments units have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. Each apartment has a cable television hook-up,
miniblinds and an individually controlled heating and air conditioning unit.
Units also include ceiling fans, intrusion alarms, private balconies and
door-to-door trash and recycling service. Each kitchen is equipped with a
refrigerator-freezer, electric range and oven, dishwasher, microwave oven and
garbage disposal. All but 24 of the units have a fireplace and all of the
two-bedroom units include full-sized washer/dryer connections. The Property also
has valet laundry service with free delivery for tenants without washers and
dryers. The owner of the Property pays for gas usage for hot water and trash
removal. Tenants pay for their electricity service, which includes cooking,
lighting, heating and air conditioning. Historically, the owner of the Property
was responsible for water and sewer charges. However, in February, 1997, the
Property was converted to individually-metered water and sewer service. As
leases are renewed or replaced, the tenants will become responsible for these
charges.
There are at least six apartment properties which compete with the
Property. All offer similar amenities and generally have rents that are
comparable when compared with those of the Property. Based on a recent telephone
survey, the Advisor estimates that occupancy in nearby competing properties
averaged approximately 96% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 93% in 1992, 94% in 1993, 94% in 1994, 95% in
1995 and 96% in 1996. Based in part on information provided by the seller,
physical occupancy in 1997 averaged 94%. On June 30, 1998, the Property was 97%
occupied. The residents are a mix of white-collar and blue-collar workers,
students and retired persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- ----------------------------------- ---------------- ------------- ---------------
<S> <C> <C> <C>
County of Tarrant ................. $3,680,000 $ 1.08135 $ 39,793.68
Grapevine School District ......... 3,680,000 1.53779 56,590.67
------------
Total ............................ $ 96,384.35
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $3,314,933 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc. a property
acquisition fee equal to 2% of the purchase price of the Property,
50
<PAGE>
or $79,270. Cornerstone Realty Income Trust, Inc. will serve as property
manager for the Property and for its services will be paid by the Company a
monthly management fee equal to 5% of the gross revenues of the Property plus
reimbursement of certain expenses.
TOSCANA APARTMENTS
DALLAS, TEXAS
On March 31, 1997, the Company purchased the Toscana Apartments, a 192-unit
apartment complex having an address of 17910 Kelly Boulevard, Dallas, Texas (the
"Property").
The seller was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $5,854,531. The Company paid all but $125,000
in cash using proceeds from the sale of Shares, and the balance was paid using
the Unsecured Line of Credit. The borrowed amount was subsequently repaid using
proceeds from the sale of Shares. Title to the Property was conveyed to the
Company by limited warranty deed.
LOCATION. The Property is located near the intersection of Kelly and
Frankford in the north section of Dallas, Texas, which is part of "The
Metroplex." For information on The Metroplex, see "Brookfield Apartments,"
herein.
The area surrounding the Property consists principally of other
multi-family housing and residential, commercial and retail development. The
Property is approximately a 20-minute drive from downtown Dallas and an
approximately 20-minute drive from the Dallas/Fort Worth International Airport.
DESCRIPTION OF THE PROPERTY. The Property consists of 192 garden-style
apartment units in six two-story buildings on approximately four acres of land.
The Property was completed in 1986.
The Company believes that the Property has generally been well maintained
and is generally in good condition. However, the Company currently has budgeted
approximately $555,000 (and as of June 30, 1998 had expended approximately
$529,000) for repairs and improvements, including painting, clubhouse
renovations, parking area repair and interior upgrades.
The Property offers six different units types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- -------------------------------------- ------------ --------
<S> <C> <C> <C>
64 Efficiency 500 $470
52 One bedroom, one bathroom 600 550
12 One bedroom, one bathroom 650 560
8 One bedroom, one bathroom 650 560
42 One bedroom, one bathroom 700 580
14 One bedroom, one bathroom (upgraded) 700 595
</TABLE>
The apartments provide a combined total of approximately 115,000 square
feet of net rentable area.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
650 square-foot apartment rented for $395 in 1993, $425 in 1994, $470 in 1995,
$490 in 1996, and $540 in 1997. The average effective annual rental per square
foot at the Property for 1993, 1994, 1995, 1996 and 1997 was $7.68, $8.26,
$9.13, $9.52 and $9.82, respectively.
The buildings are wood frame construction with a combination of brick
veneer, stucco and painted wood siding on concrete slab foundations. Roofs are
sloped fiberglass shingles on plywood.
51
<PAGE>
The Property has an outdoor swimming pool with a fountain, a jacuzzi and
cabana, a volleyball area, an exercise/weights room, a sauna, three tanning
beds, an aerobics room with aerobics classes offered, a billiard room, limited
access gates and covered parking. The Property also includes a clubhouse. There
is ample paved parking for tenants.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up, miniblinds and an individually controlled heating and air conditioning
unit. Each kitchen is equipped with a refrigerator/freezer with icemaker,
electric range and oven, microwave, dishwasher and garbage disposal. Each unit
also includes a wood burning fireplace, a stacked washer/dryer unit, ceiling
fans, alarm system and vaulted ceilings. The owner of the Property pays for cold
water, sewer service, gas usage for hot water and trash removal. Tenants pay for
their electricity usage, which includes cooking, lighting, heating and air
conditioning.
There are at least four apartment properties which compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in nearby competing properties averaged
approximately 96% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 95% in 1992, 95% in 1993, 94% in 1994, 96% in
1995 and 96% in 1996. Based in part on information provided by the seller,
physical occupancy in 1997 averaged 96%. On June 30, 1998, the Property was 94%
occupied. The residents are primarily white-collar workers.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- ---------------------------------- ---------------- ------------- ---------------
<S> <C> <C> <C>
County of Denton ................. $4,775,529 $ 0.25590 $ 12,220.58
City of Dallas ................... 5,972,590 0.65160 38,917.40
Carrollton-Farmers School District 5,972,590 1.49619 89,361.20
------------
Total ........................... 140,499.18
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $5,273,108 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc. a property
acquisition fee equal to 2% of the purchase price of the Property, or $117,091.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
THE ARBORS ON FOREST RIDGE APARTMENTS
BEDFORD, TEXAS
On April 25, 1997, the Company purchased The Arbors on Forest Ridge
Apartments, a 210-unit apartment complex having an address of 2200 Forest Ridge
Drive, Bedford, Texas (the "Property").
The seller was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $7,748,907. The Company borrowed the entire
purchase price under the Unsecured Line of Credit and subsequently repaid this
borrowed amount using proceeds from the sale of Shares. Title to the Property
was conveyed to the Company by limited warranty deed.
52
<PAGE>
LOCATION. The Property is located in Bedford within Tarrant County, which
is part of "The Metroplex." For information on The Metroplex see "Brookfield
Apartments" herein.
Bedford is located between Dallas and Fort Worth, being approximately 15
miles east of the Fort Worth central business district and approximately 20
miles west of the Dallas central business district. The immediate area
surrounding the Property consists of other multi-family and single-family
housing and commercial and retail development. The Property is located near
restaurants, businesses, schools and churches, and is readily accessible from
Interstates 121 and 183. The Property is an approximately 10-minute drive from
the Dallas/Fort Worth International Airport.
DESCRIPTION OF THE PROPERTY. The Property consists of 210 garden-style
apartment units located in 19 two-story buildings on approximately 8.9 acres of
land. The Property was completed in 1986.
The Company believes that the Property has generally been well maintained
and is generally in good condition. However the Company currently has budgeted
$365,000 (and as of June 30, 1998 had expended approximately $308,000) for
repairs and improvements, including painting, siding repairs, pool renovations,
clubhouse renovations, interior upgrades and landscaping.
The Property offers a variety of unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------------------------------------- ------------ --------
<S> <C> <C> <C>
8 Contemporary One Bedroom/One Bath Basic 581 $550
10 Contemporary One Bedroom/One Bath w/Fireplace 581 550
2 Contemporary One Bedroom/One Bath large 604 550
8 Contemporary One Bedroom/One Bath large 615 550
w/Fireplace
9 Luxury One Bedroom/One Bath Down 684 625
9 Luxury One Bedroom/One Bath Up 684 625
14 Luxury One Bedroom/One Bath Down w/Fireplace 684 625
14 Luxury One Bedroom/One Bath Up w/Fireplace 684 625
8 Luxury One Bedroom/One Bath w/View 684 635
12 Luxury One Bedroom/One Bath w/View w/Fireplace 684 635
8 Conventional One Bedroom/One Bath Lofted Study 716 625
11 Conventional One Bedroom/One Bath Lofted Study 716 625
w/Fireplace
9 Conventional One Bedroom/One Bath Lofted Study 750 625
Large w/Fireplace
12 Executive One Bedroom/One Bath Down 775 650
12 Executive One Bedroom/One Bath Up 775 650
12 Executive One Bedroom/One Bath Down w/Fireplace 775 650
12 Executive One Bedroom/One Bath Up w/Fireplace 775 650
10 Executive One Bedroom/One Bath Study Down 871 700
10 Executive One Bedroom/One Bath Study Up 893 700
4 Executive One Bedroom/One Bath Study Down 871 700
w/Fireplace
4 Executive One Bedroom/One Bath Study Up 893 700
w/Fireplace
6 Executive One Bedroom/One Bath Study 871 710
Down w/View
6 Executive One Bedroom/One Bath Study Up w/View 893 710
</TABLE>
The apartments provide a combined total of approximately 169,000 square
feet of net rentable area.
53
<PAGE>
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
one-bedroom, one-bath apartment ("executive-down") rented for $460 in 1993, $500
in 1994, $545 in 1995, $560 in 1996, and $600 in 1997. The average effective
annual rental per square foot at the Property for 1993, 1994, 1995, 1996 and
1997 was $6.65, $7.52, $7.88, $8.10 and $9.85, respectively.
The buildings are wood frame construction with a combination of brick
veneer and wood siding on concrete slab foundations. Roofs are pitched
composition shingles.
The Property includes a swimming pool and deck, hot tub/whirlpool, weight
room, sand volleyball court, basketball court, gas grills, picnic area, laundry
room, curb-side trash pick-up and access gates. The Property also has a
clubhouse. There is ample paved parking for tenants, each of whom is assigned
one covered parking space and one uncovered parking space.
Each apartment unit has wall-to-wall carpeting in the living area and vinyl
floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and an individually controlled heating and air conditioning unit. Each
apartment has ceiling fans and a private balcony or patio, and maid service is
available for an extra charge. Each kitchen has a refrigerator/freezer with ice
maker, electric range and oven, dishwasher, microwave and garbage disposal. All
the apartment units except the junior one bedroom units have a fireplace. Some
units also feature decorator bookcases, pass through bar, vaulted ceilings and
washer/dryer connections. Currently, the owner of the Property pays for cold
water, sewer service and trash removal. The tenants pay for their electricity
service, which includes cooking, lighting, heating, hot water and air
conditioning. The apartment units have recently been separately metered for
water and sewer charges, and it is expected that tenants will bear these charges
as leases are renewed or new leases are entered into.
There are at least five apartment properties which compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in nearby competing properties averaged
approximately 96% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 93% in 1992, 94% in 1993, 96% in 1994, 95% in
1995 and 96% in 1996. Based in part on information provided by the seller,
physical occupancy in 1997 averaged 96%. On June 30, 1998, the Property was 99%
occupied. The residents are a mix of white-collar and blue-collar workers and
retired persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- --------------------------- ---------------- -------------- --------------
<S> <C> <C> <C>
County of Tarrant ......... $6,200,000 $ 2.531853 $ 156,978.88
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $7,359,867 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc. a property
acquisition fee equal to 2% of the purchase price of the Property, or $154,978.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
54
<PAGE>
PACE'S COVE APARTMENTS
DALLAS, TEXAS
On June 24, 1997, the Company purchased the Pace's Cove Apartments, a
328-unit apartment complex at 13100 Pandora Drive in Dallas, Texas (the
"Property"). The seller was unaffiliated with the Company, the Advisor, and
their Affiliates. The purchase price was $9,277,355. The Company borrowed the
entire purchase price under the Unsecured Line of Credit and subsequently repaid
this borrowed amount using proceeds from the sale of Shares. Title to the
Property was conveyed to the Company by limited warranty deed.
LOCATION. The Property is located in the northern portion of Dallas within
"The Metroplex." For information on The Metroplex see "Brookfield Apartments"
herein.
The neighborhood surrounding the Property consists of other multi-family
and single-family housing and commercial and retail development. The Property is
an approximately 20-minute drive from Dallas/Fort Worth International Airport
and an approximately 15-minute drive from downtown Dallas.
DESCRIPTION OF THE PROPERTY. The Property consists of 328 garden-style
apartment units located in 19 two- and three-story buildings on approximately 13
acres of land. The Property was constructed in 1982.
The Company believes that the Property has generally been well maintained
and is generally in good condition. However, the Company initially budgeted
approximately $279,000 (and as of June 30, 1998 had expended approximately
$232,000) for certain repairs and improvements, including clubhouse renovations
and interior upgrades.
The Property offers a variety of unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------------------------------- ------------ --------
<S> <C> <C> <C>
42 One bedroom/one bath 504 $455
42 One bedroom/one bath upstairs 504 460
40 One bedroom/one bath 572 480
40 One bedroom/one bath upstairs 572 490
42 One bedroom/one bath w/fireplace 690 550
42 One bedroom/one bath w/fireplace upstairs 690 560
20 One bedroom/one bath/den w/fireplace 757 660
30 Two bedrooms/two baths w/fireplace 925 690
30 Two bedrooms/two baths w/fireplace 1,026 715
</TABLE>
The apartments provide a combined total of approximately 220,000 square
feet of net rentable area.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
downstairs one-bedroom, one-bath apartment (504 square feet) rented for $330 in
1993, $370 in 1994, $390 in 1995, $420 in 1996, and $440 in 1997. The average
effective annual rental per square foot at the Property for 1993, 1994, 1995,
and 1996 was $7.14, $7.14, $8.01, $8.44, $9.09 and $9.80, respectively.
The buildings are wood-frame construction with a combination of brick
veneer and stucco with painted trim on concrete slab foundations. Roofs are
pitched and covered with asphalt shingles on plywood sheathing.
The Property has two outdoor swimming pools, a hot tub and jacuzzi,
volleyball area, fitness center, laundry facility and covered parking for
approximately 328 vehicles. The Property also includes a clubhouse with a
leasing office. There is also ample uncovered paved parking for residents.
55
<PAGE>
Each apartment unit has wall-to-wall carpeting in the living area and vinyl
floors in the kitchen and bath. Each apartment unit has a cable television
hook-up, miniblinds, and an individual heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. Each unit has full-sized washer/dryer connections and a
security alarm. The owner of the Property pays for cold water, sewer charges and
trash removal. The tenants pay for electricity service, which includes cooking,
lighting, heating, hot water and air-conditioning.
There are at least seven apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are lower
when compared with those of the Property. Based on a recent telephone survey,
the Advisor estimates that occupancy at nearby competing properties averaged
approximately 97% at June 30, 1998.
According to information provided by the Seller, physical occupancy at the
Property averaged approximately 92% in 1992, 91% in 1993, 93% in 1994, 94% in
1995, and 93% in 1996. Based in part on information provided by seller, physical
occupancy in 1997 averaged 94%. As of June 30, 1998, the Property was 94%
occupied. The residents are a mix of white-collar and blue-collar workers.
The following table sets forth the 1997 real estate tax information on the
Property.
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- ----------------------------- ---------------- -------------- ------------
<S> <C> <C> <C>
City of Dallas ........... $9,448,220 $ 0.443070 $ 41,862.23
County of Dallas ......... 9,448,220 2.112130 199,558.69
------------
Total ................... $ 241,420.92
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $7,624,404 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property will be adequately
covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. The Company paid Cornerstone
Realty Income Trust, Inc. a property acquisition fee equal to 2% of the
purchase price of the Property, or $185,547. Cornerstone Realty Income Trust,
Inc. will also serve as property manager for the Property and for its services
will be paid by the Company a monthly management fee equal to 5% of the gross
revenues of the Property plus reimbursement of certain expenses.
REMINGTON HILLS AT LAS COLINAS
IRVING, TEXAS
On August 6, 1997, the Company purchased the Chaparosa and Riverhill
Apartments ("Chaparosa" and "Riverhill," respectively, and, collectively, the
"Property") located at 1201 Meadow Creek Drive and 1101 Meadow Creek Drive,
respectively, in Irving, Texas. Chaparosa and Riverhill are adjacent to each
other and the Company now operates them as a combined community under the new
name "Remington Hills at Las Colinas." The Property comprises 362 apartment
units. The purchase price for the Property was $13,100,000 (allocated $5,825,000
to Chaparosa and $7,275,000 to Riverhill), and the sellers were unaffiliated
with the Company, the Advisor and their Affiliates. The Company borrowed the
entire purchase price under the Unsecured Line of Credit and subsequently repaid
this borrowed amount using proceeds from the sale of Shares. Title to the
Property was conveyed to the Company by limited warranty deed.
LOCATION. The Property is located in the city of Irving, Texas, which is
part of "The Metroplex." For information on The Metroplex, see "Brookfield
Apartments" herein. For information on Irving, see "Eagle Crest I & II
Apartments" herein.
56
<PAGE>
The Property is located in the area of Las Colinas. The immediate area
surrounding the Property consists of other multi-family and single-family
housing, and commercial and retail development. The Property is an approximately
15-minute drive from downtown Dallas.
DESCRIPTION OF THE PROPERTY. The Property consists of 362 garden- and
townhouse-style apartment units in 38 two- and three-story buildings on
approximately 16.8 acres of land. Chaparosa was built in 1984 and Riverhill was
built in 1985.
The portion of the Property formerly known as Chaparosa offers five
different unit types. The unit mix and rents being charged new tenants as of
July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- --------------------------- ------------ --------
<S> <C> <C> <C>
42 One bedroom/one bath 713 $690
32 One bedroom/one bath 830 735
42 Two bedrooms/two baths 1,077 885
34 Two bedrooms/two baths 1,148 895
20 Two bedrooms/two baths TH 1,222 995
</TABLE>
The portion of the Property formerly known as Riverhill offers six
different unit types. The unit mix and rents being charged new tenants as of
July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- -------------------------------- ------------ --------
<S> <C> <C> <C>
32 One bedroom/one bath 665 $645
36 One bedroom/one bath 773 715
16 One bedroom/1.5 baths TH w/den 928 860
24 Two bedrooms/two baths 974 840
48 Two bedrooms/two baths 1,062 900
36 Two bedrooms/2.5 baths TH 1,176 940
</TABLE>
The apartments collectively provide a total of approximately 346,000 square
feet of net rentable area.
The Company believes that Chaparosa and Riverhill were generally well
maintained and are in good condition. However, the Company currently has
budgeted approximately $2,000,000 (and as of June 30, 1998 had expended
approximately $1,182,000) for repairs and improvements to the Property,
including foundation repairs, painting, wood replacement, clubhouse renovation
and appliance and carpet replacement.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
two-bedroom, two-bath apartment (1,222 square feet) at Chaparosa rented for $615
in 1993, $715 in 1994, $725 in 1995, $750 in 1996, and $905 in 1997. A
one-bedroom, one-bath apartment (665 square feet) at Riverhill rented for $465
in 1993, $485 in 1994, $505 in 1995, $525 in 1996, and $650 in 1997. The average
effective annual rental per square foot at Chaparosa for 1993, 1994, 1995, 1996
and 1997 was $6.53, $7.59, $7.70, $7.96 and $9.10, respectively. The average
effective annual rental per square foot at Riverhill for 1993, 1994, 1995, 1996
and 1997 was $7.29, $7.61, $7.92, $8.24 and $8.72, respectively.
Buildings are wood-frame construction with crawl spaces. Roofs are pitched
and covered with red tiles. Exteriors are stucco and brick veneer.
The portion of the Property formerly known as Chaparosa features an outdoor
swimming pool and hot tub, a lighted tennis court, a central laundry facility,
and a clubhouse with a rental office and lounge.
57
<PAGE>
The portion of the Property formerly known as Riverhill features an outdoor
swimming pool and enclosed whirlpool spa, a lighted tennis court, and a
clubhouse with a kitchen, lounge, game room and rental office. The Property has
access to Canal Park and ample paved parking for tenants.
All apartment units have wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and baths, as well as cable television hook-ups and
individually controlled heating and air-conditioning units. Each apartment unit
has washer/dryer connections, a wood-burning fireplace and outside storage. Each
kitchen is equipped with a refrigerator/freezer with icemaker, electric range
and oven, microwave, dishwasher and garbage disposal. The owner of the property
pays for cold water, sewer service, cable television, alarm service and trash
removal. The tenants pay for their electricity service, which includes heat, hot
water, air-conditioning, cooking and lights.
There are at least five apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are higher
when compared to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in nearby competing properties averaged
approximately 96% at June 30, 1998.
According to information provided by the seller, physical occupancy at
Chaparosa averaged approximately 94% in 1992, 94% in 1993, 95% in 1994, 97% in
1995 and 97% in 1996. According to information provided by the seller, physical
occupancy at Riverhill averaged approximately 94% in 1992, 96% in 1993, 95% in
1994, 96% in 1995 and 96% in 1996. Based in part on information provided by the
seller, physical occupancy in 1997 averaged 95% at both Chaparosa and Riverhill.
As of June 30, 1998, occupancy at the Property was 96%. Tenants at the
Property are principally white-collar workers.
The following tables set forth the 1997 real estate tax information on the
Property:
CHAPAROSA
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- -------------------------------- ---------------- ------------- ---------------
<S> <C> <C> <C>
County of Dallas ............... $6,053,350 $ 0.44307 $ 26,820.58
City of Irving ................. 6,053,350 0.49300 29,843.02
Carrollton Farmers Branch School
District ...................... 6,053,350 1.49619 90,569.62
------------
Total ......................... $ 147,233.22
</TABLE>
RIVERHILL
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- -------------------------------- ---------------- ------------- ---------------
<S> <C> <C> <C>
County of Dallas ............... $7,206,540 $ 0.44307 $ 31,930.02
City of Irving ................. 7,206,540 0.49300 35,528.24
Carrollton Farmers Branch School
District ...................... 7,206,540 1.49619 107,823.53
------------
Total ......................... $ 175,281.79
------------
Grand Total ................... $ 322,515.01
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $10,428,572 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
58
<PAGE>
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc., a property
acquisition fee equal to 2% of the purchase price of the Property, or $116,500
for Chaparosa and $145,500 for Riverhill. Cornerstone Realty Income Trust, Inc.
will serve as property manager for the Property and for its services will be
paid by the Company a monthly management fee equal to 5% of the gross revenues
of the Property plus reimbursement of certain expenses.
COPPER CROSSING
FORT WORTH, TEXAS
On November 24, 1997, the Company purchased the Copper Crossing Apartments
located at 5644 Riverwalk Drive in Fort Worth, Texas (The "Property"). The
Company now operates the Property in conjunction with the Copper Ridge
Apartments.
The Property comprises 200 apartment units. The purchase price for the
Property was $4,750,000. The seller was Copper Crossing Investors, Ltd., a Texas
limited partnership which is not affiliated with the Company, the Advisor or
their Affiliates. The entire purchase price was paid using proceeds from the
sale of Shares. Title to the Property was conveyed to the Company by limited
warranty deed.
LOCATION. The Property is located off of Bryant-Irvin Highway in Fort
Worth, Texas, in Tarrant County, which is part of the greater Dallas/Fort Worth
Consolidated Metropolitan Statistical Area, or as it is called locally, "The
Metroplex." For information on The Metroplex, see "Brookfield Apartments"
herein.
The immediate area surrounding the Property consists of other multi-family
housing, single-family housing, commercial and retail development. The Property
is located near restaurants, businesses, schools, and churches, and is readily
accessible from Interstate 20, Highway 183 and Interstate 820, which are the
major highways in the area.
The Property is close to Hulen Mall, a major regional mall. This regional
mall has spurred significant construction and corresponding retail growth in the
Hulen Mall/Benbrook area. The Property is an approximately 30-minute drive from
the Dallas/Fort Worth International Airport, an approximately 15-minutes drive
from the Fort Worth central business district and an approximately 30-minute
drive from the Dallas central business district.
DESCRIPTION OF THE PROPERTY. The Property consists of 200 garden-style
apartment units in 13 two-story buildings on approximately 6.9 acres of land.
The Property was constructed in 1981.
The Property offers four different unit types. The unit mix and rents
currently being charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ---------------------------- ------------ --------
<S> <C> <C> <C>
56 One bedroom/one bathroom 563 $410
40 One bedroom/one bathroom 663 435
32 One bedroom/one bathroom 745 500
72 Two bedrooms/two bathrooms 915 590
</TABLE>
The apartments provide a total of approximately 148,000 square feet of net
rental area.
The Company believes that the Property has generally been well maintained
and is in good condition. According to the seller, in the past two years the
seller spent over $400,000 in capital improvements to the exterior of the
Property, including new roofs, exterior rehabilitation, and repair and
replacement of awnings.
59
<PAGE>
The Company currently has budgeted approximately $425,000 (and as of June
30, 1998 had expended approximately $358,000) for additional capital
improvements to the Copper Crossing Apartments, including the separate property
originally acquired and known as the Copper Ridge Apartments. These improvements
will include clubhouse renovations, exterior painting and wood replacement, and
upgrading the landscaping at the Property.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have both increased and decreased. As an
example, a one-bedroom, one-bathroom apartment unit (563 square feet) rented for
$300 in 1993, $299 in 1994, $315 in 1995, $345 in 1996, and $425 in 1997. The
average effective annual rental per square foot at the Property for 1993, 1994,
1995, 1996 and 1997 was $5.74, $5.72, $6.03, $6.60 and $7.08, respectively.
The buildings are wood-frame construction with a combination of brick
veneer and masonite hardboard on reinforced concrete slab foundations. Roofs are
sloped fiberglass shingled on plywood.
The Property has an outdoor swimming pool with a large deck, a fitness
center, a laundry facility, a sand volleyball court and picnic areas. There is
also a clubhouse which includes an entertainment area and a leasing office.
There is ample paved parking for the tenants.
All apartment units have wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and an individually controlled heating and air conditioning unit. Each
kitchen is equipped with a refrigerator/freezer, electric range and oven,
dishwasher and garbage disposal. Each apartment unit has a wood-burning
fireplace, a screened porch or balcony, ceiling fans, mini blinds and vertical
blinds. The largest one-bedroom units and the two-bedroom units include
full-sized washer/dryer connections. The owner of the Property pays for cold
water, gas usage for hot water, sewer service and trash removal. Tenants pay for
their own electricity service, which includes cooking, lighting, heating and air
conditioning.
There are at least five apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in the nearby competing properties averaged
approximately 96% at June 30, 1998.
According to information provided by the Seller, physical occupancy at the
Property averaged approximately 85% in 1992, 87% in 1993, 96% in 1994, 95% in
1995, 94% in 1996, and 95% during 1997. As of June 30, 1998, the Property
(including the former Copper Ridge Apartments) was 93% occupied The tenants are
a mix of white-collar workers, blue-collar workers, students and retired
persons.
The following table sets forth the 1997 real estate tax information of the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE RATE TAX
- --------------------------- ------------- ------------- ---------------
<S> <C> <C> <C>
County of Tarrant ......... $3,300,000 $ 2.01160 $ 66,382.67
City of Benbrook .......... 3,300,000 0.78500 25,905.00
------------
Total .................... $ 92,287.67
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $3,993,650 at December 31, 1997) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc., a property
acquisition fee equal to 2% of the purchase price of the Property,
60
<PAGE>
or $95,000. Cornerstone Realty Income Trust, Inc. will serve as property
manager for the Property and for its services will be paid by the Company a
monthly management fee equal to 5% of the gross revenues of the Property plus
reimbursement of certain expenses.
MAIN PARK APARTMENTS
DUNCANVILLE, TEXAS
On February 4, 1998, Apple REIT Limited Partnership purchased the Main Park
Apartments located at 1303 South Main Street in Duncanville (southwest of
Dallas), Texas (The "Property").
The Property comprises 192 apartment units. The purchase price for the
Property was $8,000,000. The seller was MGW Apartments Partnership, a Texas
limited partnership which is not affiliated with the Company, the Advisor or
their Affiliates. The entire purchase price was paid using proceeds from the
sale of Shares. Title to the Property was conveyed to the Company by limited
warranty deed.
LOCATION. The Property is located on South Main Street in Duncanville,
southwest of Dallas, within the greater Dallas/Fort Worth Consolidated
Metropolitan Statistical Area, or as it is called locally, "The Metroplex." For
information on The Metroplex, see under "Brookfield Apartments."
The immediate area surrounding the Property consists of other multi-family,
single-family, commercial and retail development. The Property is located near
restaurants, businesses, schools, and churches, and is readily accessible from
Interstate 20 and Highway 67. The Property is an approximately 20-minute drive
from downtown Dallas.
DESCRIPTION OF THE PROPERTY. The Property consists of 192 garden-style
apartment units in 24 two-story buildings on approximately 10.4 acres of land.
The Property was constructed in 1984.
The Property offers eight different unit types. The unit mix and rents
being charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR MONTHLY
QUANTITY TYPE SQUARE FOOTAGE RENTAL
- ---------- --------------------------------------- ---------------- -------
<S> <C> <C> <C>
49 One bedroom/one bathroom 757 $599
11 One bedroom/one bathroom (view) 757 619
22 One bedroom/one bathroom w/den 901 709
8 One bedroom/one bathroom w/den (view) 901 725
39 Two bedrooms/two bathrooms 1,056 769
15 Two bedrooms/two bathrooms (view) 1,056 785
38 Two bedrooms/two bathrooms 1,058 789
10 Two bedrooms/two bathrooms (view) 1,058 799
</TABLE>
The apartments provide a total of approximately 180,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. The Company has budgeted approximately $144,000 (and
as of June 30, 1998 had expended approximately $81,000) for additional capital
improvements to the Property. These improvements will include clubhouse
renovations, exterior painting and interior upgrades.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
two-bedroom, two-bathroom apartment unit (1,058 square feet) rented for $608 in
1993, $618 in 1994, $655 in 1995, $683 in 1996 and $702 in 1997. The average
effective annual rental per square foot at the Property for 1993, 1994, 1995,
1996 and 1997 was $7.08, $7.20, $7.63, $7.96, and $8.18, respectively.
The buildings are wood-frame construction with a combination of brick
veneer and masonite hardboard siding on reinforced concrete slab foundations.
Roofs are sloped fiberglass shingles on plywood.
61
<PAGE>
The Property has two outdoor swimming pools, a jacuzzi, two laundry
facilities and a wooded creek view. There is also a clubhouse which includes a
kitchen, entertainment area and leasing office. There is ample paved parking for
the tenants.
All apartment units have wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen, bath, entry and utility areas. Each apartment unit
has a cable television hook-up and an individually controlled heating and air
conditioning unit. Each kitchen is equipped with a refrigerator/freezer,
electric range and oven, dishwasher and garbage disposal. Each apartment unit
has a fireplace, washer/dryer connections, miniblinds, exterior storage and a
private balcony or patio. All upstairs units have vaulted ceilings. The owner of
the Property pays for cold water, gas usage for hot water, sewer service and
trash removal. Tenants pay for their own electricity service, which includes
cooking, lighting, heating and air conditioning.
There are at least four apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in the nearby competing properties averaged
approximately 97% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 94% in 1993, 95% in 1994, 96% in 1995, 96% in
1996, and 96% in 1997. As of June 30, 1998, the Property was 96% occupied. The
tenants are a mix of white-collar workers, blue-collar workers, students and
retired persons.
The following table sets forth the 1997 real estate tax information of the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE RATE TAX
- -------------------------- ------------- ------------- ----------------
<S> <C> <C> <C>
County of Dallas ......... $6,850,180 $ 2.80107 $ 191,878.34
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $7,642,926 at the time of acquisition) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc., a property
acquisition fee equal to 2% of the purchase price of the Property, or $160,000.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
TIMBERGLEN APARTMENTS
DALLAS, TEXAS
On February 13, 1998, Apple REIT Limited Partnership purchased the
Timberglen Apartments located at 3773 Timberglen Road in Dallas, Texas (The
"Property"). The Property comprises 304 apartment units.
The purchase price for the Property was $12,000,000. The seller was
Timberglen Apartments, Ltd., a Texas limited partnership which is not affiliated
with the Company, the Advisor or their Affiliates. The entire purchase price was
paid using proceeds from the sale of Shares. Title to the Property was conveyed
to the Company by limited warranty deed.
62
<PAGE>
LOCATION. The Property is located in the north area of Dallas, within the
greater Dallas/Fort Worth Consolidated Metropolitan Statistical Area, or as it
is called locally, "The Metroplex." For information on The Metroplex, see under
"Brookfield Apartments."
The immediate area surrounding the Property consists of other multi-family,
commercial and retail development. The Property is located near restaurants,
businesses, schools, and churches, and is readily accessible from Interstate 35,
the North Dallas Tollway, Central Expressway and LBJ Freeway. The Property is an
approximately 15-minute drive from downtown Dallas.
DESCRIPTION OF THE PROPERTY. The Property consists of 304 garden and
townhouse style apartment units in 28 two-story and three-story buildings on
approximately 10.5 acres of land. The Property was constructed in 1984.
The Property offers five different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR MONTHLY
QUANTITY TYPE SQUARE FOOTAGE RENTAL
- ---------- -------------------------------------- ---------------- --------
<S> <C> <C> <C>
120 One bedroom/one bathroom 512 $495
80 One bedroom/one bathroom 743 585
32 One bedroom/one bathroom w/den 841 680
48 Two bedrooms/two bathrooms 983 740
24 Two bedrooms/two bathrooms/studio TH 1,100 850
</TABLE>
The apartments provide a total of approximately 221,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. The Company has budgeted approximately $395,000 (and
as of June 30, 1998 had expended approximately $344,000) for additional capital
improvements to the Property. These improvements will include clubhouse
renovations, landscaping and interior upgrades.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
one-bedroom, one-bathroom apartment unit (743 square feet) rented for $410 in
1993, $420 in 1994, $440 in 1995, $485 in 1996 and $510 in 1997. The average
effective annual rental per square foot at the Property for 1993, 1994, 1995,
1996 and 1997 was $6.97, $7.14, $7.48, $8.25, and $8.67, respectively.
The buildings are wood-frame construction with a combination of brick
veneer, stucco and masonite hardboard siding on reinforced concrete slab
foundations. Roofs are sloped fiberglass shingles on plywood.
The Property has a two-tiered outdoor swimming pool, two laundry facilities
and an access gate to the Property. The is also a clubhouse which includes a
kitchen, entertainment area and a leasing office. There is ample payed parking
for the tenants.
All apartment units have wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and baths. Each apartment until has a cable
television hook-up and an individually controlled heating and air conditioning
unit. Each kitchen is equipped with a refrigerator/freezer, electric range and
oven, dishwasher, microwave and garbage disposal. Each apartment unit (other
than the smallest one-bedroom unit) has a fireplace and washer/dryer
connections. Sixteen units substitute a dryer bar for the fireplace. Each
apartment unit (other than the largest two-bedroom unit) has a large patio with
exterior storage. All of the upper level units have vaulted ceilings. The owner
of the Property pays for cold water, gas usage for hot water, sewer service and
trash removal. Tenants pay for their own electricity service, which includes
cooking, lighting, heating and air conditioning.
There are at least 10 apartment properties that compete with the Property.
All offer similar amenities and generally have rents that are comparable to
those of the Property. Based on a recent telephone survey, the Advisor estimates
that occupancy in the nearby competing properties averaged approximately 96% at
June 30, 1998.
63
<PAGE>
According to information provided by the seller, physical occupancy at the
Property averaged approximately 94% in 1993, 95% in 1994, 97% in 1995, 97% in
1996, and 97% in 1997. As of June 30, 1998, the Property was 93% occupied. The
tenants are a mix of white-collar workers, blue-collar workers, students and
retired persons.
The following table sets forth the 1997 real estate tax information of the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE RATE TAX
- --------------------------------------- ------------- ------------- ---------------
<S> <C> <C> <C>
City of Dallas ........................ $9,423,870 $ 0.65160 $ 61,405.94
County of Denton ...................... 9,500,000 0.25590 24,310.50
Carrollton-Farmers Branch ISD ......... 9,423,870 1.49610 140,990.52
------------
Total ................................ $ 226,706.96
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $9,824,675 at the time of acquisition) will generally be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc., a property
acquisition fee equal to 2% of the purchase price of the Property, or $240,000.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
COPPER RIDGE APARTMENTS
FORT WORTH, TEXAS
On March 31, 1998, Apple REIT Limited Partnership purchased the Copper
Ridge Apartments located at 5643 Bellaire Drive South in Fort Worth, Texas (the
"Property"). The Property comprises 200 apartment units. The purchase price for
the Property was $4,525,000. The seller was Copper Limited Partnership, a
Missouri limited partnership which was not affiliated with the Company, the
Advisor or their Affiliates. The entire purchase price as paid using proceeds
from the sale of Shares. Title to the Property was conveyed to the Company by
limited warranty deed.
The Property is adjacent to the Copper Crossing Apartments, which were
purchased by the Company in November 1997. These two properties are operated by
the Company as a single community under the name "Copper Crossing Apartments."
LOCATION. The Property is located off of Bryant-Irvin Highway in Fort
Worth, Texas, in Tarrant County, which is part of the greater Dallas/Fort Worth
Consolidated Metropolitan Statistical Area, or as it is called locally, "The
Metroplex." For information on The Metroplex, see "Brookfield Apartments"
herein. For information on the neighborhood in which the Property is located,
see "Copper Crossing" herein.
DESCRIPTION OF THE PROPERTY. The Property consists of 200 garden-style
apartment units in 15 two-story buildings on approximately seven acres of land.
The Property was constructed in 1980.
64
<PAGE>
The Property offers six different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- -------------------------------------- ------------ --------
<S> <C> <C> <C>
64 One bedroom, one bathroom 651 $410
48 One bedroom, one bathroom 732 435
16 One bedroom, one bathroom with den 878 490
32 Two bedrooms, two bathrooms 918 540
24 Two bedrooms, two bathrooms 945 555
16 Two bedrooms, two bathrooms with den 1,110 650
</TABLE>
The apartments provide a total of approximately 160,000 square feet of net
rentable area.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
two-bedroom, two-bathroom apartment unit (918 square feet) rented for $420 in
1993, $430 in 1994, $440 in 1995, $450 in 1996, and $450 in 1997. The average
effective annual rental per square foot at the Property for 1993, 1994, 1995,
1996, 1997, was $5.73, $5.87, $6.01, $6.14, and $6.14, respectively.
The buildings are wood-frame construction with a combination of brick
veneer and hardboard ship-lap siding on reinforced concrete slab foundations.
Roofs are sloped fiberglass shingles on plywood.
The Property has an outdoor swimming pool, laundry facility and barbecue
areas. There is also a clubhouse with a leasing office. There is ample paved
parking for the tenants.
All apartment units have wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bathrooms. Each apartment unit has a cable
television hook-up and an individually controlled heating and air conditioning
unit. Each kitchen is equipped with a refrigerator/freezer, electric range and
oven, dishwasher and garbage disposal. Each apartment unit has a woodburning
fireplace, a screened patio or balcony, ceiling fans, miniblinds and a
pass-through bar, and some of the apartment units have washer/ dryer
connections. The owner of the Property pays for cold water, gas usage for hot
water, sewer service and trash removal. Tenants pay for their own electricity
service, which includes cooking, lighting, heating and air conditioning.
There are at least five other apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy in the nearby competing properties averaged
approximately 96% at June 30, 1998.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 92% in 1996 and 91% in 1997. Information for
earlier periods is not available. As of June 30, 1998, the Property (including
the Copper Crossing Apartments) was 93% occupied. The tenants are a mix of
white-collar workers, blue-collar workers, students and retired persons.
65
<PAGE>
The following table sets forth the 1997 real estate tax information of the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- --------------------------- ---------------- ------------- ---------------
<S> <C> <C> <C>
County of Tarrant ......... $3,537,000 $ 2.01160 $ 71,150.15
City of Benbrook .......... 3,537,000 0.78500 27,765.45
------------
Total .................... $ 98,915.60
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $3,796,661 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc. a property
acquisition fee equal to 2% of the purchase price of the Property, or $90,500.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
SILVER BROOK APARTMENTS
GRAND PRAIRIE, TEXAS
On May 8, 1998, Apple REIT Limited Partnership purchased the Bitter Creek
Apartments located at 2934 Alouette in Grand Prairie, Texas (the "Property").
The Company has renamed the Property the "Silver Brook Apartments."
The Property comprises 472 apartment units. The purchase price for the
Property was $13,505,000. The seller was Bitter Creek, L.P., a Texas limited
partnership which was not affiliated with the Company, the Advisor or their
Affiliates. The purchase price was paid entirely in cash using proceeds from the
sale of Shares of the Company. Title to the Property was conveyed to the Company
by limited warranty deed.
LOCATION. The Property is located on Highway 360 in Grand Prairie, Texas,
in Tarrant County, which is part of the greater Dallas/Fort Worth Consolidated
Metropolitan Statistical Area, or as it is called locally, "The Metroplex." For
information on The Metroplex, see under "Brookfield Apartments" in this
Supplement.
The immediate area surrounding the Property consists of other multi-family
housing, single-family housing, commercial and retail development. The Property
is an approximately 10-minute drive from the Dallas/Fort Worth International
Airport, an approximately 20-minute drive from downtown Fort Worth and an
approximately 20-minute drive from downtown Dallas.
DESCRIPTION OF THE PROPERTY. The Property consists of 472 apartment units
in 36 buildings on approximately 20.7 acres of land. The Property was
constructed in 1982.
66
<PAGE>
The Property offers five different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- -------------- ------------------------------- ------------ --------
<S> <C> <C> <C>
48 One bedroom, one bathroom 600 $439
192 One bedroom, one bathroom 720 469
128 Two bedrooms, two bathrooms 950 549
72 Two bedrooms, two bathrooms 1,000 599
32 Three bedrooms, two bathrooms 1,150 719
</TABLE>
All unit types are available with a fireplace for an extra $10 per month.
The apartments provide a total of approximately 397,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$354,000 for repairs and improvements to the Property. These repairs and
improvements will include clubhouse renovations, exterior painting and wood
replacement, interior upgrades and a new fitness center. As of June 30, 1998 the
Company had spent approximately $37,000 on such repairs and improvements.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 94% in 1993, 92% in 1994, 91% in 1995, 92%
in 1996 and 96% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a two-bedroom, two-bathroom apartment (1,000 square
feet) rented for $499 in 1993, $509 in 1994, $519 in 1995, $529 in 1996 and $539
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $6.83, $6.96, $7.10, $7.24, and $7.37,
respectively.
The Property has two outdoor swimming pools with fountains, a tennis court,
four laundry facilities and a sand volleyball court. There is also a clubhouse
with a kitchen, entertainment area and a leasing office. There is ample paved
parking for tenants.
The buildings are wood-frame construction with a combination of brick
veneer and masonite hardboard on concrete slab foundations. Roofs are pitched
and covered with fiberglass shingles on plywood.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and an individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. Each unit (except the smallest one-bedroom unit) has
full-sized washer/dryer connections. A total of 232 units have woodburning
fireplaces, and each second-floor unit has vaulted ceilings. Each unit has
walk-in closets, outside storage, a covered balcony or patio and ceiling fans.
The owner of the Property pays for cold water, sewer charges, gas (for hot
water) and trash removal. The tenants pay for electricity service, which
includes cooking, lighting, heating and air-conditioning.
There are at least 12 apartment properties that compete with the Property.
All offer similar amenities and generally have rents that are comparable to
those of the Property. Based on a recent telephone survey, the Advisor estimates
that occupancy at nearby competing properties averaged approximately 95% on June
30, 1998.
As of June 30, 1998, the Property was approximately 97% occupied. The
tenants are a mix of white-collar and blue-collar workers.
67
<PAGE>
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE RATE TAX
- ------------------------------- ------------- ------------- --------------
<S> <C> <C> <C>
County of Tarrant ............. $8,700,000 $ 1.99520 $ 173,582.05
City of Grand Prairie ......... 8,929,790 0.68000 60,722.40
-------------
Total ........................ $ 234,304.45
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $10,526,521 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc. a property
acquisition fee equal to 2% of the purchase price of the Property, or $270,100.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
SUMMER TREE APARTMENTS
NORTH DALLAS, TEXAS
On June 2, 1998, Apple REIT Limited Partnership purchased the Summer Tree
Apartments located at 13250 Emily Road in North Dallas, Texas (the "Property").
The Property comprises 232 apartment units. The purchase price for the
Property was $5,700,000. The seller was Sunrise Enterprises, Inc., a Texas
corporation which was not affiliated with the Company, the Advisor or their
Affiliates. The purchase price was paid entirely in cash using proceeds from the
sale of Shares of the Company. Title to the Property was conveyed to the Company
by limited warranty deed.
LOCATION. The Property is located on Emily Road on the north side of
Interstate 635 (L.B.J. Freeway), and just west of U.S. Highway 75 (Central
Expressway) in North Dallas, Texas. The Property is located within "The
Metroplex." For information on The Metroplex, see under "Brookfield Apartments"
in this Supplement.
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
The Property is located approximately one-quarter mile from a
multi-billion-dollar Texas Instruments facility. The Property is proximate to
other businesses, restaurants, schools and churches, and is readily accessible
from Interstate 635 and Highway 75. The Property is an approximately 20-minute
drive from the Dallas/Fort Worth International Airport and an approximately
15-minute drive from downtown Dallas.
DESCRIPTION OF THE PROPERTY. The Property consists of 232 garden-style
apartment units in 11 two- and three-story buildings on approximately six acres
of land. The Property was constructed in 1980.
68
<PAGE>
The Property offers four different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ----------------------------- ------------ --------
<S> <C> <C> <C>
96 One bedroom, one bathroom 481 $449
48 One bedroom, one bathroom 575 474
72 One bedroom, one bathroom 622 494
16 Two bedrooms, two bathrooms 933 669
</TABLE>
The apartments provide a total of approximately 133,500 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$348,000 for repairs and improvements to the Property, to include clubhouse
renovations, exterior painting, pool renovations, sign replacement and interior
upgrades. As of June 30, 1998, the Company had spent approximately $13,000 on
such repairs and improvements.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 94% in 1993, 94% in 1994, 96% in 1995, 96%
in 1996 and 97% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a one-bedroom, one-bathroom apartment (622 square
feet) rented for $390 in 1993, $424 in 1994, $444 in 1995, $454 in 1996 and $484
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $7.97, $8.67, $9.07, $9.28, and $9.89,
respectively.
The Property has an outdoor swimming pool, a fitness center, a laundry
facility and card-accessed entrance gates. The Property also has a clubhouse
with a kitchen, entertainment area and leasing office. There is ample paved
parking for tenants.
The buildings are wood-frame construction with a combination of brick
veneer, stucco and wood lap siding on concrete slab foundations. Roofs are
pitched and covered with asphalt shingles on plywood sheathing.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher,
microwave oven and garbage disposal. All units have washer/dryer connections and
all units except the smallest one-bedroom units have a wood-burning fireplace.
The owner of the Property pays for cold water, sewer charges, gas (for hot
water) and trash removal. The tenants pay for their electricity service, which
includes cooking, lighting, heating and air-conditioning.
There are at least eight apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy at nearby competing properties averaged
approximately 95% on June 30, 1998.
As of June 30, 1998, the Property was approximately 98% occupied. The
tenants are primarily a mix of white-collar and blue-collar workers.
69
<PAGE>
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- ---------------------------- ---------------- ------------- ---------------
<S> <C> <C> <C>
County of Dallas ........... $4,423,510 $ 0.44307 $ 19,599.25
City of Dallas ............. 4,423,510 0.65160 28,823.59
Richardson I.S.D. .......... 4,423,510 1.60000 70,776.16
------------
Total ..................... $ 119,199.00
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $2,738,537 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the Property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc. a property
acquisition fee equal to 2% of the purchase price of the Property, or $114,000.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
PARK VILLAGE APARTMENTS
BEDFORD, TEXAS
On July 1, 1998, Apple REIT Limited Partnership purchased the Park Village
Apartments located at 2401 L. Don Dodson Drive, in Bedford, Texas (the
"Property").
The Property comprises 238 apartment units. The purchase price for the
Property was $7,000,000. The seller was Park Village Investment Partnership, a
Texas limited partnership which was not affiliated with the Company, the Advisor
or their affiliates. The purchase price was paid entirely in cash using proceeds
from the sale of Shares of the Company. Title to the Property was conveyed to
the Company by limited warranty deed.
LOCATION. The Property is located on L. Don Dodson Drive off of Central
Drive just north of Airport Freeway (Highway 183) in Bedford, Texas. The
Property is located within the greater Dallas/ Fort Worth metropolitan
statistical area, or as it is called locally, "The Metroplex." See above under
"Brookfield Apartments" for a description of "The Metroplex."
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
The Property is proximate to businesses, restaurants, schools and churches and
is readily accessible from Interstates 121, 360 and 183. The Property is an
approximately 10-minute drive from Dallas/Fort Worth International Airport and
an approximately 20-minute drive from either downtown Dallas or Fort Worth.
DESCRIPTION OF THE PROPERTY. The Property consists of 238 garden-style
apartment units in 23 two story buildings on approximately ten acres of land.
The Property was constructed in 1983.
70
<PAGE>
The Property offers six different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- -------------------------- ------------ --------
<S> <C> <C> <C>
48 One Bedroom/One Bath 456 $401
64 One Bedroom/One Bath 521 449
62 One Bedroom/One Bath 669 515
32 One Bedroom/One Bath/Den 841 614
16 Two Bedrooms/Two Baths 920 672
16 Two Bedrooms/Two Baths 983 718
</TABLE>
The apartments provide a total of approximately 154,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$238,000 for repairs and improvements to the Property to include clubhouse
renovations, exterior painting, sign replacement and interior upgrades.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 95% in 1993, 97% in 1994, 97% in 1995, 96%
in 1996 and 96% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a two-bedroom, two-bathroom apartment (983 square
feet) rented for $560 in 1993, $560 in 1994, $580 in 1995, $605 in 1996 and $630
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $7.58, $7.58, $7.85, $8.14, and $8.53,
respectively.
The Property has an outdoor swimming pool, hot tub and two laundry
facilities. The Property also has a clubhouse with a leasing office. There is
ample paved parking for tenants.
The buildings are wood frame construction with a combination of brick
veneer, stucco and wood siding on concrete slab foundations. Roofs are pitched
composition.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has smoke detectors, a
cable television hook-up and individually controlled heating and
air-conditioning unit. Each kitchen has a refrigerator/freezer, electric range
and oven, dishwasher, and garbage disposal. All units except the smallest
one-bedroom units have washer/dryer connections and a wood-burning fireplace.
The owner of the Property pays for cold water, sewer charges, gas (for hot
water) and trash removal. The tenants pay for their electricity service, which
includes cooking, lighting, heating and air-conditioning.
There are at least seven apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy at nearby competing properties averaged
approximately 94% on July 1, 1998.
As of July 1, 1998, the Property was approximately 98% occupied. The
tenants are primarily a mix of white-collar and blue-collar workers and retired
persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- ---------------------------- ---------------- -------------- ---------------
<S> <C> <C> <C>
County of Tarrant .......... $5,392,450 $ 0.264836 $ 14,281.15
City of Bedford ............ 5,392,450 0.369000 19,898.14
T C Hospital ............... 5,392,450 0.234070 12,622.11
T C Jr. College ............ 5,392,450 0.057690 3,110.90
H-E-B I.S.D. ............... 5,392,450 1.606257 86,616.61
------------
Total ..................... $ 136,528.91
</TABLE>
71
<PAGE>
The basis of the depreciable residential real property portion of the
Property (approximately $6,165,062 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Internal Revenue Code of 1986, as amended (the
"Code"). Amounts to be spent by the Company on repairs and improvements will be
treated for tax purposes as permitted by the Code based on the nature of the
expenditures.
The Advisor and the Company believe that the property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, the Company paid Cornerstone Realty Income Trust, Inc. a property
acquisition fee equal to 2% of the purchase price of the property, or $140,000.
Cornerstone Realty Income Trust, Inc. will serve as property manager for the
Property and for its services will be paid by the Company a monthly management
fee equal to 5% of the gross revenues of the Property plus reimbursement of
certain expenses.
COTTONWOOD CROSSING APARTMENTS
GRAND PRAIRIE, TEXAS
On July 9, 1998, Apple REIT Limited Partnership purchased the Cottonwood
Crossing Apartments located at 2105 Cottonwood Club, in Arlington, Texas (the
"Property").
The Property comprises 200 apartment units. The purchase price for the
Property was $5,700,000. The seller was Cottonwood Realty Associates, a New York
general partnership which was not affiliated with the Company, the Advisor or
their affiliates. The purchase price was paid using proceeds from the sale of
Shares of the Company. Title to the Property was conveyed to the Company by
limited warranty deed.
LOCATION. The Property is located on Cottonwood Club off of Pioneer Parkway
(Spur 303), a major east/west thoroughfare in Arlington, Texas. The Property is
located within the greater Dallas/Forth Worth metropolitan statistical area, or
as it is called locally, "The Metroplex." For information on The Metroplex, see
under "Brookfield Apartments" in this Supplement.
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
The Property is conveniently located near fine restaurants, businesses, schools
and churches and is readily available from Interstates 360, 20 and 30, the
Arlington area interstates. The Property is an approximately 20-minute drive
from Dallas/Fort Worth International Airport, an approximately 15-minute drive
from downtown Fort Worth and an approximately 30-minute drive from downtown
Dallas.
DESCRIPTION OF THE PROPERTY. The Property consists of 200 apartment units
in 10 buildings on approximately 6.8 acres of land. The Property was constructed
in 1985.
The Property offers four different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- --------------------------------- ------------ --------
<S> <C> <C> <C>
100 One bedroom, one bathroom 628 $400
52 One bedroom, one bathroom w/den 868 545
8 Two bedrooms, one bathroom 868 555
40 Two bedrooms, two bathrooms 883 575
</TABLE>
The apartments provide a total of approximately 150,000 square feet of net
rentable area.
72
<PAGE>
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$300,000 for repairs and capital improvements to the Property to include
clubhouse renovations, exterior painting, landscaping and interior upgrades.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 92% in 1993, 94% in 1994, 95% in 1995, 96%
in 1996 and 96% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a one-bedroom, one-bathroom apartment (868 square
feet) rented for $440 in 1993, $455 in 1994, $455 in 1995, $465 in 1996 and $475
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $6.19, $6.40, $6.40, $6.54, and $6.68,
respectively.
The Property has an outdoor swimming pool with a fountain and a clubhouse
with a leasing office. The buildings are wood framed construction with a
combination of brick veneer and wood siding on concrete slab foundations. Roofs
are pitched composition.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. All of the units include ceiling fans, french patio doors,
full size washer/dryer connections, fireplace, a patio or balcony and outside
storage. The owner of the Property pays for cold water, sewer charges, gas (for
hot water) and trash removal. The tenants pay for their electricity service,
which includes cooking, lighting, heating and air-conditioning.
There are at least three apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy at nearby competing properties averaged
approximately 97% on June 30, 1998.
As of June 30, 1998, the Property was approximately 89% occupied. The
tenants are primarily a mix of blue-collar and white-collar workers, students
and retired persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
ASSESSED
JURISDICTION VALUE RATE TAX
- --------------------------- ------------- ----------- ---------------
<S> <C> <C> <C>
County of Tarrant ......... $4,700,000 $ 1.995 $ 93,774.21
City of Arlington ......... 4,700,000 0.638 29,986.00
------------
Total .................... $ 123,760.21
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $5,248,575 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, Cornerstone Realty Income Trust, Inc. earned a property acquisition
fee equal to 2% of the purchase price of the property, or $114,000.
Cornerstone Realty Income Trust, Inc. will serve as property manager for
the Property and for its services will be paid by the Company a monthly
management fee equal to 5% of the gross revenues of the Property plus
reimbursement of certain expenses.
73
<PAGE>
PACE'S POINT APARTMENTS
LEWISVILLE, TEXAS
On July 17, 1998, Apple REIT V Limited Partnership purchased the Pace's
Point Apartments located at 247 East Corporate Drive, in Lewisville, Texas (the
"Property").
The Property comprises 300 apartment units. The purchase price for the
Property was $11,405,000. The seller was Corporate Drive, L.P., a Texas limited
partnership which was not affiliated with the Company, the Advisor or their
affiliates. The purchase price was paid through a combination of (i)
approximately $3,691,383 in cash using proceeds from the sale of the Shares of
the Company and (ii) approximately $7,713,617 by assumption of a mortgage loan.
Title to the Property was conveyed to the Company by special warranty deed.
The Property was acquired with the assumption of a mortgage loan in the
original principal amount of $7,836,000 held by the Federal National Mortgage
Association ("Fannie Mae"). On July 17, 1998, the outstanding principal balance
of the mortgage loan was $7,713,616.57. The interest on the mortgage loan is
8.555% per annum; amortization is based on a 30-year amortization term; and
prepayments are permitted upon notice and payment of a prepayment premium based
on a yield maintenance formula contained in the loan documents. The maturity
date of the mortgage loan is July 1, 2003, and the balance due at maturity,
assuming no payment has been made on principal in advance of its due date, is
$7,307,129.73.
LOCATION. The Property is located on East Corporate Drive in Lewisville,
Texas. The Property is located within "The Metroplex." For information on The
Metroplex, see under "Brookfield Apartments" in this Supplement.
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
The Property is an approximately 15-minute drive from Dallas/Fort Worth
International Airport, an approximately 25-minute drive from downtown Dallas and
an approximately 20-minute drive from downtown Fort Worth.
DESCRIPTION OF THE PROPERTY. The Property consists of 300 apartment units
in 14 buildings on approximately 12.6 acres of land. The Property was
constructed in 1985.
The Property offers six different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------------------------ ------------ -----------
<S> <C> <C> <C>
36 One bedroom, one bathroom 535 $479 - 499
24 One bedroom, one bathroom 581 499 - 519
84 One bedroom, one bathroom 683 539 - 559
40 One bedroom, one bathroom with den 779 599 - 519
56 Two bedrooms, two bathrooms 875 649 - 669
60 Two bedrooms, two bathrooms 966 689 - 709
</TABLE>
The apartments provide a total of approximately 229,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$225,000 for repairs and capital improvements to the Property to include
clubhouse renovations, additional landscaping and interior upgrades.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 94% in 1993, 95% in 1994, 96% in 1995, 96%
in 1996 and 96% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a one-bedroom, one-bathroom apartment (581 square
feet) rented for $400 in 1993, $449 in 1994, $449 in 1995, $449 in 1996 and $469
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $7.36, $8.26, $8.26, $8.26, and $8.63,
respectively.
74
<PAGE>
The Property has two outdoor swimming pools, a jacuzzi, a sand volleyball
court, a fitness center, a sauna, 23 carports and two laundry facilities. The
Property also has a clubhouse with a leasing office.
The buildings are wood framed construction with a combination of brick
veneer and painted horizonal wood siding on concrete slab foundations. Roofs are
pitched and covered with fiberglass shingles on plywood.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. All units have full-sized washer/dryer connections. Some of
the units have wood-burning fireplaces, vaulted ceilings and alarm systems. Each
unit has walk-in closets, outside storage, a covered balcony or patio and
ceiling fans. The owner of the Property pays for cold water, sewer charges, gas
(for hot water) and trash removal. The tenants pay for their electricity
service, which includes cooking, lighting, heating and air-conditioning.
There are at least 15 apartment properties that compete with the Property.
All offer similar amenities and generally have rents that are comparable to
those of the Property. Based on a recent telephone survey, the Advisor estimates
that occupancy at nearby competing properties averaged approximately 95% on June
30, 1998.
As of June 30, 1998, the Property was approximately 95% occupied. The
tenants are primarily a mix of white-collar and blue-collar workers, students
and retired persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- ----------------------------- ---------------- ------------- ---------------
<S> <C> <C> <C>
County of Denton ............ $9,389,517 $ 0.25590 $ 24,027.77
City of Lewisville .......... 9,389,517 1.51600 142,345.08
Lewisville I.S.D. ........... 9,389,517 0.48949 45,960.75
------------
Total ....................... $ 212,333.60
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $9,633,257 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, Cornerstone Realty Income Trust, Inc. earned a property acquisition
fee equal to 2% of the purchase price of the property, or $228,100. At closing,
Cornerstone Realty Income Trust, Inc. was paid a portion of the property
acquisition fee corresponding to the portion of the purchase price of the
property paid in cash by the Company. The cash portion of the purchase price was
approximately $3,691,383, and 2% of that amount was approximately $72,828. On
September 17, 1998, the Company entered into an agreement providing for the
payment of the balance of the property acquisition fee. See "The Advisor and its
Affiliates -- The Property Acquisition/Disposition Agreement."
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.
75
<PAGE>
PEPPER SQUARE APARTMENTS
NORTH DALLAS, TEXAS
On July 17, 1998, Apple REIT VI Limited Partnership purchased the Pepper
Square Apartments located at 6069 Beltline Road, in North Dallas, Texas (the
"Property").
The Property comprises 144 apartment units. The purchase price for the
Property was $5,205,000. The seller was Pepper Square Associates, Ltd., a Texas
limited partnership which was not affiliated with the Company, the Advisor or
their affiliates. The purchase price was paid through a combination of (i)
approximately $1,561,576 in cash using proceeds from the sale of the Shares of
the Company and (ii) approximately $3,643,424 by assumption of a mortgage loan.
Title to the Property was conveyed to the Company by special warranty deed.
The Property was acquired with the assumption of a mortgage loan in the
original principal amount of $3,701,000 held by Fannie Mae. On July 17, 1998,
the outstanding principal balance of the mortgage loan was $3,643,423.53. The
interest on the mortgage loan is 8.575% per annum; amortization is based on a
30-year amortization term; and prepayments are permitted upon notice and payment
of a prepayment premium based on a yield maintenance formula contained in the
loan documents. The maturity date of the mortgage loan is July 1, 2006, and the
balance due at maturity, assuming no payment has been made on principal in
advance of its due date, is $3,312,543.23.
LOCATION. The Property is located in North Dallas, Texas. The Property is
located within "The Metroplex." For information on The Metroplex, see under
"Brookfield Apartments" in this Supplement.
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
The Property is an approximately five-minute drive from Preston Mall, the
Galleria Mall and Valley View Mall. The Property is an approximately 25-minute
drive from Dallas/Fort Worth International Airport.
DESCRIPTION OF THE PROPERTY. The Property consists of 144 apartment units
in 15 buildings on approximately 5.9 acres of land. The Property was constructed
in 1978.
The Property offers six different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------------------------------- ------------ --------
<S> <C> <C> <C>
24 One bedroom, one bathroom 622 $449
32 One bedroom, one bathroom 777 499
24 One bedroom, one bathroom 888 559
32 Two bedrooms, two bathrooms 948 659
30 Two bedrooms, two bathrooms 1,044 679
2 Two bedrooms, two bathrooms with sun room 1,185 799
</TABLE>
The apartments provide a total of approximately 126,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$288,000 for repairs and capital improvements to the Property to include
clubhouse renovations, siding repair and replacement, exterior painting,
landscaping and interior upgrades.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 94% in 1993, 93% in 1994, 95% in 1995, 93%
in 1996 and 95% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a one-bedroom, one-bathroom apartment (777 square
feet) rented for $459 in 1993, $479 in 1994, $489 in 1995, $489 in 1996 and $499
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $7.30, $7.61, $7.77, $7.77, and $7.93,
respectively.
76
<PAGE>
The Property has an outdoor swimming pool, a weight room, a jogging trail,
63 carports and a laundry facility. The Property also has a clubhouse with a
leasing office.
The buildings are wood framed construction with a combination of brick
veneer and painted stucco and shingled wood exterior walls on concrete slab
foundations. Roofs are pitched and covered with fiberglass shingles on plywood.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. Some units have a wood burning fireplace or full-sized
washer/dryer connections. Each unit has walk-in closets, outside storage, a
covered balcony or patio and ceiling fans. The owner of the Property pays for
cold water, sewer charges, gas (for hot water) and trash removal. The tenants
pay for their electricity service, which includes cooking, lighting, heating and
air-conditioning.
There are at least 13 apartment properties that compete with the Property.
All offer similar amenities and generally have rents that are comparable to
those of the Property. Based on a recent telephone survey, the Advisor estimates
that occupancy at nearby competing properties averaged approximately 94% on June
30, 1998.
As of June 30, 1998, the Property was approximately 94% occupied. The
tenants are primarily a mix of white-collar and blue-collar workers, students
and retired persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- --------------------------- ---------------- ------------- ---------------
<S> <C> <C> <C>
County of Dallas .......... $4,059,090 $ 0.44307 $ 17,984.61
City of Dallas ............ 4,059,090 0.65160 26,449.03
Dallas I.S.D. ............. 4,059,090 1.46053 59,284.23
------------
Total ..................... $ 103,717.87
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $3,607,225 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, Cornerstone Realty Income Trust, Inc. earned a property acquisition
fee equal to 2% of the purchase price of the property, or $104,100. At closing,
Cornerstone Realty Income Trust, Inc. was paid a portion of the property
acquisition fee corresponding to the portion of the purchase price of the
property paid in cash by the Company. The cash portion of the purchase price was
approximately $1,561,576, and 2% of that amount was approximately $31,232. On
September 17, 1998, the Company entered into an agreement providing for the
payment of the balance of the property acquisition fee. See "The Advisor and its
Affiliates -- The Property Acquisition/Disposition Agreement."
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.
77
<PAGE>
EMERALD OAKS APARTMENTS
GRAPEVINE, TEXAS
On July 24, 1998, Apple REIT II Limited Partnership purchased the Emerald
Oaks Apartments located at 2100 Grayson Drive, in Grapevine, Texas (the
"Property").
The Property comprises 250 apartment units. The purchase price for the
Property was $10,930,000. The seller was Newemerald Texas, Ltd., a Texas limited
partnership which was not affiliated with the Company, the Advisor or their
affiliates. The purchase price was paid through a combination of (i)
approximately $4,244,294 in cash using proceeds from the sale of the Shares of
the Company and (ii) approximately $6,685,706 by assumption of a mortgage loan.
Title to the Property was conveyed to the Company by special warranty deed.
The Property was acquired with the assumption of a mortgage loan in the
original principal amount of $9,650,000 held by Fannie Mae. On July 24, 1998,
the outstanding principal balance of the mortgage loan was $6,685,706.08. The
interest on the mortgage loan is 6.75% per annum; amortization is based on a
30-year amortization term; and prepayments are permitted under the following
circumstances: after May 1, 2001 to April 30, 2002 at 102% of the principal
balance of the mortgage loan, from May 1, 2002 to April 30, 2003 at 101% of the
principal balance, and from May 1, 2003 and thereafter at 100% of the principal
balance. The maturity date of the mortgage loan is April 1, 2007, and the
balance due at maturity, assuming no payment has been made on principal in
advance of its due date, is $5,509,607.59.
In connection with the original financing of the Property, the previous
owner of the Property agreed to certain restrictions on the use of the Property
set forth in a special warranty deed and deed restrictions. In connection with
the purchase of the Property and the assumption of the mortgage loan, the
Company entered into an assumption of the special warranty deed and deed
restrictions. Among the restrictions agreed to by the Company is that at least
20% of the apartment units must be occupied by persons who, at the time of
initial occupancy of the apartment units, are "low or moderate income tenants."
The term low or moderate income tenants is defined, generally, as one or more
persons who occupy an apartment unit whose aggregate anticipated income does not
exceed 80% of the median income for the area where the Property is located.
LOCATION. The Property is located on Grayson Drive, within Tarrant County,
northwest of the City of Dallas and near the Dallas/Fort Worth International
Airport. The Property is located within "The Metroplex." For Information on The
Metroplex, see under "Brookfield Apartments" in this Supplement.
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
The Property is an approximately 10-minute drive from Dallas/Fort Worth
International Airport, an approximately 25-minute drive from downtown Dallas,
and an approximately 15-minute drive from downtown Fort Worth.
DESCRIPTION OF THE PROPERTY. The Property consists of 250 apartment units
in 19 buildings on approximately 13.5 acres of land. The Property was
constructed in 1986.
The Property offers five different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------------------------ ------------ --------
<S> <C> <C> <C>
28 One bedroom, one bathroom 600 $479
92 One bedroom, one bathroom 750 569
70 One bedroom, one bathroom with den 900 669
44 Two bedrooms, two bathrooms 1,018 779
16 Three bedrooms, two bathrooms 1,186 899
</TABLE>
The apartments provide a total of approximately 213,000 square feet of net
rentable area.
78
<PAGE>
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$250,000 for repairs and capital improvements to the Property to include
clubhouse renovations, exterior painting, installation of new gutters and
downspouts and paving repairs.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 90% in 1993, 94% in 1994, 94% in 1995, 92%
in 1996 and 93% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a one-bedroom, one-bathroom apartment (750 square
feet) rented for $425 in 1993, $450 in 1994, $480 in 1995, $519 in 1996 and $549
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $6.76, $7.16, $7.64, $8.26, and $8.74,
respectively.
The Property has two outdoor swimming pools with picnic areas and grills, a
jacuzzi, a sand volleyball court, 19 carports and two laundry facilities. The
Property also has a clubhouse with a leasing office.
The buildings are wood framed construction with a combination of brick
veneer, stucco and painted wood siding on concrete slab foundations. Roofs are
pitched and covered with fiberglass shingles on plywood.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher, and
garbage disposal. All units (except for the smallest one-bedroom unit) have
full-sized washer/dryer connections. Each upstairs unit has a fireplace and each
downstairs unit has a built-in bookcase and nine-foot ceilings. The owner of the
Property pays for cold water, sewer charges, gas (for hot water) and trash
removal. The tenants pay for their electricity service, which includes cooking,
lighting, heating and air-conditioning.
There are at least three apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy at nearby competing properties averaged
approximately 96% on June 30, 1998.
As of June 30, 1998, the Property was approximately 92% occupied. The
tenants are primarily a mix of white-collar workers, students and retired
persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- ---------------------------- ---------------- ----------- ---------------
<S> <C> <C> <C>
County of Tarrant .......... $7,850,000 $ 0.556 $ 43,692.79
City of Grapevine .......... 7,850,000 1.942 152,501.95
------------
Total ...................... $ 196,194.74
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $10,224,983 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, Cornerstone Realty Income Trust, Inc. earned a property acquisition
fee equal to 2% of the purchase price of the property, or $218,600. At closing,
Cornerstone Realty Income Trust, Inc. was paid a portion of the property
acquisition fee corresponding to the portion of the purchase price of the
property paid in cash by the Company. The cash
79
<PAGE>
portion of the purchase price was approximately $4,244,294, and 2% of that
amount was approximately $84,886. On September 17, 1998, the Company entered
into an agreement providing for the payment of the balance of the property
acquisition fee. See "The Advisor and its Affiliates -- The Property
Acquisition/Disposition Agreement."
Cornerstone Realty Income Trust, Inc. will serve as property manager for
the Property and for its services will be paid by the Company a monthly
management fee equal to 5% of the gross revenues of the Property plus
reimbursement of certain expenses.
HAYDEN'S CROSSING APARTMENTS
GRAND PRAIRIE, TEXAS
On July 24, 1998, Apple REIT III Limited Partnership purchased the Hayden's
Crossing Apartments located at 2802 South State Highway 360, in Grand Prairie,
Texas (the "Property").
The Property comprises 170 apartment units. The purchase price for the
Property was $4,705,000. The seller was Hayden's Crossing, Ltd., a Texas limited
partnership which was not affiliated with the Company, the Advisor or their
affiliates. The purchase price was paid through a combination of (i)
approximately $1,632,601 in cash using proceeds from the sale of the Shares of
the Company and (ii) approximately $3,072,399 by assumption of a mortgage loan.
Title to the Property was conveyed to the Company by special warranty deed.
The Property was acquired with the assumption of a mortgage loan in the
original principal amount of $5,550,000 held by Fannie Mae. On July 24, 1998,
the outstanding principal balance of the mortgage loan was $3,072,399.07. The
interest on the mortgage loan is 6.47% per annum; amortization is based on a
30-year amortization term; and prepayments are permitted under the following
circumstances: after May 1, 2001 to April 30, 2002 at 102% of the principal
balance of the mortgage loan, from May 1, 2002 to April 30, 2003 at 101% of the
principal balance, and from May 1, 2003 and thereafter at 100% of the principal
balance. The maturity date of the mortgage loan is April 1, 2004, and the
balance due at maturity, assuming no payment has been made on principal in
advance of its due date, is $2,743,814.97.
In connection with the original financing of the Property, the previous
owner of the Property agreed to certain restrictions on the use of the Property
set forth in a special warranty deed and deed restrictions. In connection with
the purchase of the Property and the assumption of the mortgage loan, the
Company entered into an assumption of the special warranty deed and deed
restrictions. Among the restrictions agreed to by the Company is that at least
20% of the apartment units must be occupied by persons who, at the time of
initial occupancy of the apartment units, are "low or moderate income tenants."
The term low or moderate income tenants is defined, generally, as one or more
persons who occupy an apartment unit whose aggregate anticipated income does not
exceed 80% of the median income for the area where the Property is located.
LOCATION. The Property is located on South State Highway 360 in Grand
Prairie, Texas and is adjacent to Bitter Creek Apartments which were purchase by
the Company on May 8, 1998. The Property is located within "The Metroplex." For
information on The Metroplex, see under "Brookfield Apartments" in this
Supplement.
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
The Property is an approximately 10-minute drive from Dallas/Fort Worth
International Airport and an approximately 20-minute drive from either downtown
Dallas or downtown Fort Worth.
DESCRIPTION OF THE PROPERTY. The Property consists of 170 apartment units
in 12 buildings on approximately 7.1 acres of land. The Property was constructed
in 1984.
80
<PAGE>
The Property offers four different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ----------------------------- ------------ --------
<S> <C> <C> <C>
56 One bedroom, one bathroom 556 $429
52 One bedroom, one bathroom 716 469
36 Two bedrooms, two bathrooms 878 549
26 Two bedrooms, two bathrooms 1,000 620
</TABLE>
All unit types are available with a fireplace for an extra $10 per month.
The apartments provide a total of approximately 126,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$340,000 for repairs and capital improvements to the Property to include
clubhouse renovations, exterior painting, wood replacement and a new fitness
center.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 93% in 1993, 92% in 1994, 96% in 1995, 96%
in 1996 and 95% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a two-bedroom, two-bathroom apartment (878 square
feet) rented for $449 in 1993, $474 in 1994, $484 in 1995, $489 in 1996 and $509
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $6.54, $6.91, $7.05, $7.13, and $7.42,
respectively.
The Property has an outdoor swimming pool, a jacuzzi, a tennis court and a
laundry facility The Property also has a clubhouse with a kitchen, entertainment
area and leasing office.
The buildings are wood framed construction with a combination of brick
veneer and hardboard ship-lap siding on concrete slab foundations. Roofs are
pitched and covered with fiberglass shingles on plywood.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. The largest one-bedroom and the largest two-bedroom units have
full-sized washer/dryer connections. A total of 92 units have a wood-burning
fireplace and each second-floor unit has vaulted ceilings. Each unit has walk-in
closets, outside storage and a covered balcony or patio and ceiling fans. The
owner of the Property pays for cold water, sewer charges, gas (for hot water)
and trash removal. The tenants pay for their electricity service, which includes
cooking, lighting, heating and air-conditioning.
There are at least eight apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy at nearby competing properties averaged
approximately 95% on June 30, 1998.
As of June 30, 1998, the Property was approximately 89% occupied. The
tenants are primarily a mix of white-collar and blue-collar workers, students
and retired persons.
81
<PAGE>
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- -------------------------------- ---------------- ----------- ------------
<S> <C> <C> <C>
County of Tarrant .............. $3,150,000 $ 1.995 $ 62,848.67
City of Grand Prairie .......... 3,312,000 0.680 22,522.08
------------
Total .......................... $ 85,370.75
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $3,739,211 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, Cornerstone Realty Income Trust, Inc. earned a property acquisition
fee equal to 2% of the purchase price of the property, or $94,100. At closing,
Cornerstone Realty Income Trust, Inc. was paid a portion of the property
acquisition fee corresponding to the portion of the purchase price of the
property paid in cash by the Company. The cash portion of the purchase price was
approximately $1,632,601, and 2% of that amount was approximately $32,652. On
September 17, 1998, the Company entered into an agreement providing for the
payment of the balance of the property acquisition fee. See "The Advisor and its
Affiliates -- The Property Acquisition/Disposition Agreement."
Cornerstone Realty Income Trust, Inc. will serve as property manager for
the Property and for its services will be paid by the Company a monthly
management fee equal to 5% of the gross revenues of the Property plus
reimbursement of certain expenses.
NEWPORT APARTMENTS
AUSTIN, TEXAS
On July 24, 1998, Apple REIT IV Limited Partnership purchased the Newport
Apartments located at 1930 West Rundberg Lane, in Austin, Texas (the
"Property").
The Property comprises 200 apartment units. The purchase price for the
Property was $6,330,000. The seller was Newemerald Texas, Ltd., a Texas limited
partnership which was not affiliated with the Company, the Advisor or their
affiliates. The purchase price was paid through a combination of (i)
approximately $3,286,127 in cash using proceeds from the sale of the Shares of
the Company and (ii) approximately $3,043,873 by assumption of a mortgage loan.
Title to the Property was conveyed to the Company by special warranty deed.
The Property was acquired with the assumption of a mortgage loan in the
original principal amount of $6,275,000 held by Fannie Mae. On July 24, 1998,
the outstanding principal balance of the mortgage loan was $3,043,873.04. The
interest on the mortgage loan is 6.675% per annum; amortization is based on a
30-year amortization term; and prepayments are permitted under the following
circumstance: after May 1, 2001 to April 30, 2002 at 102% of the principal
balance of the mortgage loan, from May 1, 2002 to April 30, 2003 at 101% of the
principal balance, and from May 1, 2003 and thereafter at 100% of the principal
balance. The maturity date of the mortgage loan is December 1, 2005, and the
balance due at maturity, assuming no payment has been made on principal in
advance of its due date, is $2,614,373.31.
In connection with the original financing of the Property, the previous
owner of the Property agreed to certain restrictions on the use of the Property
set forth in a special warranty deed and deed restrictions. In connection with
the purchase of the Property and the assumption of the mortgage loan, the
Company entered into an assumption of the special warranty deed and deed
restrictions. Among the restrictions agreed to by the Company is that at least
20% of the apartment units must be occupied by
82
<PAGE>
persons who, at the time of initial occupancy of the apartment units, are "low
or moderate income tenants." The term low or moderate income tenants is defined,
generally, as one or more persons who occupy an apartment unit whose aggregate
anticipated income does not exceed 80% of the median income for the area where
the Property is located.
LOCATION. The Property is located on West Rundberg Lane in Austin, Texas,
which is the capital of Texas. The following information on Austin is based in
part on information provided by the greater Austin Chamber of Commerce.
The economy of the greater Austin metropolitan area is diversified, with
key economic factors being the semiconductor and computer industries,
manufacturing, real estate and higher education. The rapid development of the
semiconductor and computer industries has been accompanied by rapid developments
in the transportation, finance, insurance, communications and utilities
capabilities of the area.
The Metropolitan Statistical Area that includes Austin had a 1995
population that exceeded one million and is expected to have a population of
approximately 1.1 million by the end of 1998. Much of the recent population
growth in the area is due to relocations from other parts of the country,
although the percentage of total population growth represented by relocated
persons is expected to decrease over the coming years. Currently, job gains in
the Austin metropolitan area are at approximately four percent per year.
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
Newport Apartments are located near The Colonade Mall and Northcross Mall, and
are an approximately 20-minute drive from an IBM facility and a Texas
Instruments facility. This property is within a few blocks of a new Dell
Computer facility and is a 15-minute drive from the downtown Austin business
district.
DESCRIPTION OF THE PROPERTY. The Property consists of 200 apartment units
in 15 buildings on approximately 10 acres of land. The Property was constructed
in 1988.
The Property offers four different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------------------------ ------------ --------
<S> <C> <C> <C>
60 One bedroom, one bathroom 510 $469
60 One bedroom, one bathroom 710 549
40 One bedroom, one bathroom 875 629
40 One bedroom, one bathroom with den 1,000 699
</TABLE>
The apartments provide a total of approximately 148,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$400,000 for repairs and capital improvements to the Property to include
clubhouse renovations, exterior painting and siding replacement and interior
upgrades.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 97% in 1993, 96% in 1994, 95% in 1995, 93%
in 1996 and 88% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a one-bedroom, one-bathroom apartment (1,000 square
feet) rented for $426 in 1993, $465 in 1994, $669 in 1995, $679 in 1996 and $689
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $5.66, $6.18, $8.90, $9.03, and $9.16,
respectively.
The Property has an outdoor swimming pool, a lighted tennis court, a picnic
area and two laundry facilities. The Property also has a clubhouse with a
leasing office.
83
<PAGE>
The buildings are wood framed construction with a combination of brick
veneer and wood siding on concrete slab foundations. Roofs are pitched and
covered with fiberglass shingles on plywood.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. Each
kitchen has a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. All units have full-sized washer/dryer connections and all
upper-level units have vaulted ceilings. Some of the units have wood-burning
fireplaces, dry bars and private patios or decks. Each unit has walk-in closets,
outside storage and ceiling fans. The owner of the Property pays for cold water,
sewer charges, gas (for hot water) and trash removal. The tenants pay for their
electricity service, which includes cooking, lighting, heating and
air-conditioning.
There are at least four apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy at nearby competing properties averaged
approximately 96% on June 30, 1998.
As of June 30, 1998, the Property was approximately 93% occupied. The
tenants are primarily a mix of white-collar and blue-collar workers, students
and retired persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- --------------------------- ---------------- ------------ ---------------
<S> <C> <C> <C>
County of Travis .......... $6,600,000 $ 0.4938 $ 32,590.80
City of Austin ............ 6,600,000 0.5401 35,646.60
Austin I.S.D. ............. 6,600,000 1.4010 92,466.00
ACC (Travis) .............. 6,600,000 0.0500 3,300.00
------------
Total ..................... $ 164,003.40
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $5,920,449 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, Cornerstone Realty Income Trust, Inc. earned a property acquisition
fee equal to 2% of the purchase price of the property, or $126,600. At closing,
Cornerstone Realty Income Trust, Inc. was paid a portion of the property
acquisition fee corresponding to the portion of the purchase price of the
property paid in cash by the Company. The cash portion of the purchase price was
approximately $3,286,127, and 2% of that amount was approximately $65,723. On
September 17, 1998, the Company entered into an agreement providing for the
payment of the balance of the property acquisition fee. See "The Advisor and its
Affiliates -- The Property Acquisition/Disposition Agreement."
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.
84
<PAGE>
ESTRADA OAKS APARTMENTS
IRVING, TEXAS
On July 27, 1998, Apple REIT Limited Partnership purchased the Estrada Oaks
Apartments located at 2115 Estrada Parkway, in Irving, Texas (the "Property").
The Property comprises 248 apartment units. The purchase price for the
Property was $9,350,000. The seller was Dallas - Fort Worth Properties, L.P., a
Texas limited partnership which was not affiliated with the Company, the Advisor
or their affiliates. The purchase price was paid using proceeds from the sale of
Shares of the Company. Title to the Property was conveyed to the Company by
limited warranty deed.
LOCATION. The Property is located on Estrada Parkway south of Airport
Freeway (SH 183) and west of Belt Line Road in Irving, Texas. The Property is
located within "The Metroplex." For information on The Metroplex, see under
"Brookfield Apartments" in this supplement.
The immediate neighborhood surrounding the Property consists of other
multi-family and single-family housing and commercial and retail development.
The property is conveniently located near fine restaurants, businesses, schools
and churches and is readily accessible from highways 181 and 163, two major
highways in Irving, Texas. The Property is an approximately 5-minute drive from
Dallas/Fort Worth International Airport, an approximately 25-minute drive from
downtown Dallas and downtown Fort Worth.
DESCRIPTION OF THE PROPERTY. The Property consists of 248 apartment units
in 14 buildings on approximately 10.1 acres of land. The Property was
constructed in 1983.
The Property offers ten different unit types. The unit mix and rents being
charged new tenants as of July 1998 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- --------------------------------------------- ------------ --------
<S> <C> <C> <C>
24 One bedroom, one bathroom 490 $480
56 One bedroom, one bathroom 608 510
60 One bedroom, one bathroom 744 565
10 One bedroom, one bathroom tennis court view 744 575
10 One bedroom, one bathroom pool view 744 580
24 Two bedrooms, one bathroom 886 670
30 Two bedrooms, two bathrooms 942 715
2 Two bedrooms, two bathrooms pool view 942 730
30 Two bedrooms, two bathrooms 1081 770
2 Two bedrooms, two bathrooms pool view 1081 785
</TABLE>
The apartments provide a total of approximately 191,000 square feet of net
rentable area.
The Company believes that the Property has generally been well maintained
and is in good condition. However, the Company has budgeted approximately
$248,000 for repairs and capital improvements to the Property to include
clubhouse renovations, exterior painting and wood replacement.
The following information was provided by the seller. Physical occupancy at
the Property averaged approximately 94% in 1993, 94% in 1994, 95% in 1995, 96%
in 1996 and 95% in 1997. Leases at the Property are generally for terms of one
year or less. Average rental rates for the past five years have generally
increased. As an example, a one-bedroom, one-bathroom apartment (744 square
feet) rented for $430 in 1993, $470 in 1994, $470 in 1995, $470 in 1996 and $490
in 1997. The average effective annual rental per square foot at the Property for
1993, 1994, 1995, 1996 and 1997 was $7.16, $7.82, $7.82, $7.82, and $8.16,
respectively.
The Property has an outdoor swimming pool, a jacuzzi, lighted tennis
courts, a fitness center, a laundry facility and 80 covered parking spaces. The
Property also has a clubhouse with a leasing office.
85
<PAGE>
The buildings are wood framed construction with a combination of brick
veneer and painted wood siding on concrete slab foundations. Roofs are high
sloped with asphalt shingles.
Each apartment unit has wall-to-wall carpeting in the living areas and
vinyl floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and individually controlled heating and air-conditioning unit. All of
the units include ceiling fans, intrusion alarm systems, patio/balcony and
outside storage. All of the units, except the two smallest one bedroom floor
plans, include full size washer/dryer connections and all of the units, except
the smallest one bedroom floor plan, include wood burning fireplaces with
mantels. Select units includes microwaves, icemakers and double french patio
doors. All kitchens are equipped with a frost free refrigerator/freezer,
self-cleaning electric range and oven, dishwasher and garbage disposal. The
owner of the Property pays for cold water, sewer charges, gas (for hot water)
and trash removal. The tenants pay for their electricity service, which includes
cooking, lighting, heating and air-conditioning.
There are at least three apartment properties that compete with the
Property. All offer similar amenities and generally have rents that are
comparable to those of the Property. Based on a recent telephone survey, the
Advisor estimates that occupancy at nearby competing properties averaged
approximately 98% on June 30, 1998.
As of July 27, 1998, the Property was approximately 97% occupied. The
tenants are primarily a mix of blue-collar and white-collar workers, students
and retired persons.
The following table sets forth the 1997 real estate tax information on the
Property:
<TABLE>
<CAPTION>
JURISDICTION ASSESSED VALUE RATE TAX
- --------------------------- ---------------- ------------- ---------------
<S> <C> <C> <C>
County of Dallas .......... $7,009,660 $ 0.44307 $ 31,057.70
City of Irving ............ 7,009,660 0.49300 34,557.62
Irving I.S.D. ............. 7,009,660 1.64840 115,547.24
------------
Total .................. 181,162.56
</TABLE>
The basis of the depreciable residential real property portion of the
Property (approximately $7,579,500 at the time of acquisition) will be
depreciated over 27.5 years on a straight-line basis. The basis of the personal
property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
on the nature of the expenditures.
The Advisor and the Company believe that the property is and will continue
to be adequately covered by property and liability insurance.
ACQUISITION AND MANAGEMENT SERVICES AND FEES. In consideration of services
rendered to the Company in connection with the selection and acquisition of the
Property, Cornerstone Realty Income Trust, Inc. earned a property acquisition
fee equal to 2% of the purchase price of the property, or $187,000.
Cornerstone Realty Income Trust, Inc. will serve as property manager for
the Property and for its services will be paid by the Company a monthly
management fee equal to 5% of the gross revenues of the Property plus
reimbursement of certain expenses.
86
<PAGE>
OWNERSHIP OF ASSETS IN SUBSIDIARY PARTNERSHIPS
GENERAL
Originally, the Company's Properties were acquired and owned directly by
the Company without the interposition or use of any subsidiary companies. In
1997, Company management determined that the direct ownership of its Properties
could inhibit in certain respects the Company's flexibility in planning certain
transactions or acquisitions. For example, the direct-ownership structure makes
it difficult, if not impossible, for potential sellers of properties to exchange
their properties for equity interests in the Company in a manner that could
defer tax liabilities for the sellers. Company management felt that this lack of
flexibility could hinder the Company's acquisition of desirable properties from
sellers seeking such tax deferral. Furthermore, Company management believed that
the direct-ownership structure tended to maximize the Company's exposure to
certain franchise taxes.
Based upon the foregoing, Company management proposed to the Board of
Directors, and the Board of Directors adopted and submitted for approval by the
Shareholders, a proposal the effect of which would be to transfer the apartment
properties of the Company owned as of the end of 1997 to a newly-organized
limited partnership indirectly wholly-owned by the Company.
The Board of Directors approved and submitted to the Shareholders (with its
recommendation for adoption) the following resolutions (collectively, the
"Reorganization Proposal");
RESOLVED, that the Company transfer any and all of the Company's
multifamily rental apartment communities (including all assets associated
therewith) to a partnership to be created by the Company, the partners of
which will be the Company or entities wholly-owned, directly or indirectly,
by the Company; and
RESOLVED, that the following be added as a new Article XIII to the
Company's Bylaws:
ARTICLE XIII
CONDUCT OF BUSINESS THROUGH SUBSIDIARIES
13.1 Subsidiaries. To the extent permitted by the Articles of
Incorporation, these Bylaws (excluding Section 9.1(i) hereof, which shall not
be construed to prohibit anything contemplated by this Article XIII) and
applicable law (including any required consent of the Directors and
Shareholders under applicable law), the Company may conduct its business
through subsidiary companies owned or controlled by the Company (or its
subsidiaries). Any such subsidiary company is referred to as a "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.
87
<PAGE>
13.3 Certain Shareholder Consents. If a transaction involving the
proposed sale or other transfer, whether by sale, exchange, merger,
consolidation, lease, share exchange or otherwise, by a Subsidiary Company
would require pursuant to applicable law the consent or approval of
Shareholders if the Company owned directly, and were proposing the sale or
other transfer of, the relevant assets, the Company shall not approve,
undertake or effectuate any such proposed sale or other transfer through such
Subsidiary Company without first obtaining the consent or approval of the
Shareholders of the Company.
Pursuant to notice duly given, to all Shareholders of record on October 31,
1997, in a Proxy Statement dated November 26, 1997, a Special Meeting of
Shareholders of the Company was held at 3:00 p.m. on Wednesday, December 17,
1997, at the offices of McGuire, Woods, Battle & Boothe LLP, Richmond, Virginia.
At the Special Meeting, Shareholders were asked to consider and vote on the
Reorganization Proposal. There being insufficient votes to approve the
Reorganization Proposal at that time, the meeting was adjourned and then
reconvened after adjournment on December 19, 1997 at 2:00 p.m. A vote was then
taken on the Reorganization Proposal. As of the record date, there were
10,108,598 Common Shares outstanding and entitled to vote. A total of 6,845,381
Common Shares were present in person or by proxy. A total of 6,823,288 Common
Shares voted in favor of the Reorganization Proposal. A total of 11,785 Common
Shares voted against the Reorganization Proposal and a total of 10,308 Common
Shares abstained. The Reorganization Proposal was adopted, as 67.5%, or more
than two-thirds, of the Common Shares outstanding and entitled to vote approved
the Reorganization Proposal.
REORGANIZATION
In light of the foregoing and as further described herein, the Company
transferred the Properties owned as of the end of 1997 to a Virginia limited
partnership, the partners of which were two newly created, wholly-owned
subsidiaries of the Company.
The Company formed the two wholly-owned subsidiaries, Apple Limited, Inc.
and Apple General, Inc., as Virginia corporations. The Company then transferred
an undivided 99 percent interest in the Properties to Apple Limited, Inc. and
an undivided 1 percent interest in the Properties to Apple General, Inc. Apple
Limited, Inc. and Apple General, Inc. together formed the limited partnership,
Apple REIT Limited Partnership (the "Partnership"), as a Virginia limited
partnership. Apple Limited, Inc. contributed its 99% interest in the Properties
to the Partnership in exchange for a 99% limited partnership interest in the
Partnership. Apple General, Inc. contributed its 1% interest in the Properties
to the Partnership in exchange for a 1% general partnership interest in the
Partnership. The Properties were transferred to the Partnership on December 29,
1997.
SUBSEQUENT PROPERTY ACQUISITIONS
Generally, the Company expects to acquire, and has acquired, additional
properties by purchase directly by Apple REIT Limited Partnership. However, the
Company acquired five Properties in July 1998 that involved the assumption of
mortgage indebtedness. The lender in each case required that each Property be
purchased by a separate ("single-purpose") entity. Accordingly, the Company
organized five additional Virginia limited partnerships identical in structure
and ownership to Apple REIT Limited Partnership for the purpose of purchasing
these five Properties.
The following diagram sets forth the manner in which the Company owns its
Properties. It is expected that additional Properties will be purchased by Apple
REIT Limited Partnership, unless special circumstances requiring the use of
additional subsidiaries arise in particular cases. All of the Company's
subsidiary limited partnerships are sometimes referred to herein as the
"Subsidiary Partnerships."
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[GRAPHIC OMITTED]
EFFECT OF USE OF SUBSIDIARY PARTNERSHIP AND BYLAW AMENDMENTS
The Company owns 100% of Apple Limited, Inc., which owns a 99% interest in
each Subsidiary Partnership, and owns 100% of Apple General, Inc., which owns a
1% interest in each Subsidiary Partnership. Apple General, Inc., as general
partner of each Subsidiary Partnership, will manage the affairs of the
Subsidiary Partnership. The Company, as sole shareholder of Apple General, Inc.,
will be entitled to exercise the rights of a 100%-shareholder with respect to
Apple General, Inc., including the election and removal of directors of that
company. At the present time, Glade M. Knight, Chairman of the Board and Chief
Executive Officer of the Company, is the sole director and President of Apple
General, Inc. No substantive change in the rights of the Shareholders is
intended to occur as a result of the holding of the Properties in the Subsidiary
Partnerships. To give effect to this intent, there are now in effect amendments
to the Company's Bylaws (set forth above) designed to retain existing Bylaw
restrictions on the Company and its directors and officers, and to retain
certain existing Shareholder rights, notwithstanding the technical changes in
legal ownership effected by the use of Subsidiary Partnerships.
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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.
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.
The 1998 Annual Meeting of Shareholders of the Company was held at the
Company's executive offices at 306 East Main Street, Richmond, Virginia 23219,
on Tuesday, May 12, 1998, beginning at 10:00 a.m. The sole item on the agenda
for consideration was the re-election of the four current Directors to an
additional term of one year each. The holders of Shares of record at the close
of business on March 20, 1998 were entitled to vote at the meeting. A quorum was
present, and therefore the four candidates receiving the greatest number of
affirmative votes of Shares were elected Directors of the Company. At the close
of business on the record date, the Company had 16,708,817 Shares outstanding
and entitled to vote.
At the Annual Meeting of Shareholders of the Company, held on May 12, 1998,
the following four persons, already serving as directors, were duly nominated
for election as Directors of the Company, received the number of votes set forth
opposite their respective names, and were therefore re-elected to one-year
terms:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
NAME VOTES RECEIVED VOTES WITHHELD
- -------------------------- ---------------- ---------------
<S> <C> <C>
Lisa B. Kern ............. 14,906,853 61,993
Glade M. Knight .......... 14,906,853 61,993
Penelope W. Kyle ......... 14,906,853 61,993
Bruce H. Matson .......... 14,906,853 61,993
</TABLE>
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.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- ----- ----------------------------------------------
<S> <C> <C>
Glade M. Knight ........... 52 Director, Chairman of the Board and President
Penelope W. Kyle .......... 48 Director (Independent)
Bruce H. Matson ........... 39 Director (Independent)
Lisa B. Kern .............. 38 Director (Independent)
</TABLE>
GLADE M. KNIGHT. Mr. Knight is Chairman of the Board, Chief Executive
Officer and Director of the Company. He also is the chief executive officer,
sole Director and sole common shareholder of ARA, ARG and ARMG, which were all
organized in July 1996.
Mr. Knight founded, and serves as the Chairman of the Board, President and
a Director of, Cornerstone, a Virginia corporation which is a public real
estate investment trust. Cornerstone, which began
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operations in 1993, acquires, owns and operates apartment complexes in the
mid-Atlantic and southeastern regions of the United States. Through December 31,
1997, Cornerstone had sold approximately $349 million in common shares to
approximately 14,000 investors and had acquired 51 apartment communities.
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 its Affiliates -- Prior Performance of Cornerstone and
Partnerships Sponsored by Affiliates of ARG," for information on certain prior
real estate programs organized by Mr. 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.
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.
LISA B. KERN. Ms. Kern is a portfolio manager with Davenport & Co. of
Virginia, Inc., in Richmond, Virginia. Before joining Davenport as Vice
President in 1996, Ms. Kern advised clients in the areas of investments and
estate planning. She began her investment career in 1982 as a financial planner
and later District Manager with IDS/American Express Advisory. In 1985, Ms.
Kern received her CFP designation. In 1989, Ms. Kern joined Crestar Bank's
Trust and Investment Management Group as a Vice President. Ms. Kern is a
graduate of Randolph Macon College and received her MBA from Virginia
Commonwealth University in 1991.
COMMITTEES OF DIRECTORS
The Directors have established 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 have established 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.
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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.
The current members of the Company's Executive Committee are Mr. Knight,
Ms. Kyle and Mr. Matson. The current members of the Audit Committee are Ms.
Kyle, Ms. Kern and Mr. Matson. The current members of the Compensation
Committee are Mr. Matson and Ms. Kyle.
DIRECTOR COMPENSATION
The Company pays 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 is 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.
During 1997, Independent Directors (Mss. Kern and Kyle and Mr. Matson)
received annual directors' fees of $5,000 plus $500 for each meeting of the
Board and $100 for each committee meeting attended; however, Independent
Directors did not receive any compensation for attending a committee meeting if
it occurred on the same day as a meeting of the entire Board of Directors.
Non-independent Directors received no compensation from the Company for their
service as Directors. All Directors were reimbursed by the Company for their
travel and other out-of-pocket expenses incurred in attending meetings of the
Directors or a committee and in conducting the business of the Company.
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 has obtained, and pays 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. Officers of the Company are, however, eligible to receive stock
options and restricted stock from the Company. See "-- The Incentive Plan, --
Award Agreement to Mr. Knight" and "Principal and Management Stockholders." 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, this 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.
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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 additional offerings, including this 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, Mr. Knight is a participant 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 additional offerings, including this
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.
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 Common 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.
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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 any subsidiary of the Company or
any of ARA, ARMG or ARG (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 Initial Offering and this 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 subsidiary of
the Company or any of ARA, ARMG or ARG 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 Mr.
Knight) are qualified to receive options under the Directors' Plan.
The Directors' Plan will be administered by the Board. Grants of stock
options to eligible Directors under the Plan will be automatic. However, the
Board has certain powers vested in it by the terms of the Plan, including,
without limitation, the authority (within the limitations described therein) to
prescribe the form of the agreement embodying awards of stock options under the
Plan, to construe the Plan, to determine all questions arising under the Plan,
and to adopt and amend rules and regulations for the administration of the Plan
as it may deem desirable. Any decision of the Board in the administration of the
Directors' Plan will be final and conclusive. The Board may act only by a
majority of its members in office, except members thereof may authorize any one
or more of their number, or any officer of the Company, to execute and deliver
documents on behalf of the Board.
The Directors' Plan provides for the following automatic option awards:
(1) As of the initial closing of the Shares under the Initial Offering,
each eligible Director received 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.
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(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.
In 1997, each independent Director received an option to purchase 6,850
Shares, and in 1998 each independent Director received an option to purchase
4,022 shares, all exercisable at $10 per Share. Independent Directors will
receive additional Share options in future years under the Company's Non-
Employee Directors Stock Option Plan.
In 1997, no Share options or restricted Shares were issued to the Company's
officers or employees. The Compensation Committee expects that it may issue
Share options and/or restricted Shares to selected Company officers and
employees in 1998 and in future years. The Compensation Committee intends to
propose and recommend grants that reward officers and employees for actions that
benefit the Company and its shareholders and that align the interests of the
officers and employees with those of the Company and its shareholders.
In December 1997 the Compensation Committee approved and adopted a plan
pursuant to which certain employees of the Company would be eligible for grants
of options to purchase up to 87,000 Shares (in the aggregate for all such
employees) based upon such employees and/or the Company meeting or exceeding
performance goals for 1998 as specified by the Chairman. If such performance
goals are met, such options are expected to be issued to eligible persons (who
are still employees) in the early part of 1999.
AWARD AGREEMENT TO MR. KNIGHT
On September 17, 1998, the Company's Board of Directors authorized the
Company to grant and issue to Glade M. Knight options to purchase Common Shares
(the "Award Agreement"). This grant was made apart from the Incentive Plan by
special action of the Board of Directors. The terms of the Award Agreement will
provide Mr. Knight options to purchase 355,111 Common Shares (the "Award
Options"). The Award Options will be issued in five equal parts, if, as and when
there is sold in this Offering $10 million, $20 million, $30 million, $40
million and $50 million, respectively (each a break point), in Shares. If this
Offering is terminated at any point other than one of the break points, there
will be issued at the time of termination a pro rata portion of the Award
Options corresponding to the sales in excess of the break point previously
achieved.
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The Award Options are exercisable and transferable immediately but may not
be exercised after ten years from the date of grant. The Award Options may be
exercised only so long as Mr. Knight is an executive officer of the Company;
provided that if he ceases to be an executive officer of the Company other than
by reason of disability or death at the time when he holds an Award Option that
is exercisable, he may exercise any or all of such Award Options within 60 days
after termination of such status. If Mr. Knight's employment is terminated
either by reason of his disability or by reason of his death, at a time when he
holds an Award Option that is exercisable, such Award Option may be exercised
within 180 days after the date of disability or death. No Award Option will be
exercisable by a person subject to Section 16(b) of the Exchange Act in a manner
not permitted by the Act and the rules thereunder.
The exercise price of the Award Options will be $10 per Common Share
acquired; provided, however, that if a "Triggering Event" (as defined below)
occurs, the exercise price will be $1.00 per Common Share. All of the Award
Options will become immediately exercisable upon and for 180 days following the
occurrence of a "Triggering Event." A Triggering Event means 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 between the Company and ARA (whether or not subject to a
subcontract arrangement) is terminated or not renewed, and the Company ceases to
use ARMG (whether or not subject to a subcontract arrangement) to provide
substantially all of its property management services.
If a Triggering Event occurs, and the holders of the Award Options either
elects not to, or fails to, exercise any exercisable Award Options within the
180-day period, then the Company will pay to the holder of the Award Options the
difference between the exercise price and the value of the Common Shares that
would be obtained upon exercise of the Award Options. If the exercise of the
Award Options or the receipt of payment in lieu of such exercise subjects the
holder of the Award Options to an additional penalty tax under section 4999 of
the Code, the Company will pay to the Award Option holder an additional amount
to put such holder in the same position in which the holder would have been if
such penalty tax had not been imposed (but the holder will remain liable for the
ordinary income taxes payable thereon).
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THE ADVISOR AND ITS AFFILIATES
GENERAL
Cornerstone Realty Income Trust, Inc. ("Cornerstone" or "the Advisor") will
provide the day-to-day management for the Company and its properties. Apple
Residential Advisors, Inc. ("ARA") and Apple Residential Management Group, Inc.
("ARMG") originally contracted with the Company to provide these services, but,
with the approval of the Company, the Advisor entered into subcontracts with ARA
and ARMG effective March 1, 1997. Under these subcontracts, the Advisor agreed
to provide to the Company the services ARA and ARMG previously agreed to
provide, in exchange for the compensation the Company previously agreed to pay
ARA and ARMG. For the period prior to March 1, 1997, the Company paid to ARMG a
management fee plus reimbursement of certain expenses in the amount of $52,375,
and paid to ARA an advisory fee in the amount of $14,894. For the period from
March 1, 1997 through December 31, 1997, the Company paid to the Advisor
$822,934 in management and advisory fees, and $213,961 in certain reimbursable
items. For the six months ended June 30, 1998, the Company paid to the Advisor
$817,954 in management and advisory fees and in certain reimbursable items.
The Advisor will also provide property acquisition and disposition services
to the Company. Prior to March 1, 1997, Apple Realty Group, Inc. ("ARG")
provided these services. Effective March 1, 1997, the Advisor acquired all of
the assets of ARG (consisting principally of ARG's contract with the Company)
for consideration totaling $2 million ($350,000 in cash and $1,650,000 in
Cornerstone common shares (150,000 Cornerstone common shares valued at $11 per
Cornerstone common share)). Pursuant to this acquisition, the Advisor has
assumed ARG's obligations to the Company in exchange for the compensation the
Company previously agreed to pay ARG. For the period prior to March 1, 1997, the
Company paid to ARG fees in the amount of $624,382. For the period from March 1,
1997 through December 31, 1997, and for the six months ended June 30, 1998, the
Company paid to the Advisor approximately $1,115,566 and $874,600, respectively,
for the property acquisition and disposition agreement.
Cornerstone is a REIT originally organized by Glade M. Knight, the Chairman
of the Board and President of the Company. Mr. Knight is also the Chairman of
the Board and President of Cornerstone, and the sole holder of common shares of
ARA, ARMG and ARG. Cornerstone, ARA, ARMG and ARG may be deemed to be affiliates
of each other. Accordingly, the Advisor, ARA, ARMG and ARG are sometimes
referred to herein as "the Advisor and its Affiliates."
THE ADVISORY AGREEMENT
The current Advisory Agreement has a one-year term ending October 31, 1998,
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
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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 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.
THE PROPERTY ACQUISITION/DISPOSITION AGREEMENT
Under the Property Acquisition/Disposition Agreement, the Advisor will act
as a real estate broker in connection with the Company's purchases and sales of
properties and is entitled to a real estate commission equal to 2% of the gross
purchase prices of the Company's properties, payable by the
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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. On September 17, 1998, the Company's Board of Directors
authorized the Company to agree to and enter into an amendment to the Property
Acquisition/Disposition Agreement providing for the payment of the two percent
(2%) fee on the indebtedness assumed by the Company with the purchase of Pace's
Point Apartments, Pepper Square Apartments, Emerald Oaks Apartments, Hayden's
Crossing Apartments and Newport Apartments. See "Business and Properties --
Properties Owned by the Company." Under such agreements, the Advisor 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 the Advisor 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 paid any fee to the Advisor, such amount would
decrease the amount of the Company's obligation to the Advisor. In addition, the
Advisor is not entitled to any disposition fee in connection with a sale of a
property by the Company to itself or any of its Affiliates, but the Advisor
would, in such case, be entitled to payment by the Company of its direct costs
incurred in such regard. The agreement had 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"), the Advisor and its
Affiliates 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.
THE PROPERTY MANAGEMENT AGREEMENT
Property management services for the Company's properties generally will be
performed by the Advisor as described under "Investment Objectives and Policies
- -- Management of Properties."
DEVELOPMENTS INVOLVING CORNERSTONE REALTY INCOME TRUST, INC.
Authorization for Additional Share Issuance. On February 10, 1997, in
response to a request from 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 continued during the Company's Initial Offering, and the
purchase price for such Shares under such right was the current public offering
price less the Selling Commissions and Marketing Expense Allowance payable with
respect thereto. On September 17, 1998, the Company's Board of Directors decided
to extend this right to Cornerstone through this Offering on the same terms and
conditions as previously authorized during the Company's Initial Offering.
Shares sold to Cornerstone pursuant to this right are in addition to, and not
part of, the Initial Offering, or this Offering.
The Company has elected to grant to Cornerstone this ongoing right because
it has determined that the issuance of Shares in this manner represents an
appropriate and financially prudent method of
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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.
On April 25, 1997, Cornerstone exercised the right described above and
purchased 417,778 Shares of the Company for approximately $3.76 million.
Cornerstone owns approximately 2.1% of the Shares of the Company outstanding on
June 30, 1998.
Possible Acquisition of the Company by Cornerstone. As described, 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. Cornerstone later informed the
Company that it had, 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, Cornerstone told the Company that it expects to reevaluate the
desirability of seeking to acquire the Company by the end of 1998.
Providing of Certain Services by Cornerstone. As discussed above,
Cornerstone is entitled to compensation for property management and company
management under subcontract agreements with ARMG and ARA. Cornerstone owns 100%
of the nonvoting preferred shares of ARA and ARMG. As holder of such preferred
shared, the Company owns 95% of the economic benefits of such companies. Mr.
Knight owns all of the common shares of such companies and is entitled to 5% of
the economic benefits of these companies. Because all of the revenues of ARA and
ARMG are expected to be paid to Cornerstone under the subcontract agreements, it
is not expected that ARA or ARMG will pay any dividend to its shareholders.
However, because Cornerstone as a REIT, is limited in the amount of fee income
it can receive (see "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT"), it has the right by notice to ARA or ARMG, to
terminate its subcontract relationship with either or both of such companies at
any time, to the extent such subcontract relationship is terminated, fees
payable by the Company will be paid to ARA or ARMG, as the case may be, and net
amounts remaining from such payments, after the payment of expenses of ARA or
ARMG, including tax liabilities of such corporations, will be payable for
distribution to the shareholders of ARA or ARMG. As noted, Cornerstone would be
entitled to 95% of any such distributions.
PRIOR PERFORMANCE OF CORNERSTONE AND PARTNERSHIPS SPONSORED BY AFFILIATES OF
ARG
The following paragraphs contain information on Cornerstone and certain
prior partnerships, sponsored by Affiliates of ARG to invest in real estate.
Except as otherwise indicated in this section, the information set forth is
current as of October 1, 1998. 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 ARG 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
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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 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 ARG 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 ARG 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 ARG 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, 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. Through December 31, 1997, Cornerstone had sold approximately $349
million in common shares to approximately 14,000 investors, and had acquired 51
apartment communities in Virginia, North Carolina, South Carolina and Georgia.
The aggregate cost of the 51 properties (including capital im-
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provements thereto) was approximately $488 million. The purchase price of all
such properties was paid either using the proceeds from the sale of common
shares or using the proceeds from an unsecured line of credit which was
subsequently repaid using proceeds from the sale of common shares, except that
at December 31, 1997, approximately $146 million remained unpaid on such line of
credit. See also "Update on Experience of Prior Programs" herein. Cornerstone's
common shares were first listed and began trading on the New York Stock Exchange
on April 18, 1997. None of Cornerstone's 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 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 51 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.
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PRINCIPAL AND MANAGEMENT STOCKHOLDERS
As described above under "The Advisor and its Affiliates -- Developments
Involving Cornerstone Realty Income Trust, Inc.," on June 30, 1998, Cornerstone
owned approximately 2.1% of the Company's outstanding Shares. As of June 30,
1998, no person was the beneficial owner of more than five percent of any class
of the registrant's voting securities.
Beneficial ownership of Shares held by Directors and executive officers of
the Company as of September 17, 1998 is indicated in the table below. Each
person named in the table and included in the Director/officer group has sole
voting and investment powers as to such Shares, or shares such powers with his
or her spouse and minor children, if any.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME BENEFICIALLY OWNED(1) PERCENT OF CLASS
- ----------------------------------------------------- ----------------------- -----------------
<S> <C> <C>
Lisa B. Kern . ...................................... 10,642.00 *
Glade M. Knight ..................................... 361,228.05 1.54%
Penelope W. Kyle .................................... 11,142.00 *
Bruce H. Matson ..................................... 10,642.00 *
----------
All Directors and executive officers as a group ..... 394,344.05 *
</TABLE>
- ----------
* Less than one percent of outstanding Shares.
(1) Includes Shares that may be acquired upon the exercise of stock options, as
follows: Mss. Kern and Kyle and Mr. Matson -- 10,872 Shares each at $10
per Share, and Mr. Knight -- 335, 111 shares. See "Management -- Award
Agreement to Mr. Knight.
In addition, at June 30, 1998, Glade M. Knight owned 170,000 Class B
Convertible Shares of the Company, and each of Debra A. Jones and Stanley J.
Olander, Jr. owned 15,000 Class B Convertible Shares, constituting collectively
all of the Company's issued and outstanding Class B Convertible Shares. Ms.
Jones and Mr. Olander are executive officers of Cornerstone. 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 ARA is terminated or not renewed,
and the Company ceases to use ARMG 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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<TABLE>
<CAPTION>
NUMBER OF COMMON SHARES
GROSS PROCEEDS RAISED FROM THROUGH CONVERSION
SALES OF COMMON SHARES THROUGH OF ONE CLASS B
DATE OF CONVERSION CONVERTIBLE 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.
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 its Affiliates 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.
Mr. Knight also holds Award Options exercisable immediately to purchase
355,111 Common Shares. Upon a Triggering Event the Award Options may be
exercised for less than the fair market value of the Common Shares as of the
date of the grant of the Award Options. The exercise by Mr. Knight of the Award
Options following a Triggering Event will result in dilution of the
Shareholders' interests. See "Management -- Award Agreement to Mr. Knight."
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 has elected 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 qualifies as a REIT. However, the Company has received
an opinion of its counsel, McGuire, Woods, Battle & Boothe LLP, 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
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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, Woods, Battle & Boothe
LLP 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 is 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, two
gross income requirements must be met annually: the "75% income test" and the
"95% income test." The 75% income test requires that the Company derive,
directly or indirectly, at least 75% of its gross income (excluding gross
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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 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.
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 the Advisor, 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 net income derived from a prohibited transaction is subject to a 100%
tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (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
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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.
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 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
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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.
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
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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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CHANGES MADE BY THE TAXPAYER RELIEF ACT OF 1997
Prospective investors should be aware that the Taxpayer Relief Act of 1997
(the "1997 Act") made numerous changes to the Code, including reducing the
maximum tax rate imposed on net capital gains from the sale of assets held for
more than 18 months by individuals, trusts and estates. The 1997 Act also made
certain changes to the requirements to qualify as a REIT and to the taxation of
REITs and their shareholders.
The 1997 Act provided that for gains realized after July 28, 1997, and
subject to certain exceptions, the maximum rate of tax on net capital gains was
reduced to 20%. For taxpayers who would be subject to a maximum tax rate of 15%,
the rate on net capital gains was reduced to 10%. The maximum tax rate for net
capital gains attributable to the sale of depreciable real property held for
more than 18 months is 25% to the extent of the deductions for depreciation with
respect to such property. Long-term capital gain allocated to a shareholder by
the Company will be subject to the 25% rate to the extent that the gain does not
exceed depreciation on real property sold by the Company. Under the 1997 Act the
maximum rate of capital gains tax on the sale or exchange of capital assets held
more than one year but not more than 18 months remained at 28%. Under Internal
Revenue Service Notice 97-64, a REIT may designate (subject to certain limits)
whether a capital gains dividend or an amount designated as retained capital
gains is taxable to U.S. shareholders (other than corporations) as a 20% rate
gain distribution, a 28% rate gain distribution, or a 25% rate section 1250 gain
distribution.
On July 22, 1998, President Clinton signed into law the Internal Revenue
Service Restructuring and Reform Act of 1998 (the IRS Reform Act). Among the
provisions included in the IRS Reform Act is a provision eliminating the
18-month holding period requirement imposed by the 1997 Act in order to obtain
lower capital gain rates for non-corporate holders. The IRS Reform Act reduces
the holding period for long-term capital gains from 18 to 12 months effective
for sales of capital assets after December 31, 1997.
The 1997 Act included several provisions that were intended to simplify the
taxation of REITs. These provisions were effective for taxable years beginning
after the date of enactment of the 1997 Act which, as to the Company, was its
taxable year commencing January 1, 1998. First, in determining whether a REIT
satisfies certain income tests, a REIT's rental income from a property will not
cease to qualify as "rents from real property" merely because the REIT performs
services for a tenant other than permitted customary services if the amount that
the REIT is deemed to have received as a result of performing impermissible
services does not exceed one percent of all amounts received directly or
indirectly by the REIT with respect to that property. For this purpose, the
amount that a REIT will be deemed to have received for performing impermissible
services is at least 150% of the direct cost to the REIT of providing those
services. Second, certain non-cash income, including income from cancellation of
indebtedness and original issue discount, will be excluded from income in
determining the amount of dividends that a REIT is required to distribute.
However, the REIT will still be subject to tax on this income to the extent it
is not offset by the dividends-paid deduction. Third, a REIT may elect to retain
and pay income tax on any net long-term capital gains and require its
shareholders to include such undistributed net capital gains in their income. If
a REIT makes such an election, the REIT's shareholders would receive a tax
credit attributable to their shares of capital gains tax paid by a REIT on the
undistributed net capital gains that was included in the shareholders' income,
and such shareholders would receive an increase in the basis of their share in
the amount of undistributed net capital gain included in their income reduced by
the amount of the credit. Finally, the 1997 Act contains a number of technical
provisions that reduce the risk that a REIT will inadvertently cease to qualify
as a REIT.
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.
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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 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.
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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 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.
112
<PAGE>
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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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998, (i) on a historical basis, and (ii) as adjusted to give effect to the
Offering and the application of the net proceeds therefrom as described under
"Use of Proceeds" and the assumption of mortgage notes incurred in connection
with five property acquisitions as described under "Business and Properties."
The information set forth in the following table should be read in conjunction
with the historical financial statements and related notes included herein.
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------
PRO FORMA
HISTORICAL AS ADJUSTED(1)
------------ ---------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Mortgage Notes Payable(2) .................................. $ -- $ 24,159
Shareholders' Equity:
Common Shares, no par value, 50,000,000 Common Shares
authorized; 20,109,698 Common Shares issued and outstanding
(25,109,698 as adjusted) ................................. 178,552 223,052
Class B Convertible Shares, 200,000 authorized and outstand- 20 20
ing ...................................................... (190) (190)
Distributions greater than net income ...................... -------- --------
178,382 222,882
Total shareholders' equity ................................. -------- --------
$178,382 $247,041
Total capitalization ....................................... ======== ========
</TABLE>
- ----------
(1) Includes the offering of 5,000,000 Shares and the application of the
estimated net proceeds thereof $44,500,000 as described herein under "Use of
Proceeds."
(2) Consisting of $24,159,000 of debt assumed in July 1998.
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<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company and
should be read in conjunction with the consolidated financial statements and
related notes of the Company included elsewhere in this Supplement.
<TABLE>
<CAPTION>
AS OF OR FOR THE AS OF OR FOR THE
SIX MONTH PERIOD YEAR ENDED
ENDING JUNE 30, DECEMBER 31,
------------------ -------------------------
1998 1997 1996
------------------ ----------------- -------
<S> <C> <C> <C>
OPERATING RESULTS
Rental Income .................................... $ 11,035,129 $ 12,005,968 --
Net Income ....................................... $ 4,436,460 $ 3,499,194 --
Distributions Declared and Paid .................. $ 4,876,491 $ 3,249,098 --
PER SHARE
Net Income ....................................... $ .28 $ .54 --
Distributions .................................... $ .41 $ .60 --
Distributions Representing Return of Capital ..... not available 0% --
Weighted Average Shares Outstanding .............. 15,855,507 6,493,114
BALANCE SHEET DATA
Investment in Rental Property .................... $ 138,831,383 $ 89,634,348 --
Total Assets ..................................... $ 181,959,019 $ 112,485,520 $100
Shareholders' Equity ............................. $ 178,382,007 $ 109,340,555 $100
Shares Outstanding ............................... 20,109,698 12,371,829 10
OTHER DATA
Cash Flows from:
Operating Activities ........................... $ 5,904,337 $ 7,075,025 --
Investing Activities ........................... $ (48,794,629) $ (88,753,814) --
Financing Activities ........................... $ 64,604,992 $ 105,841,261 --
Number of Communities Owned at Period-End ........ 16 11 --
FUNDS FROM OPERATIONS CALCULATION
Net Income ....................................... $ 4,436,460 $ 3,499,194 --
Depreciation of Real Estate ...................... $ 2,080,000 $ 1,898,003 --
--------------- ------------- ----
Funds from Operations ............................ $ 6,516,460 $ 5,397,197 --
</TABLE>
The Company was formed in 1996 and did not commence operations until January,
1997.
(a) "Funds from operations" is defined as income before gains (losses) on
investments and extraordinary items (computed in accordance with generally
accepted accounting principles) plus real estate depreciation and after
adjustment for significant nonrecurring items, if any. This definition
conforms to the recommendations set forth in a White Paper adopted by the
National Association of Real Estate Investment Trusts (NAREIT). The Company
considers funds from operations in evaluating property acquisitions and its
operating performance, and believes that funds from operations should be
considered along with, but not as an alternative to, net income and cash
flows as a measure of the Company's operating performance and liquidity.
Funds from operations, which may not be comparable to other similarly titled
measures of other REITs, does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and
is not necessarily indicative of cash available to fund cash needs.
115
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is based upon the unaudited financial statements
of the Company as of June 30, 1998 and the financial statements of the Company
as of December 31, 1997. The information should be read in conjunction with the
Company's financial statements and notes thereto and the pro forma financial
statements and notes thereto of the Company included elsewhere in this
Prospectus. The Company is operated and has elected to be treated as a REIT for
federal income tax purposes.
FOR THE SIX MONTHS ENDED JUNE 30, 1998
RESULTS OF OPERATIONS
Income and occupancy
Substantially all of the Company's income is from the rental operation of
apartment communities. The Company's rental income for six months ended June 30,
1998 reflect the operations from the properties acquired before 1998 and from
the 5 properties acquired in 1998 from their respective acquisition dates.
Rental income for the first six months increased to $11,035,129 in 1998 from
$3,978,434 in 1997. For the second quarter of 1998 rental income increased to
$6,106,378 from $2,824,034 in 1997. The increase in rental income is primarily
due to the 1997 acquisition operations, as well as the incremental effect of the
1998 acquisition operations.
Rental income is expected to continue to increase from the impact of
planned improvements which are being made in an effort to improve the
properties' marketability, economic occupancies, and rental rates.
Overall economic occupancy for the Company's properties was 92% and 94% at
the three months ended and six months ended June 30, 1998 and 1997. Overall, the
average rental rates for the portfolio increased 4% to $514 from $493 per month
for the six months ended June 30, 1998 and 1997, respectively. For the second
quarter of 1998 and 1997 average rental rates increased 14% to $530 to $464 per
month, respectively. The increase is primarily due to rental increases combined
with increases in average rental rates of properties acquired.
The Company's other source of income is the investment of its cash and cash
reserves. Interest income for the six months ended June 30, 1998 and 1997 was
$821,796 and $88,541, respectively. For the second quarter of 1998 and 1997,
interest income was $485,409 and $3,600, respectively. The increases are due to
the Company's investment balance held in liquid money market investments pending
use for acquisitions. The investment rate was 4.9% at June 30, 1998. It is
anticipated the interest income will decrease with future acquisitions.
Expenses
Total expenses for the first six months of 1998 increased to $7,394,634
from $2,519,247 in 1997. For the second quarter of 1998, total expenses
increased to $4,101,715 from $1,840,334 for the same period in 1997. The
increases are due largely to the increase in the number of apartments. The
operating expense ratio (the ratio of rental expenses, excluding general and
administrative, amortization and depreciation expense, to rental income) was 45%
and 47% for the six months ended June 30, 1998 and 1997, respectively. For the
second quarter of 1998 and 1997, the operating expense ratio was 44% and 50%,
respectively. The decreases are primarily due to a full period of operation of
the 1997 acquisitions and increased efficiencies associated with economies of
scale.
General and administrative expenses totaled 3.2% of total rental income for
the six months ended June 30, 1998 and 4.6% for the same period in 1997. For the
second quarter of 1998 and 1997, general and administrative expense totaled 3.2%
and 3.9%, respectively, of total income. This percentage is expected to decrease
as the Company's asset base and rental income grow. These expenses represent the
administrative expenses of the Company as distinguished from the operations of
the Company's properties.
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<PAGE>
Depreciation expense for the six month period ended June 30 has increased
to $2,080,000 in 1998 from $443,341 in 1997. For the second quarter of 1998
depreciation expense was $1,190,455 in 1998 and $305,526 for 1997. The increase
is directly attributable to the acquisition of additional apartment communities
in 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
Equity
There was a significant change in the Company's liquidity during the six
months ended June 30, 1998, as the Company continued to acquire properties.
During the six months ended June 30, 1998, the Company closed the sale to
investors of 7,737,869 shares representing gross proceeds to the Company of
$77,378,698 and net proceeds after payment of brokerage fees and other
offering-related costs of $69,461,483.
Using proceeds from the sale of common shares, the Company acquired 1,400
apartment homes in five residential rental communities during first six months
of 1998. The following is information on these five acquisitions:
<TABLE>
<CAPTION>
APARTMENT
PROPERTY NAME DATE ACQUIRED HOMES PURCHASE PRICE LOCATION
- --------------------------------- --------------- ---------- ---------------- ------------------
<S> <C> <C> <C> <C>
Main Park Apartments ............ February 1998 192 $ 8,000,000 Duncanville, TX
Timberglen Apartments ........... February 1998 304 12,000,000 Dallas, TX
Copper Ridge Apartments ......... March 1998 200 4,525,000 Fort Worth, TX
Bitter Creek Apartments ......... May 1998 472 13,505,000 Grand Prairie, TX
Summer Tree Apartments .......... June 1998 232 5,700,000 Dallas, TX
</TABLE>
Notes payable
During July 1998, the Company purchased five properties through a
combination of using proceeds from the offering and assumption of mortgage
loans. The total of the mortgage loans assumed at acquisition was approximately
$24.1 million (see Note 5 to the consolidated financial statements).
Cash and cash equivalents
Cash and cash equivalents totaled $45,877,272 at June 30, 1998. During the
first six months of 1998, the Company distributed $4,876,491 to its
shareholders, of which $2,992,890 was reinvested in additional shares through
the Additional Share Option. The reinvested funds netted the Company $2,693,601
after payment of brokerage fees. During the six months of 1998, the Company
distributed $168,777 to Cornerstone on shares that had been purchased by
Cornerstone.
Capital requirements
The Company has an ongoing capital expenditure commitment to fund its
renovation program for recently acquired properties. In addition, the Company is
always assessing potential acquisitions and intends to acquire additional
properties during 1998. During July 1998, the Company purchased eight properties
for approximately $60.6 million. The properties were purchased through a
combination of using approximately $36.4 million in proceeds from the offering
and assumption of mortgage loans totaling approximately $24.2 million. As of
August 1, 1998, no material definitive commitments existed for the purchase of
additional properties. The potential sources to fund the improvements and any
additional acquisitions include additional equity, cash reserves, and debt
provided by its line of credit.
The Company capitalized $3.9 million of improvements to its various
properties during the first six months of 1998. It is anticipated that some $11
million in additional capital improvements will be completed during the next
year on the current portfolio, which are expected to be funded through cash
reserves and dividend reinvestment.
117
<PAGE>
The Company has short-term cash flow needs in order to conduct the
operation of its properties. The rental income generated from the properties
supplies sufficient cash to provide for the payment of these operating expenses
and distributions.
Capital resources are expected to grow with the future sale of its shares
and the cash flow from operations. Approximately 55% of 1998's first and second
quarter distributions, $2,693,601 (net of brokerage commissions), were
reinvested in additional common shares. In general, the Company's liquidity and
capital resources are expected to be adequate to meet its cash requirements in
1998.
FOR THE YEAR ENDED DECEMBER 31, 1997
RESULTS OF OPERATIONS
Income and Occupancy
As operations of the Company commenced in January 1997, a comparison of the
years ended December 31, 1996 and December 31, 1997 is not possible. The results
of the Company's property operations for the year ended December 31, 1997
include the results of operations from the 11 properties acquired in 1997 from
their respective acquisition dates. Substantially all of the Company's revenue
is from the rental operation of its apartment communities. Rental income was
$12,005,968 in 1997. Overall average economic occupancy was 93% in 1997. The
average rental rate for the portfolio was $555 at December 31, 1997.
Expenses
Total expenses were $8,271,066 in 1997. The operating expense ratio (the
ratio of expenses, excluding depreciation, amortization, and general and
administrative expenses, to rental income) was 50% in 1997. The Company
contracts its property management to a third party (see Note 6 to the
consolidated financial statements). General and administrative expenses totaled
3% of revenues in 1997. These expenses represent the administrative expenses of
the Company as distinguished from the operations of the Company's properties.
The percentage of general and administrative expenses is expected to decrease as
the Company's operations grow. Depreciation of real estate was $1,898,003.
Interest and Investment
The Company earned interest income of $222,676 in 1997 from the investment
of its cash and cash reserves. The weighted-average interest rate earned on
short-term investments was 4%. The Company incurred $458,384 of interest expense
in 1997, associated with short-term borrowings under its line of credit to fund
acquisitions. The weighted-average interest rate on the line of credit during
1997 was 7.8%.
LIQUIDITY AND CAPITAL RESOURCES
Equity
There was a significant change in the Company's liquidity during the year
ended December 31, 1997 as the Company commenced operations and thereafter
continued to grow. During 1997, the Company sold 12,371,819 shares of its common
stock to its investors (including 417,778 shares purchased by Cornerstone Realty
Income Trust, Inc. ("Cornerstone") and 197,496 common shares sold through the
Company's additional share option), bringing the total number of shares
outstanding to 12,371,829. The total gross proceeds from the shares sold were
$121,633,733, which netted $109,090,359 to the Company after the payment of
brokerage fees and other offering-related costs.
Using proceeds from the sale of common shares and supplemented by
short-term borrowings when necessary, the Company acquired 2,776 apartment units
in 12 residential rental communities during 1997. Riverhill Apartments and
Chaparosa Apartments are adjoining properties and are operated as one apartment
community (subsequently renamed Remington Hills).
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<PAGE>
During 1997, the company made the following 12 acquisitions:
<TABLE>
<CAPTION>
INITIAL NUMBER DATE
DESCRIPTION LOCATION ACQUISITION COST OF UNITS ACQUIRED
- ---------------------------- ---------------- ------------------ ---------- --------------
<S> <C> <C> <C> <C>
Brookfield Dallas, TX $ 5,458,485 232 January 1997
Eagle Crest Irving, TX 15,650,000 484 January 1997
Tahoe Arlington, TX 5,690,560 240 January 1997
Mill Crossing Arlington, TX 4,544,121 184 February 1997
Wildwood Euless, TX 3,963,519 120 March 1997
Toscana Dallas, TX 5,854,531 192 March 1997
Polo Run Arlington, TX 6,858,974 224 March 1997
The Arbors on Forest Ridge Bedford, TX 7,748,907 210 April 1997
Pace's Cove Dallas, TX 9,277,355 328 June 1997
Chaparosa Irving, TX 5,825,000 170 August 1997
River Hill Irving, TX 7,275,000 192 August 1997
Copper Crossing Fort Worth, TX 4,750,000 200 November 1997
</TABLE>
Notes Payable
The Company seeks to hold all of its properties on an unsecured basis. The
Company obtained a $20 million unsecured line of credit with a commercial bank.
The line expires on March 31, 1998. The line bears interest at LIBOR plus 200
basis points. The line of credit is used to fund acquisitions on a short-term
basis and is sought to be repaid, generally within 60 days, with proceeds from
the offering. The Company plans to continue to use its $20 million unsecured
line of credit to facilitate the timely acquisition of properties, if proceeds
from the Company's "best efforts" offering are unavailable at the time of a
proposed acquisition. It is anticipated that any borrowings will be curtailed
through the sale of additional shares, although there can be no assurance that
such sales will be sufficient to repay such borrowings. If the future sale
proceeds were insufficient, the Company could seek to extend the maturity date
or pay the balance of the loan due from its rental operations or cash reserves.
At year-end, there were no outstanding balances on the acquisition line of
credit.
Cash and Cash Equivalents
Cash and cash equivalents totaled $24,162,572 at December 31, 1997. During
the year, the Company distributed $3,249,098 to its shareholders, of which
$1,974,949 was reinvested in additional shares under the terms of the Company's
Additional Share Option. The reinvested funds netted the company $1,777,454
after payment of brokerage fees. During the year, the Company distributed
$168,364 to Cornerstone on shares that had been purchased by Cornerstone.
Capital Requirements
The Company has an ongoing capital commitment to fund its renovation
program for acquired properties. In addition, the Company expects to acquire new
properties during the year. The Company anticipates that it will continue to
operate as it did in 1997 and fund these cash needs from a variety of sources
including equity, cash reserves, and debt provided by its line of credit.
The Company continues to renovate its properties. In connection with these
renovations, the Company capitalized improvements of $3.6 million in 1997.
Approximately $5 million of additional capital improvements are budgeted for
1998 on the existing property portfolio which are expected to be funded through
cash reserves and dividend reinvestment.
The Company has short-term cash flow needs in order to conduct the
operation of its properties. The rental income generated from the properties
supplies ample cash to provide for the payment of these operating expenses and
the payment of distributions to shareholders. The Company is operated as, and
annually elects to be taxed as, a real estate investment trust under the
Internal Revenue Code. As a result, the Company has no provision for taxes, and
thus there is no effect on the Company's liquidity.
119
<PAGE>
Capital resources are expected to grow with the future sale of its shares
and from cash flow from operations. Approximately 61% of all 1997 distributions
were reinvested in additional common shares. In general, the Company's liquidity
and capital resources are believed to be more than adequate to meet its cash
requirements during 1998.
The Company is expecting to continue with significant growth during 1998.
The company plans to have monthly equity closings in 1998, until the offering is
fully funded, or until such time as the Company may opt to discontinue it. It is
anticipated that the equity funds will be invested in additional apartment
communities. Since year-end 1997, the Company purchased two additional apartment
properties, using share sale proceeds, and is evaluating other potential
acquisitions.
In addition to shares sold in the public offering, as of December 31, 1997,
Cornerstone owned 417,778 common shares of the Company at a cost of $3,760,000
which represents approximately 3% of the Company's common shares outstanding at
December 31, 1997. These shares are purchased outside of the above-referenced
offering. In 1997, the Company granted Cornerstone a continuing right to own up
to 9.8% of the common shares of Apple at the market price, net of selling
commissions.
The Company also has granted Cornerstone a "first right of refusal" to
purchase the properties or business of Apple. Cornerstone has stated in its
public filings its intent to make periodic evaluations on the feasibility of
purchasing the Company.
IMPACT OF YEAR 2000
Some computer programs were written using two digits rather than four to
define the applicable year. As a result, those computer programs have
time-sensitive software that recognize a date using "00" as the year 1900 rather
than the year 2000. This could cause a system miscalculation causing disruptions
of operations. The Company has completed an assessment of its programs and has
begun to modify or replace portions of its software, so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The total Year 2000 project cost will be expensed as incurred and is
not expected to have a material effect on the results of operations. This
project is estimated to be completed by December 31, 1998, which is prior to any
impact on the Company's systems.
IMPACT OF INFLATION
The Company does not believe that inflation had any significant impact on
the operation of the Company in 1997. Future inflation, if any, would likely
cause increased operating expenses, but the company believes that increases in
expenses would be more than offset by increases in rental revenues. Continued
inflation may also cause capital appreciation of the Company's properties over
time, as rental rates and replacement costs increase.
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. There is no minimum number of
shares that must be sold.
The Shares are 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. The final closing
will be held shortly after the termination of the offering period or, if
earlier, upon the sale of all the Shares. It is expected that purchasers will be
sold Shares no later than the last day of the calendar month following the month
in
120
<PAGE>
which their orders are received. Funds received during the offering but after
the disbursement of funds may be held in an interest bearing account for the
benefit of subscribers 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 interest bearing account each investor's share of net
interest on such 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 at least
five days before the applicable closing. Subject to the foregoing, an investor's
subscription funds may remain in an interest bearing account 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 80,000 Shares ($800,000 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 ($0.75
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 $0.25 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.
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.
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<PAGE>
The Agency Agreement between the Company Advisor and its Affiliates 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 September 15, 1998, there were 23,393,074 Common Shares of the
Company issued and outstanding. All 200,000 authorized Class B Convertible
Shares are held by Mr. Knight, Ms. Jones and Mr. Olander. See "Principal and
Management Stockholders." Mr. Knight also holds Award Options exercisable
immediately to purchase 355,111 Common Shares. See "Management -- Award
Agreement to Mr. Knight."
The Common Shares have the sole voting power to elect Directors and holders
of the outstanding Common Shares are 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 January 1997,
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.
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 investment restrictions set forth in the
Bylaws.
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
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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 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.
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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 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."
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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.
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.
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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 LLP, Richmond, Virginia, as
counsel to the Company. McGuire, Woods, Battle & Boothe LLP also acts as counsel
to the Advisor and certain of its Affiliates.
EXPERTS
The consolidated financial statements of the Company at December 31, 1997
and 1996, and for the year in the period ended December 31, 1997, appearing in
this Registration Statement and this Prospectus have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The following Statements of Income and Direct Operating Expenses of
properties, included herein, have been included herein in reliance on the
reports of L.P. Martin & Company, P.C., independent certified public
accountants, also included herein, and upon the authority of said firm as
experts in accounting and auditing: (1) A report dated March 19, 1997 with
respect to the statement of income and direct operating expenses exclusive of
items not comparable to the proposed future operations of the property
Brookfield Apartments for the twelve-month period ended December 31, 1996 (2) a
report dated March 27, 1997 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Eagle Crest Apartments for the twelve-month period
ended December 31, 1996 (3) a report dated April 11, 1997 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Tahoe Apartments
for the twelve-month period ended December 31, 1996, (4) a report dated April
29, 1997 with respect to the statement of income and direct operations expenses
exclusive of items not comparable to the proposed future operations of the
property Mill Crossing Apartments for the twelve-month period ended January 31,
1997 (5) a report dated May 21, 1997 with respect to the statement of income and
direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Polo Run Apartments for the twelve-month
period ended February 28, 1997, (6) a report dated June 4, 1997 with respect to
the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Wildwood Apartments
for the twelve-month period ended February 28, 1997, (7) a report dated June 4,
1997 with respect to the statement of income and direct operating expenses
exclusive of items not comparable to the proposed future operations of the
property Toscana Apartments for the twelve-month period ended February 28, 1997,
(8) a report dated June 4, 1997 with respect to the statement of income and
direct operating expenses exclusive of items not comparable to the proposed
future operations of the property The Arbors on Forest Ridge Apartments for the
twelve-month period ended February 28, 1997, (9) a report dated July 22, 1997
with respect to the statement of income and direct operating expenses exclusive
of items not comparable to the proposed future operations of the property Paces
Cove Apartments for the twelve-month period ended May 31, 1991, (10) a report
dated September 24, 1997 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Chaparosa Apartments for the twelve-month period
ended June 30, 1997, (11) a report dated September 24, 1997 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Riverhill
Apartments for the twelve-month period ended June 30, 1997, (12) a report dated
December 16, 1997 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Copper Crossing Apartments for the twelve-month period ended
October 31, 1997, (13) a report dated March 25, 1998 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Main Park
Apartments for the twelve-month period ended December 31, 1997, (14) a report
dated April 6, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Timberglen Apartments for the twelve-month period ended December
31, 1997, (15) a report dated April 14, 1998 with respect to the statement of
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income and direct operating expenses exclusive of items not comparable to the
proposed future operations of the property Copper Ridge Apartments for the
twelve-month period ended February 28, 1998, (16) a report dated May 14, 1998
with respect to the statement of income and direct operating expenses exclusive
of items not comparable to the proposed future operations of the property Bitter
Creek Apartments for the twelve-month period ended March 31, 1998, (17) a report
dated July 16, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Summer Tree Apartments for the twelve-month period ended May 31,
1998, (18) a report dated July 17, 1998 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Park Village Apartments for the 1twelve-month
period ended May 31, 1998, (19) a report dated July 21, 1998 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Cottonwood Crossing
Apartments for the twelve-month period ended May 31, 1998, (20) a report dated
May 14, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Pace's Point Apartments for the twelve-month period ended March 31,
1998, (21) a report dated May 14, 1998 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Pepper Square Apartments for the twelve-month
period ended March 31, 1998, (22) a report dated May 14, 1998 with respect to
the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Emerald Oaks
Apartments for the twelve-month period ended March 31, 1998, (23) a report dated
May 14, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Hayden's Crossing Apartments for the twelve-month period ended
March 31, 1998, (24) a report dated May 14, 1998 with respect to the statement
of income and direct operating expenses exclusive of items not comparable to the
proposed future operations of the property Newport Apartments for the
twelve-month period ended March 31, 1998, and (25) a report dated July 15, 1998
with respect to the statement of income and direct operating expenses exclusive
of items not comparable to the proposed future operations of the property
Estrada Oaks Apartments for the twelve-month period ended June 30, 1998.
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EXPERIENCE OF PRIOR PROGRAMS
The tables following this introduction set forth information with respect
to Cornerstone. 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 ARA which
completed operations in the last five years. Information in the tables is
current as of December 30, 1997. The tables are furnished solely to provide
prospective investors with information concerning the past performance of
entities formed by Affiliates of ARA. 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 the
Company'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 December 30, 1997, Affiliates of ARA sponsored
only Cornerstone, which has investment objectives similar to those of the
Company. 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 its Affiliates -- Prior Performance of Cornerstone and
Partnerships Sponsored by Affiliates of ARG" in the Prospectus for additional
information on certain prior real estate programs sponsored by Affiliates of ARG
and its predecessors, including a description of the investment objectives which
are deemed by the Prior Partnership Sponsor to be similar and dissimilar to
those of the Company.
See the Glossary, beginning at page 135, 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.
130
<PAGE>
TABLE I: EXPERIENCE IN RAISING AND INVESTING FUNDS
Table I presents a summary of the funds raised and the use of those funds
by Cornerstone, whose investment objectives are similar to those of the Company
and whose offering closed within three years ending December 31, 1997.
<TABLE>
<S> <C>
Dollar Amount Offered .................................... $368,536,368
Dollar Amount Raised ..................................... $368,536,368
LESS OFFERING EXPENSES:
Selling Commissions and Discounts ...................... 7.19%
Organizational Expenses ................................ 3.42%
Other .................................................. 0.00%
Reserves ................................................. 3.00%
Percent Available for Investment ......................... 86.39%
ACQUISITION COSTS:
Prepaid items and fees to purchase property ............ 85.12%
Cash down payment ...................................... 0.00%
Acquisition fees ....................................... 1.27%
Other .................................................. 0.00%
Total Acquisition Costs .................................. 86.39%
Percent Leverage (excluding unsecured debt) .............. 0.00%
Date offering began ...................................... May 1993
Length of offering (in months) ........................... 54
Months to invest amount available for investment ......... 54
</TABLE>
131
<PAGE>
TABLE II: COMPENSATION TO SPONSOR AND ITS AFFILIATES
Table II summarizes the compensation paid to the Prior Program Sponsor and
its Affiliates (i) by programs organized by it and closed within three years
ended December 31, 1997, and (ii) by all other programs during the three years
ended December 31, 1997.
<TABLE>
<CAPTION>
OTHER
CORNERSTONE PROGRAM
--------------- ---------------
<S> <C> <C>
Date offering commenced ................................... May 1993 Various
Dollar amount raised ...................................... $368,536,368 $ 35,483,175
AMOUNTS PAID TO PRIOR PROGRAM SPONSOR FROM PROCEEDS OF OF-
FERING:
Acquisition fees
Real Estate commission ................................. $ 4,075,337 $ 0
Advisory fees .......................................... $ 515,689 $ 0
Other .................................................. $ 0 $ 0
Cash generated from operations before deducting payments to
Prior Program Sponsor .................................... $ 67,583,917 $ 9,069,403
AGGREGATE COMPENSATION TO PRIOR PROGRAM SPONSOR
Management and accounting fees ........................... $ 3,088,348 $ 1,137,934
Reimbursements ........................................... $ 2,717,655 $ 0
Leasing fees ............................................. $ 0 $ 0
Other fees ............................................... $ 0 $ 0
There have been no fees from property sales or refinancings
</TABLE>
132
<PAGE>
TABLE III: OPERATING RESULTS OF PRIOR PROGRAMS
Table III presents a summary of the annual operating results for
Cornerstone, the only offering closed in the five years ending December 31,
1997. Table III is shown on both an income tax basis as well as in accordance
with generally accepted accounting principles, the only significant difference
being the methods of calculating depreciation.
<TABLE>
<CAPTION>
1997 1996 1995 1994
----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Capital contributions by year .................. $ 63,485,868 $ 176,885,206 $71,771,027 $23,496,784
Gross revenue .................................. $ 71,970,624 $ 40,352,955 $16,300,821 $ 8,177,576
Operating expenses ............................. $ 29,948,366 $ 18,696,781 $ 8,180,016 $ 4,690,941
Interest income (expense) ...................... $ (7,230,205) $ (1,140,667) $ (68,061) $ 110,486
Depreciation ................................... $ 15,163,593 $ 8,068,063 $ 2,788,818 $ 1,210,818
Net income (loss) GAAP basis ................... $ 19,225,553 $ (4,169,849) $ 5,229,715 $ 2,386,303
Taxable income ................................. $ 0 $ 0 $ 0 $ 0
Cash generated from operations ................. $ 34,973,533 $ 20,162,776 $ 9,618,956 $ 3,718,086
Less cash distributed to investors ............. $ 31,324,870 $ 15,934,901 $ 6,316,185 $ 2,977,136
Cash generated after cash distribution ......... $ 3,648,663 $ 4,227,875 $ 3,302,771 $ 740,950
Special items
Capital contributions, net .................... $ 63,485,868 $ 144,798,035 $71,771,027 $23,496,784
Fixed asset additions ......................... $ 157,859,343 $ 194,519,406 $75,589,089 $28,557,568
Line of credit ................................ $ 96,166,141 $ 41,603,000 $ 3,300,000 $ 5,000,000
Cash generated ................................. $ 1,331,335 $ (3,890,496) $ 2,784,709 $ 680,166
End of period cash ............................. $ 4,513,986 $ 3,182,651 $ 7,073,147 $ 4,288,438
Tax and distribution data per $1,000 in-
vested ........................................
Federal income tax results
Cornerstone Realty Income Trust is a
REIT and thus is not taxed at the cor-
porate level
Cash distributions to investors
Source (on GAAP basis)
Investment income ........................... $ 77 $ 85 $ 80 $ 70
Return of capital ........................... $ 23 $ 14 $ 16 $ 19
Source (on Cash basis)
Sales ....................................... $ 0 $ 0 $ 0 $ 0
Refinancings ................................ $ 0 $ 0 $ 0 $ 0
Operations .................................. $ 100 $ 99 $ 96 $ 89
Other ....................................... $ 0 $ 0 $ 0 $ 0
</TABLE>
133
<PAGE>
TABLE IV: RESULTS OF COMPLETED PROGRAMS
Table IV shows the results of programs sponsored by Affiliates of ARA which
completed operations in the five years ending December 31, 1997. 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).
134
<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
entered into an Advisory Agreement with ARA; with the Company's approval, ARA
subcontracted the Advisory Agreement out of Cornerstone, effective March 1,
1997. Cornerstone shall act as the Advisor until it resigns such appointment or
is replace in accordance with the provisions of the Bylaws.
ADVISORY AGREEMENT. The agreement between the Company and ARA, 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.
ARA. Apple Residential Advisors, Inc., a Virginia corporation, which is an
Affiliate of the Advisor.
ARMG. 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.
135
<PAGE>
ASSET MANAGEMENT FEE. The fee payable to Apple Residential Advisors, Inc.
as the Advisor, pursuant to the Advisory Agreement.
AVERAGE INVESTED ASSETS. The average of the aggregate book value of the
assets of the Company invested, directly or indirectly, in equity interests in
and loans secured by real estate, before reserves for depreciation or bad debts
or other similar non-cash reserves, computed by taking the average of such
values at the end of each month during any period.
BOARD OF DIRECTORS. The Directors of the Company as of any particular time,
under the Articles of Incorporation, whether they be the Directors named therein
or additional or successor Directors.
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.
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
136
<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 OFFERING. The offering of Shares made pursuant to the Prospectus
dated November 19, 1996.
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 $50,000,000 in 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.
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.
137
<PAGE>
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.
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 from the
Initial Offering and this Offering.
138
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF THE COMPANY
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMPANY FINANCIAL STATEMENTS
Report of Independent Auditors .......................................................... F-3
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996 ............... F-4
Consolidated Statement of Operations for the Year Ended December 31, 1997 ............... F-5
Consolidated Statement of Shareholders' Equity for the Year Ended December 31, 1997 ..... F-5
Consolidated Statement of Cash Flows for the Year Ended December 31, 1997 ............... F-6
Notes to Consolidated Financial Statements .............................................. F-7
COMPANY INTERIM FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Balance Sheets -- June 30, 1998 and December 31, 1997 ...................... F-14
Consolidated Statements of Operations -- Three Months Ended June 30, 1998 and June 30,
1997 and Six Months Ended June 30, 1998 and June 30, 1997 ............................. F-15
Consolidated Statement of Shareholders' Equity -- Six Months Ended June 30, 1998 ........ F-16
Consolidated Statements of Cash Flows -- Six Months Ended June 30, 1998 and June 30 ,
1997 .................................................................................. F-17
Notes to Consolidated Financial Statements .............................................. F-18
PROPERTY FINANCIAL STATEMENTS
Brookfield Apartments:
Independent Auditors' Report .......................................................... F-21
Historical Statement of Income and Direct Operating Expenses .......................... F-22
Eagle Crest I & II Apartments:
Independent Auditors' Report .......................................................... F-23
Historical Statement of Income and Direct Operating Expenses .......................... F-24
Aspen Hill (formerly Tahoe Apartments):
Independent Auditors' Report .......................................................... F-25
Historical Statement of Income and Direct Operating Expenses .......................... F-26
Mill Crossing Apartments:
Independent Auditors' Report .......................................................... F-27
Historical Statement of Income and Direct Operating Expenses .......................... F-28
Polo Run Apartments:
Independent Auditors' Report .......................................................... F-29
Historical Statement of Income and Direct Operating Expenses .......................... F-30
Wildwood Apartments:
Independent Auditors' Report .......................................................... F-31
Historical Statement of Income and Direct Operating Expenses .......................... F-32
Toscana Apartments:
Independent Auditors' Report .......................................................... F-33
Historical Statement of Income and Direct Operating Expenses .......................... F-34
Arbors on Forest Ridge Apartments:
Independent Auditors' Report .......................................................... F-35
Historical Statement of Income and Direct Operating Expenses .......................... F-36
Pace's Cove Apartments:
Independent Auditors' Report .......................................................... F-37
Historical Statement of Income and Direct Operating Expenses .......................... F-38
Remington Hills at Las Colinas (formerly, Chaparosa and Riverhill Apartments):
Independent Auditors' Report (Chaparosa Apartments) ................................... F-39
Historical Statement of Income and Direct Operating Expenses (Chaparosa Apartments).... F-40
Independent Auditors' Report (Riverhill Apartments) ................................... F-41
Historical Statement of Income and Direct Operating Expenses (Riverhill Apartments) ... F-42
Copper Crossing Apartments:
Independent Auditors' Report .......................................................... F-43
Historical Statement of Income and Direct Operating Expenses .......................... F-44
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Main Park Apartments:
Independent Auditors' Report .......................................................... F-45
Historical Statement of Income and Direct Operating Expenses .......................... F-46
Timberglen Apartments:
Independent Auditors' Report .......................................................... F-47
Historical Statement of Income and Direct Operating Expenses .......................... F-48
Copper Ridge Apartments:
Independent Auditors' Report .......................................................... F-49
Historical Statement of Income and Direct Operating Expenses .......................... F-50
Silver Brook (formerly Bitter Creek Apartments):
Independent Auditors' Report .......................................................... F-51
Historical Statement of Income and Direct Operating Expenses .......................... F-52
Summer Tree Apartments:
Independent Auditors' Report .......................................................... F-53
Historical Statement of Income and Direct Operating Expenses .......................... F-54
Park Village Apartments:
Independent Auditors' Report .......................................................... F-55
Historical Statement of Income and Direct Operating Expenses .......................... F-56
Cottonwood Crossing Apartments:
Independent Auditors' Report .......................................................... F-57
Historical Statement of Income and Direct Operating Expenses .......................... F-58
Pace's Point Apartments:
Independent Auditors' Report .......................................................... F-59
Historical Statement of Income and Direct Operating Expenses .......................... F-60
Pepper Square Apartments:
Independent Auditors' Report .......................................................... F-61
Historical Statement of Income and Direct Operating Expenses .......................... F-62
Emerald Oaks Apartments .................................................................
Independent Auditors' Report .......................................................... F-63
Historical Statement of Income and Direct Operating Expenses .......................... F-64
Hayden's Crossing Apartments:
Independent Auditors' Report .......................................................... F-65
Historical Statement of Income and Direct Operating Expenses .......................... F-66
Newport Apartments:
Independent Auditors' Report .......................................................... F-67
Historical Statement of Income and Direct Operating Expenses .......................... F-68
Estrada Oaks Apartments:
Independent Auditors' Report .......................................................... F-69
Historical Statement of Income and Direct Operating Expenses .......................... F-70
PRO FORMA FINANCIAL STATEMENTS
Pro Forma Consolidated Statement of Operations for Six Months Ending June 30, 1998 (Un-
audited) .............................................................................. F-71
Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 1997
(Unaudited) ........................................................................... F-72
Pro Forma Consolidated Balance Sheet as of June 30, 1998 (Unaudited) .................... F-75
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Apple Residential Income Trust, Inc.
We have audited the accompanying consolidated balance sheets of Apple
Residential Income Trust, Inc. (the "company") as of December 31, 1997 and 1996,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the year ended December 31, 1997. These financial statements are
the responsibility of the company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Apple Residential Income Trust, Inc. at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Richmond, Virginia
February 13, 1998
F-3
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------
1997 1996
---------------- ------------
<S> <C> <C>
Assets
Investment in rental property ..........................................
Land .................................................................. $ 15,396,823
Building and improvements ............................................. 73,113,886 --
Furniture and fixtures ................................................ 1,123,639 --
------------ ---------
89,634,348 --
Less accumulated depreciation .......................................... (1,898,003) --
------------ ---------
87,736,345
Cash and cash equivalents .............................................. 24,162,572 $ 100
Prepaid expenses ....................................................... 142,581 --
Other assets ........................................................... 444,022 --
------------ ---------
24,749,175 100
------------ ---------
Total Assets ........................................................... $112,485,520 $ 100
============ =========
Liabilities and Shareholders' Equity
Accounts payable ....................................................... $ 536,324 --
Accrued expenses ....................................................... 2,143,888 --
Rents received in advance .............................................. 70,051 --
Tenant security deposits ............................................... 394,702 --
------------ ---------
Total Liabilities ...................................................... 3,144,965 --
Shareholders' Equity
Common stock, no par value, authorized 50,000,000 shares; issued
and outstanding 12,371,829 shares and 10 shares, respectively ......... 109,090,459 $ 100
Class B convertible stock, no par value, authorized 200,000 shares;
issued and outstanding 200,000 shares ................................. 20,000 20,000
Receivable from officer-shareholder .................................... (20,000) (20,000)
Net income greater than distributions .................................. 250,096 --
------------ ---------
109,340,555 100
------------ ---------
Total Liabilities and Shareholders' Equity ............................. $112,485,520 $ 100
============ =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1997
-------------------
<S> <C>
Revenue
Rental income ...................................... $12,005,968
Expenses
Property and maintenance ........................... 3,571,484
Taxes and insurance ................................ 1,765,741
Property management ................................ 656,267
General and administrative ......................... 351,081
Amortization ....................................... 28,490
Depreciation of rental property .................... 1,898,003
-----------
Total expenses ...................................... 8,271,066
Income before interest income (expense) ............. 3,734,902
Interest income .................................... 222,676
Interest expense ................................... (458,384)
-----------
Net income .......................................... $ 3,499,194
===========
Basic and diluted earnings per common share ......... $ 0.54
===========
</TABLE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE CLASS B
COMMON STOCK STOCK RECEIVABLE
---------------------------- ---------------------- FROM NET INCOME TOTAL
NUMBER NUMBER PRINCIPAL GREATER THAN SHAREHOLDERS'
OF SHARES AMOUNT OF SHARES AMOUNT SHAREHOLDER DISTRIBUTIONS EQUITY
------------- -------------- ----------- ---------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ..... 10 $ 100 200,000 $20,000 $ (20,000) $ 0 $ 100
Net proceeds from the sale of
shares .......................... 11,756,545 103,552,905 -- -- -- -- 103,552,905
Net income ....................... -- -- -- -- -- 3,499,194 3,499,194
Cash distributions declared to
shareholders ($.60 per share) ... -- -- -- -- -- (3,249,098) (3,249,098)
Shares issued to Cornerstone Re-
alty Income Trust, Inc. ......... 417,778 3,760,000 -- -- -- -- 3,760,000
Shares issued through Additional
Share Option .................... 197,496 1,777,454 -- -- -- 1,777,454
---------- ------------ ------- ------- --------- ------------- ------------
Balance December 31, 1997 ........ 12,371,829 $109,090,459 200,000 $20,000 $ (20,000) $ 250,096 $109,340,555
========== ============ ======= ======= ========= ============= ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1997
-------------------
<S> <C>
From operating activities:
Net income ........................................................ $ 3,499,194
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ..................................... 1,926,493
Amortization of deferred loan costs ............................... 60,490
Changes in operating assets and liabilities:
Prepaid expenses .................................................. (142,581)
Other assets ...................................................... (533,002)
Accounts payable .................................................. 536,324
Accrued expenses .................................................. 1,631,776
Rent received in advance .......................................... 70,051
Tenant security deposits .......................................... 26,280
-------------
Net cash provided by operating activities ........................ 7,075,025
From investing activities:
Acquisitions of rental property, net of liabilities assumed ....... (85,147,726)
Capital improvements .............................................. (3,606,088)
-------------
Net cash used in investing activities ............................ (88,753,814)
From financing activities:
Proceeds from short-term borrowings ............................... 39,640,000
Repayments of short-term borrowings ............................... (39,640,000)
Net proceeds from issuance of shares .............................. 109,090,359
Cash distributions paid to shareholders ........................... (3,249,098)
-------------
Net cash provided by financing activities ........................ 105,841,261
Increase in cash and cash equivalents ............................ 24,162,472
Cash and cash equivalents, beginning of year ........................ 100
-------------
Cash and cash equivalents, end of year .............................. $ 24,162,572
=============
</TABLE>
See accompanying notes.
F-6
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Apple Residential Income Trust, Inc., together with its subsidiaries Apple
Limited, Inc., Apple General, Inc., and Apple REIT Limited Partnership, (the
"company"), is an externally advised real estate investment trust formed on
August 7, 1996 as a Virginia corporation. The company is an owner of residential
apartment communities in Texas. All of the company's apartment communities are
located in the Dallas/ Fort Worth, Texas metropolitan area. All operations
commenced in January, 1997; therefore, no statements of operations or cash flows
are presented for periods prior to January 1997. The accompanying consolidated
financial statements include the accounts of Apple Residential Income Trust,
Inc. and its subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments with original maturities of
three months or less. The fair market value of cash and cash equivalents
approximate their carrying value.
INVESTMENT IN REAL ESTATE
The investment in rental property is recorded at the depreciated cost and
includes real estate brokerage commissions paid to Apple Realty Group, Inc. and
Cornerstone Realty Income Trust, Inc. (See Note 6 to the consolidated financial
statements).
The company records impairment losses on rental property used in the operations
if indicators of impairment are present and the undiscounted cash flows
estimated to be generated by the respective properties are less than their
carrying amount. Impairment losses are measured as the difference between the
asset's fair value and its carrying value.
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized. Depreciation is
computed on a straight-line basis over the estimated useful lives of the related
assets which are 27.5 years for buildings and major improvements and a range
from five to ten years for furniture and fixtures.
INCOME RECOGNITION
Rental, interest, and other income are recorded on an accrual basis. The
company's properties are leased under operating leases that, typically, have
terms that do not exceed one year.
DEFERRED FINANCING COSTS
Deferred financing costs are generally amortized over a period not to exceed the
term of the related debt. Amortization of deferred financing costs is classified
as interest expense in the consolidated statements of operations.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.
STOCK INCENTIVE PLANS
The company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options. As discussed in
Note 5, the alternative fair value accounting provided for under FASB State-
F-7
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
NOTE 1 -- GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES -(CONTINUED)
ment No. 123, "Accounting for Stock-Based Compensation," ("FASB 123") requires
use of option valuation models that were developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
ADVERTISING COSTS
Costs incurred for the production and distribution of advertising are expensed
as incurred.
INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share are very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods that have
been presented are to conform to the requirements of Statement 128.
FEDERAL INCOME TAX
The company is operated as, and annually elects to be taxed as, a real estate
investment trust under the Internal Revenue Code of 1986, as amended (the
"Code"). Generally, a real estate investment trust, which complies with the
provisions of the Code and distributes at least 95% of its taxable income to its
shareholders, does not pay federal income taxes on its distributed income.
Accordingly, no provision has been made for federal income taxes.
For income tax purposes, distributions paid to shareholders consist of ordinary
income and return of capital or a combination thereof. Distributions per share
were $.60 for the year ended December 31, 1997. In 1997, the total distribution
was taxable as ordinary income.
NOTE 2 -- INVESTMENT IN RENTAL PROPERTY
The following is a summary of rental property owned at December 31, 1997:
<TABLE>
<CAPTION>
INITIAL TOTAL ACCUMULATED DATE
DESCRIPTION ACQUISITION COST INVESTMENT* DEPRECIATION ACQUIRED
- ------------------------------------ ------------------ ------------- -------------- --------------
<S> <C> <C> <C> <C>
Brookfield ......................... $ 5,458,485 $ 5,946,299 $ 166,694 January 1997
Eagle Crest ........................ 15,650,000 17,299,740 483,740 January 1997
Tahoe .............................. 5,690,560 6,641,227 199,049 January 1997
Mill Crossing ...................... 4,544,121 5,046,908 136,519 February 1997
Polo Run ........................... 6,858,974 7,545,163 191,302 March 1997
Wildwood ........................... 3,963,519 4,389,742 98,645 March 1997
Toscana ............................ 5,854,531 6,222,223 147,776 March 1997
The Arbors on Forest Ridge ......... 7,748,907 8,315,672 187,034 April 1997
Pace's Cove ........................ 9,277,355 9,536,559 141,850 June 1997
Remington at Las Colinas ........... 13,100,000 13,815,064 133,271 August 1997
Copper Crossing .................... 4,750,000 4,875,751 12,123 November 1997
----------- ----------- ----------
$82,896,452 $89,634,348 $1,898,003
</TABLE>
- ----------
* Includes real estate commissions, closing costs, and improvements capitalized
since the date of acquisition.
F-8
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
NOTE 3 -- NOTES PAYABLE
During 1997, the company entered into an agreement with a commercial bank to
obtain an unsecured, revolving line of credit not to exceed $20 million to
facilitate the timely acquisition of properties. The unsecured line of credit
expires on March 31, 1998. Borrowings under the agreement are evidenced by an
unsecured promissory note and bear interest at one-month LIBOR plus 200 basis
points. The company also obtained a $1 million unsecured line of credit for
general corporate purposes. The terms of such borrowings are the same as under
the unsecured line of credit for acquisitions. No interest was capitalized in
1997. The company paid interest of $458,384 in 1997. At December 31, 1997, there
were no outstanding borrowings under the lines of credit. The weighted-average
interest rate incurred under the lines of credit was 7.8% in 1997.
NOTE 4 -- SHAREHOLDERS' EQUITY
The company is raising equity capital through a "best efforts" offering of
shares by David Lerner Associates, Inc. (the "Managing Dealer"), which will
receive selling commissions and a marketing expense allowance based on proceeds
of the shares sold. The company received gross proceeds of $121,633,733 from the
sale of 2,084,445 shares at $9 per share and 10,287,384 shares at $10 per share,
including shares sold through the reinvestment of distributions for the year
ended December 31, 1997. The underwriter received selling commissions and a
marketing expense allowance equal to 7.5% and 2.5%, respectively, of the gross
proceeds of shares sold. During 1997, the underwriter earned $11,787,399. The
net proceeds of the offering, after deducting selling commissions and other
offering expenses, were $109,090,359. These totals include 417,778 shares
purchased by Cornerstone for $3.76 million. Cornerstone owned approximately
3.38% of the company's outstanding shares on December 31, 1997 (See Note 6 to
the consolidated financial statements).
On November 14, 1996, the company issued 200,000 shares of Class B Convertible
Shares to Mr. Glade Knight, president and chairman of the board of the company,
for $.10 per share or $20,000 in aggregate.
There are no dividends payable on the Class B Convertible Shares. On liquidation
of the company, the holder of the Class B Convertible Shares is entitled to a
liquidation payment of $.10 per Class B Convertible Share before any
distribution of liquidation proceeds to the holders of the common shares.
Holders of more than two-thirds of the Class B Convertible Shares must approve
any proposed amendment to the Articles of Incorporation that would adversely
affect the Class B Convertible Shares or create a new class of stock senior to,
or on a parity with, the Class B Convertible Shares. The Class B Convertible
Shares are convertible into common shares upon and for 180 days following the
occurrence of either of the following events: (1) Substantially all of the
company's assets, stock, or business is sold or otherwise transferred, whether
through sale, exchange, merger, consolidation, lease, share exchange, or
otherwise; or (2) The Advisory Agreement with the Advisor is terminated or not
renewed, and the company ceases to use Apple Residential Management Group, Inc.
to provide substantially all of its property management services. Upon the
occurrence of either triggering event, each Class B Convertible Share is
convertible into a number of common shares based upon the gross proceeds raised
through the date of conversion in the "best efforts" offering according to the
following formula:
GROSS PROCEEDS RAISED FROM NUMBER OF COMMON SHARES
SALES OF COMMON SHARES THROUGH THROUGH CONVERSION OF ONE
DATE OF CONVERSION CLASS B CONVERTIBLE SHARE
-------------------------------- --------------------------
$50 million ........... 1.0
$100 million .......... 2.4
$150 million .......... 4.2
$200 million .......... 6.4
$250 million .......... 8.0
F-9
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4 -- SHAREHOLDERS' EQUITY - (CONTINUED)
No additional consideration is due upon the conversion of the Class B
Convertible Shares. Upon the probable occurrence of a triggering event, the
company will record expense in the statement of operations based on conversion
of the Class B Convertible Shares.
The company provides a plan which allows shareholders to reinvest distributions
in the purchase of additional shares of the company ("Additional Share Option
Plan"). Of the total proceeds raised from common shares during the year ended
December 31, 1997, $1,974,949 (net $1,777,454) was provided through the
reinvestment of distributions.
NOTE 5 -- STOCK INCENTIVE PLANS
Based on the outstanding shares, under the 1997 Incentive Option Plan, a maximum
of 1,121,875 options could be granted, at the discretion of the Board of
Directors, to certain officers and key employees of the company. Also under the
Directors Plan, a maximum of 468,000 options could be granted to the directors
of the company.
In 1997, the company granted 20,550 options to purchase shares under the
Directors Plan and no options under the Incentive Plan. Both of the plans
generally provide, among other things, that options be granted at exercise
prices not lower than the market value of the shares on the date of grant. Under
the Incentive Plan, at the earliest, options become exercisable at the date of
grant. The optionee has up to 10 years from the date on which the options first
become exercisable during which to exercise the options. Activity in the
company's share option plans during the year ended December 31, 1997 is
summarized in the following table:
<TABLE>
<CAPTION>
1997
WEIGHTED-AVERAGE
---------------------------
OPTIONS EXERCISE PRICE
--------- ---------------
<S> <C> <C>
Outstanding, beginning of year
Granted .............................. 20,550 $ 10.00
Exercised ............................ -- --
Forfeited ............................ -- --
------ --------
Outstanding, end of year ............. 20,550 $ 10.00
Exercisable at end of year ........... 20,550 $ 10.00
====== ========
Weighted-average fair value of options
granted during the year ............. -- $ .83
</TABLE>
Pro forma information regarding net income and earnings per share is required by
FASB 123 under the fair value method described in that statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions, for 1997:
risk-free interest rates of 6.7%; a dividend yield of 7.0%; volatility factor of
the expected market price of the company's common stock of .161; and a
weighted-average expected life of the option of 10 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.
Because the company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-10
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5 -- STOCK INCENTIVE PLANS - (CONTINUED)
For purposes of FASB 123 pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. As the options
are immediately exercisable, the full impact of the pro forma is disclosed
below:
<TABLE>
<CAPTION>
1997
-------------
<S> <C>
Pro forma FASB 123 net income .................. $3,482,138
As reported net income ......................... 3,499,194
Pro forma FASB 123 earnings per share .......... .54
As reported net income per share ............... .54
</TABLE>
NOTE 6 -- RELATED-PARTY TRANSACTIONS
The company had contracted with Apple Residential Management Group, Inc. (the
"Management Company") to manage the acquired properties; Apple Residential
Advisors, Inc. (the "Advisor") to advise and provide the company with
day-to-day management; and Apple Realty Group, Inc. to acquire and dispose of
real estate assets held by the company. The Management Company, Advisor, and
Apple Realty Group, Inc. were initially owned by Glade M. Knight. Mr. Knight
also serves as chairman of the board and chief executive officer of the company
and Cornerstone Realty Income Trust, Inc. Before the transaction described
below, during 1997, the company paid the Management Company a management fee
equal to 5% of rental income plus reimbursement of certain expenses in the
amount of $52,375. The company paid the Advisor a fee equal to .1% to .25% of
total contributions received by the company in the amount of $14,894. The
company paid Apple Realty Group, Inc. a fee of 2% of the purchase price of the
acquired properties in the amount of $624,382.
During 1997, with the approval of the company, Cornerstone entered into
subcontract agreements with the Management Company and the Advisor, whereby
Cornerstone will provide advisory and property management services to the
company in exchange for fees and expense reimbursement on the same terms
described above. As of December 31, 1997, the company had paid Cornerstone
$822,934 in management and advisory fees and $214,961 for certain reimbursable
items.
During 1997, with the consent of the company, Cornerstone acquired all the
assets of Apple Realty Group, Inc. The sole material asset of Apple Realty
Group, Inc. was the acquisition/disposition agreement with the company.
Cornerstone paid $350,000 in cash and issued 150,000 common shares in exchange
for the assignment of the rights to the acquisition/disposition agreement.
Cornerstone is entitled, under the terms of the acquisition/disposition
agreement, to a real estate commission equal to 2% of the gross purchase price
of the company's properties plus reimbursement of certain expenses. As of
December 31, 1997, Cornerstone had earned approximately $1,116,566 under the
agreement.
During the first quarter of 1997, the company granted Cornerstone a continuing
right to acquire up to 9.8% of the common shares of the company at market price,
net of selling commissions. In April 1997, Cornerstone purchased 417,778 shares
of the company for approximately $3.76 million. Cornerstone owns approximately
3.38% of the total common shares of the company outstanding on December 31,
1997.
The company also has granted Cornerstone a "first right of refusal" to purchase
the properties or business of Apple. Cornerstone has stated in its public
filings its intent to make periodic evaluations of the feasibility of purchasing
the company.
F-11
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
NOTE 7 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The first three quarters of 1997 earnings per share amounts have been restated
to comply with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share". The following is a summary of quarterly results of operations for
the year ended December 31, 1997:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1997 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue .................................. $1,155,766 $2,826,712 $3,789,266 $4,234,224
Income before interest income (ex-
pense) .................................. 471,321 971,198 1,070,504 1,221,879
Net income ............................... 556,255 831,469 856,729 1,254,741
Basic and diluted earnings per share ..... .16 .15 .12 .12
Distributions per share .................. -- .20 .20 .20
</TABLE>
NOTE 8 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1997
-------------
<S> <C>
Numerator:
Net income numerator for basic and di-
luted earnings ............................. $3,499,194
Denominator:
Denominator for basic earnings per share-
weighted-average shares .................... 6,493,114
Effect of dilutive securities: stock options --
----------
Denominator for diluted earnings per
share-adjusted weighted-average shares
and assumed conversions .................... 6,493,114
----------
Basic and diluted earnings per share ......... .54
----------
</TABLE>
NOTE 9 -- SUBSEQUENT EVENT
In January 1998, the company declared and paid a cash distributions to
shareholders of $1,953,243, of which $1,246,809 was reinvested through the
Additional Share Option. The company also closed the sale to investors of
2,905,289 shares at $10 per share, representing net proceeds after payment of
brokerage fees to the company of $26,147,598. In February 1998, the company
purchased Main Park Apartments, a 192-unit apartment community, and Timberglen
Apartments, a 304-unit apartment community. Both properties are located in
Dallas, Texas. Their purchase prices were $8 million and $12 million,
respectively.
F-12
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED )
NOTE 10 -- PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma information for the year ended December 31,
1997 is presented as if (a) The company had qualified as a REIT, distributed all
of its taxable income and, therefore, incurred no federal income tax expense
during the period; and (b) The company had used proceeds from its best efforts
offering to acquire the properties. The pro forma information does not purport
to represent what the company's results of operations would have been if such
transactions, in fact, had occurred on January 1, 1997, nor does it purport to
represent the results of operations for future periods.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA TOTALS 1997
----------------------------------- --------------
<S> <C>
Revenue ........................... $17,398,526
Net income ........................ 5,047,475
Basic earnings per share .......... .53
-----------
</TABLE>
The pro forma information reflects adjustments for the actual rental income and
rental expenses of all the 1997 acquisitions for the respective period in 1997
prior to acquisition by the company. Net income has been adjusted as follows:
(1) Property management and advisory expenses have been adjusted based on the
company's contractual arrangements; and (2) Depreciation has been adjusted based
on the company's basis in the properties.
F-13
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------------- ---------------
<S> <C> <C>
ASSETS
Investment in rental property
Land ............................................................. $ 25,515,794 $ 15,396,823
Building and property improvements ............................... 111,419,576 73,113,886
Furniture and fixtures ........................................... 1,896,013 1,123,639
------------ ------------
138,831,383 89,634,348
Less accumulated depreciation ..................................... (3,978,003) (1,898,003)
------------ ------------
134,853,380 87,736,345
Cash and cash equivalents ......................................... 45,877,272 24,162,572
Prepaid expenses .................................................. 99,503 142,581
Other assets ...................................................... 1,128,864 444,022
------------ ------------
Total Assets ................................................... $181,959,019 $112,485,520
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable .................................................. $ 1,235,261 $ 536,324
Accrued expenses .................................................. 1,710,253 2,143,888
Rents received in advance ......................................... 42,745 70,051
Tenant security deposits .......................................... 588,753 394,702
------------ ------------
Total Liabilities .............................................. 3,577,012 3,144,965
Shareholders' Equity
Common stock, no par value, authorized 50,000,000 shares; issued
and outstanding 20,109,698 shares and 12,371,829 shares, respec-
tively ........................................................... 178,551,942 109,090,459
Class B convertible stock, no par value, authorized 200,000 shares;
issued and outstanding 200,000 shares ............................ 20,000 20,000
Receivable from officer-shareholder ............................... -- (20,000)
Net income greater than distributions ............................. (189,935) 250,096
------------ ------------
Total Shareholders' Equity ..................................... 178,382,007 109,340,555
------------ ------------
Total Liabilities and Shareholders' Equity ..................... $181,959,019 $112,485,520
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUE:
Rental income .................................. $6,106,378 $2,824,034 $11,035,129 $3,978,434
EXPENSES:
Property and maintenance ....................... 1,634,846 808,237 2,871,674 1,100,889
Taxes and insurance ............................ 724,401 472,857 1,462,552 578,955
Property management ............................ 349,207 135,790 606,245 196,453
General and administrative ..................... 194,322 109,314 357,195 182,649
Amortization expense ........................... 8,484 8,484 16,968 16,960
Depreciation of rental property ................ 1,190,455 305,652 2,080,000 443,341
---------- ---------- ----------- ----------
Total expenses ............................... 4,101,715 1,840,334 7,394,634 2,519,247
---------- ---------- ----------- ----------
Income before interest income (expense) ......... 2,004,663 983,700 3,640,495 1,459,187
Interest income ................................ 485,409 3,606 821,796 88,541
Interest expense ............................... (13,330) (156,837) (25,831) (161,004)
---------- ---------- ----------- ----------
Net income ...................................... $2,476,742 $ 830,469 $ 4,436,460 $1,386,724
========== ========== =========== ==========
Basic and diluted earnings per common
share .......................................... $ 0.14 $ 0.15 $ 0.28 $ 0.31
========== ========== =========== ==========
Distributions per common share .................. $ 0.20 $ 0.20 $ 0.41 $ 0.20
========== ========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-15
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE CLASS B
COMMON STOCK STOCK
---------------------------- ----------------------
NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT
------------ --------------- ----------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 .............. 12,371,829 $109,090,459 200,000 $20,000
Net proceeds from the sale of shares . 7,438,580 66,767,882 -- --
Net income ................................ -- -- -- --
Cash distributions declared to share-
holders ($.41 per share) ................. -- -- -- --
Payment from officer-shareholder .......... -- -- -- --
Shares issued through Additional
Share Option ............................. 299,289 2,693,601 -- --
---------- ------------ ------- -------
Balance at June 30, 1998 .................. 20,109,698 $178,551,942 200,000 $20,000
========== ============ ======= =======
<CAPTION>
RECEIVABLE
FROM NET INCOME TOTAL
OFFICER- GREATER THAN SHAREHOLDERS'
SHAREHOLDER DISTRIBUTIONS EQUITY
------------- --------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1997 .............. $ (20,000) $ 250,096 $109,340,555
Net proceeds from the sale of shares . -- -- 66,767,882
Net income ................................ -- 4,436,460 4,436,460
Cash distributions declared to share-
holders ($.41 per share) ................. -- (4,876,491) (4,876,491)
Payment from officer-shareholder .......... 20,000 -- 20,000
Shares issued through Additional
Share Option ............................. -- -- 2,693,601
--------- ------------- ------------
Balance at June 30, 1998 .................. $ -- $ (189,935) $178,382,007
========= ============= ============
</TABLE>
See accompanying notes to consolidated financial statments.
F-16
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------
JUNE 30, JUNE 30,
1998 1997
---------------- ----------------
<S> <C> <C>
Cash flow from operating activities:
Net income .......................................................... $ 4,436,460 $ 1,386,724
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization ..................................... 2,096,968 460,301
Amortization of deferred financing costs .......................... 25,831 16,668
Changes in operating assets and liabilities:
Prepaid expenses ................................................. 43,078 (144,540)
Other assets ..................................................... (727,641) (235,148)
Accounts payable ................................................. 698,937 276,966
Accrued expenses ................................................. (633,699) 644,150
Rent received in advance ......................................... (27,306) 3,772
Tenant security deposits ......................................... (8,291) 53,311
------------- -------------
Net cash provided by operating activities ...................... 5,904,337 2,462,204
Cash flow from investing activities:
Acquisitions of rental property, net of liabilities assumed ......... (44,875,121) (66,314,416)
Capital improvements ................................................ (3,919,508) (1,255,299)
------------- -------------
Net cash used in investing activities .......................... (48,794,629) (67,569,715)
Cash flow from financing activities:
Proceeds from short-term borrowings ................................. -- 26,540,000
Repayments of short-term borrowings ................................. -- (16,540,000)
Payment from officer-shareholder .................................... 20,000 --
Net proceeds from issuance of shares ................................ 69,461,483 56,720,606
Cash distributions paid to shareholders ............................. (4,876,491) (680,482)
------------- -------------
Net cash provided by financing activities ...................... 64,604,992 66,040,124
Increase in cash and cash equivalents .......................... 21,714,700 932,613
Cash and cash equivalents, beginning of year ......................... 24,162,572 --
------------- -------------
Cash and cash equivalents, end of period ............................. $ 45,877,272 $ 932,613
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
NOTE 1 -- GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information required by generally
accepted accounting principles. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. These financial statements should
be read in conjunction with the Company's December 31, 1997 Annual Report on
Form 10-K.
All earnings per share amounts for all periods have been presented and where
appropriate, restated to conform to the Statement 128 requirements.
Certain previously reported amounts have been reclassified to conform with the
current financial statement presentation.
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. The Company does not currently have any items of comprehensive income
requiring separate reporting and disclosure.
The Company commenced operations in January 1997.
NOTE 2 -- INVESTMENT IN RENTAL PROPERTY
The Company purchased five properties located in the Dallas/ Fort Worth area of
Texas for $43,730,000 during the six months ended June 30, 1998. The following
is a summary of rental property acquired during the six months ended June 30,
1998:
<TABLE>
<CAPTION>
INITIAL DATE OF
DESCRIPTION ACQUISITION COST ACQUISITION
- ------------------------------------ ------------------ ---------------
<S> <C> <C>
Main Park .......................... $ 8,000,000 February, 1998
Timberglen ......................... 12,000,000 February, 1998
Copper Ridge ....................... 4,525,000 March, 1998
Silver Brook (formerly Bitter Creek) 13,505,000 May, 1998
Summer Tree ........................ 5,700,000 June, 1998
</TABLE>
NOTE -- RELATED PARTIES
Prior to March 1, 1997, the Company had contracted with Apple Residential
Management Group, Inc. (the "Management Company") to manage the acquired
properties, Apple Residential Advisors, Inc. (the "Advisor") to advise and
provide the Company with day to day management, and Apple Realty Group, Inc. to
acquire and dispose of real estate assets held by the Company. The Company paid
the Management Company a management fee equal to 5% of rental income plus
reimbursement of certain expenses in the amount of $52,375. The Company paid the
Advisor a fee equal to .25% of total contributions received by the Company in
the amount of $14,894. The Company paid Apple Realty Group, Inc. a fee of 2% of
the purchase price of the acquired properties in the amount of $624,382.
F-18
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED )
Effective March 1, 1997, with the approval of the Company, Cornerstone Realty
Income Trust Inc. ("Cornerstone"), for which Glade M. Knight (Chief Executive
Officer and Chairman of the Board of the Company) also serves as Chief Executive
Officer and Chairman, entered into subcontract agreements with the Management
Company and Advisor whereby Cornerstone will provide advisory and property
management services to the Company in exchange for fees and expense
reimbursement per the same terms described above. For the six months ended June
30, 1998, the Company paid Cornerstone $817,954 under the agreements and $84,000
for certain reimbursable items.
During 1997, with the consent of the Company, Cornerstone acquired all the
assets of Apple Realty Group, Inc. The sole material asset of the company was
the acquisition/disposition agreement with the Company. Cornerstone paid
$350,000 in cash and issued 150,000 common shares (valued at $11 per common
share for a total of $1,650,000) in exchange for the assignment of the rights to
the acquisition/ disposition agreement. Cornerstone is entitled, under the terms
of the -hrt- acquisition/disposition agreement, to a real estate commission
equal to 2% of the gross purchase price of the Company's properties plus
reimbursement of certain expenses to the extent proceeds from the Company's
equity offering are used to purchase the property. For the six months ended June
30, 1998, the Company paid Cornerstone approximately $874,600 under the
agreement and $12,500 for expense reimbursement.
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, extending through the end of the Company's
initial public offering of its shares. In April 1997, Cornerstone purchased
417,778 common shares of the Company at $9 per share for approximately $3.76
million. Cornerstone owns approximately 2% of the total common shares of the
Company outstanding as of June 30, 1998. Cornerstone intends to make periodic
evaluations of the advisability of purchasing additional common shares of the
Company and may make such purchases, if such purchases are deemed by the
Cornerstone board of directors to be in the best interests of Cornerstone and
its shareholders.
NOTE 4 -- EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
common share:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS THREE MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
6/30/98 6/30/98 6/30/97 6/30/97
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Numerator:
Net income ....................................... $ 2,476,742 $ 4,436,460 $ 830,469 $ 1,386,724
Numerator for basic and diluted earnings ......... 2,476,742 4,436,460 830,469 1,386,724
Denominator:
Denominator for basic earnings per share-
weighted- average shares ....................... 17,828,897 15,855,507 5,458,096 4,430,927
Effect of dilutive securities:
Stock options .................................... -- -- -- --
------------ ------------ ----------- -----------
Denominator for diluted earnings per share-
adjusted weighted- average shares and as-
sumed conversions .............................. 17,828,897 15,855,507 5,458,096 4,430,927
------------ ------------ ----------- -----------
Basic and diluted earnings per common share . $ .14 $ 0.28 $ .15 $ 0.31
------------ ------------ ----------- -----------
</TABLE>
F-19
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED )
NOTE 5 -- SUBSEQUENT EVENTS
During July 1998, the Company distributed to its shareholders approximately
$3,581,284 (20.5 cents per share) of which approximately $2,238,677 was
reinvested in the purchase of additional shares through the Additional Share
Option. During July 1998, the Company also closed the sale to investors of
1,440,433 shares at $10 per share representing net proceeds to the Company after
payment of brokerage fees of $12,963,897.
During July 1998, the Company purchased the following eight apartment
communities:
<TABLE>
<CAPTION>
CONTRACTUAL
PURCHASE MATURITY INTEREST
PROPERTY NAME UNITS PRICE DEBT ASSUMED DATE RATE LOCATION
- ---------------------------- ------- ------------- -------------- ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Park Village ............... 238 $ 7,000,000 -- -- -- Bedford, TX
Cottonwood Crossing ........ 200 5,700,000 -- -- -- Arlington, TX
Pace's Point ............... 300 11,405,000 $7,713,617 7-1-2003 8.555% Lewisville, TX
Pepper Square............... 144 5,205,000 3,643,424 7-1-2006 8.575 North Dallas, TX
Emerald Oaks ............... 250 10,930,000 6,685,706 4-1-2007 6.75 Grapevine, TX
Hayden's Crossing .......... 170 4,705,000 3,072,399 4-1-2004 6.47 Grand Prairie, TX
Newport .................... 200 6,330,000 3,043,873 12-1-2005 6.675 Austin, TX
Estrada Oaks ............... 248 9,350,000 -- -- -- Irving, TX
</TABLE>
Park Village Apartments, Cottonwood Crossing Apartments, and Estrada Oaks
Apartments were purchased with proceeds from the equity offering. The remaining
properties were purchased through a combination of proceeds from the equity
offering and assumption of mortgage loans. The total of the mortgage loans
assumed at acquisition was $24,159,019.
NOTE 6 -- ACQUISITIONS (UNAUDITED)
The following unaudited pro forma information for the six months ended June 30,
1998 and 1997 assumes the property acquisitions made during the first six months
of 1998 and all of 1997 were made by the Company on January 1 of the respective
year and is presented as if (a) the Company had qualified as a REIT, distributed
at least 95% of its taxable income and, therefore incurred no federal income tax
expense during the period, and (b) the Company had used proceeds from its best
efforts offering to acquire the properties. The pro forma information does not
purport to represent what the Company's results of operations would actually
have been if such transactions, in fact, had occurred on January 1 of the
respective year, nor does it purport to represent the results of operations for
future periods.
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
6/30/98 6/30/97
---------------- ----------------
<S> <C> <C>
Rental income ................ $ 12,930,805 $ 12,808,170
Net income ................... $ 4,968,966 $ 3,927,518
Net Income Per Share ......... $ .27 $ .26
</TABLE>
The pro forma information reflects adjustments for the actual rental income and
rental expenses of the 5 acquisitions made in 1998 and the 12 acquisitions made
in 1997 for the respective periods in 1998 and 1997 prior to their acquisition
by the Company. Net income has been adjusted as follows: (1) property management
and advisory expenses have been adjusted based on the Company's contractual
arrangements of 5% of revenues from rental income plus reimbursement of certain
monthly expenses estimated to be $2.50 per unit; (2) advisory expenses have been
adjusted based on the Company's contractual arrangement of .25% of annual gross
proceeds of common stock raised; (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; and (4) weighted average number of shares has been adjusted
assuming the properties were acquired with net proceeds from the Company's "best
efforts" offering of $10 per share (net $8.70 per share).
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Brookfield Apartments located in Dallas, Texas for the twelve month
period ended December 31, 1996. This statement is the responsibility of the
management of Brookfield Apartments. Our responsibility is to express an opinion
on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Brookfield Apartments (as
defined above) for the twelve month period ended December 31, 1996, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
March 19, 1997
F-21
<PAGE>
BROOKFIELD APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $1,198,543
----------
DIRECT OPERATING EXPENSES
Administrative and Other ....................... 122,269
Insurance ...................................... 18,936
Repairs and Maintenance ........................ 174,233
Taxes, Property ................................ 133,700
Utilities ...................................... 92,664
----------
Total Direct Operating Expenses .............. 541,802
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property ................................. $ 656,741
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Brookfield Apartments is a 232 unit residential garden style apartment complex
located on 6.936 acres in Dallas, Texas. Living space totals 165,544 square
feet.
During the financial statement period, the assets comprising the property were
owned by Paragon Group, L.P., an entity non-affiliated with Apple Residential
Income Trust, Inc. Apple Residential Income Trust, Inc. purchased the property
in January, 1997.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation, amortization and
management fees.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Eagle Crest Apartments located in Irving, Texas for the twelve
month period ended December 31, 1996. This statement is the responsibility of
the management of Eagle Crest Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Eagle Crest Apartments (as
defined above) for the twelve month period ended December 31, 1996, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
March 27, 1997
F-23
<PAGE>
EAGLE CREST APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $3,196,618
----------
DIRECT OPERATING EXPENSES
Administrative and Other ....................... 212,613
Insurance ...................................... 93,379
Repairs and Maintenance ........................ 379,120
Taxes, Property ................................ 345,167
Utilities ...................................... 305,101
----------
Total Direct Operating Expenses .............. 1,335,380
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property .................................. $1,861,238
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Eagle Crest Apartments is a residential garden style apartment complex
consisting of two phases totaling 484 units located on 17.88 acres in Irving,
Texas. Living space totals 429,300 square feet.
During the financial statement period, the assets comprising the property were
owned by entities not affiliated with Apple Residential Income Trust, Inc.
Apple Residential Income Trust, Inc. purchased the property on January 30,
1997.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation, amortization, legal and
professional and management fees.
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Tahoe Apartments located in Arlington, Texas for the twelve month
period ended December 31, 1996. This statement is the responsibility of the
management of Tahoe Apartments. Our responsibility is to express an opinion on
this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Tahoe Apartments (as
defined above) for the twelve month period ended December 31, 1996, in
conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
April 11, 1997
F-25
<PAGE>
TAHOE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $1,200,270
----------
DIRECT OPERATING EXPENSES
Administrative and Other ....................... 118,781
Insurance ...................................... 30,606
Repairs and Maintenance ........................ 351,750
Taxes, Property ................................ 114,578
Utilities ...................................... 149,166
----------
Total Direct Operating Expenses .............. 764,881
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property ................................. $ 435,389
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Tahoe Apartments is a 240 unit residential garden style apartment complex
located on 17.88 acres in Arlington, Texas. Living space totals 160,928 square
feet.
During the financial statement period, the assets comprising the property were
owned by two separate entities, neither of which was affiliated with Apple
Residential Income Trust, Inc. Apple Residential Income Trust, Inc. purchased
the property on January 31, 1997.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation, legal fees and management
fees. Also, excluded are certain employee bonuses which one of the former owners
paid when they sold the apartment project.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Mill Crossing Apartments located in Arlington, Texas for the twelve
month period ended January 31, 1997. This statement is the responsibility of the
management of Mill Crossing Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Mill Crossing Apartments
(as defined above) for the twelve month period ended January 31, 1997, in
conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
April 29, 1997
F-27
<PAGE>
MILL CROSSING APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED JANUARY 31, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $ 908,336
---------
DIRECT OPERATING EXPENSES
Administrative and Other ....................... 102,522
Insurance ...................................... 23,714
Repairs and Maintenance ........................ 216,500
Taxes, Property ................................ 91,663
Utilities ...................................... 148,270
---------
Total Direct Operating Expenses .............. 582,669
---------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property .................................. $ 325,667
=========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Mill Crossing Apartments is a 184 unit garden style apartment complex located on
8 acres in Arlington, Texas. Living space totals 127,168 square feet.
During the financial statement period, the assets comprising the property were
owned by two separate entities, neither of which was affiliated with Apple
Residential Income Trust, Inc. Apple Residential Income Trust, Inc. purchased
the property in February 1997.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation, amortization, legal fees
and management fees.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Polo Run Apartments located in Arlington, Texas for the twelve
month period ended February 28, 1997. This statement is the responsibility of
the management of Polo Run Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Polo Run Apartments (as
defined above) for the twelve month period ended February 28, 1997, in
conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
May 21, 1997
F-29
<PAGE>
POLO RUN APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED FEBRUARY 28, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $1,304,547
----------
DIRECT OPERATING EXPENSES
Administrative and Other ....................... 101,400
Insurance ...................................... 28,521
Repairs and Maintenance ........................ 257,602
Taxes, Property ................................ 133,509
Utilities ...................................... 128,924
----------
Total Direct Operating Expenses .............. 649,956
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property .................................. $ 654,591
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Polo Run Apartments is a 224 unit residential garden style apartment complex
located on 9.15 acres in Arlington, Texas.
During the financial statement period, the assets comprising the property were
owned by A V Polo Run Associates, Ltd. Apple Residential Income Trust, Inc.
subsequently purchased the property.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation and management fees.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Wildwood Apartments located in Euless, Texas for the twelve month
period ended February 28, 1997. This statement is the responsibility of the
management of Wildwood Apartments. Our responsibility is to express an opinion
on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Wildwood Apartments (as
defined above) for the twelve month period ended February 28, 1997, in
conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
June 4, 1997
F-31
<PAGE>
WILDWOOD APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED FEBRUARY 28, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $ 809,555
---------
DIRECT OPERATING EXPENSES
Administrative and Other ....................... 110,035
Insurance ...................................... 15,246
Repairs and Maintenance ........................ 123,470
Taxes, Property ................................ 85,616
Utilities ...................................... 78,937
---------
Total Direct Operating Expenses .............. 413,304
---------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property .................................. $ 396,251
=========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Wildwood Apartments is a 120 unit garden style apartment complex located on
10.01 acres in Euless, Texas.
The assets comprising the property were owned by Western Rim Investors 1991-4,
L.P., an entity unaffiliated with Apple Residential Income Trust, Inc., during
the financial statement period. Apple Residential Income Trust, Inc.
subsequently purchased the property.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, amortization, professional fees and
management fees.
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Toscana Apartments located in Dallas, Texas for the twelve month
period ended February 28, 1997. This statement is the responsibility of the
management of Toscana Apartments. Our responsibility is to express an opinion on
this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Toscana Apartments (as
defined above) for the twelve month period ended February 28, 1997, in
conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
June 4, 1997
F-33
<PAGE>
TOSCANA APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED FEBRUARY 28, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $1,083,249
----------
DIRECT OPERATING EXPENSES
Administrative and Other ....................... 128,884
Insurance ...................................... 18,985
Repairs and Maintenance ........................ 117,117
Taxes, Property ................................ 123,710
Utilities ...................................... 84,886
----------
Total Direct Operating Expenses .............. 473,582
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property .................................. $ 609,667
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Toscana Apartments is a 192 unit garden style apartment complex located on 3.975
acres in Dallas, Texas.
The assets comprising the property were owned by Western Rim Investors 1993-2,
L.P., an entity unaffiliated with Apple Residential Income Trust, Inc., during
the financial statement period. Apple Residential Income Trust, Inc.
subsequently purchased the property.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, amortization, professional fees and
management fees.
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property The Arbors on Forest Ridge Apartments located in Bedford, Texas for
the twelve month period ended February 28, 1997. This statement is the
responsibility of the management of The Arbors on Forest Ridge Apartments. Our
responsibility is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of The Arbors on Forest Ridge
Apartments (as defined above) for the twelve month period ended February 28,
1997, in conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
June 4, 1997
F-35
<PAGE>
ARBORS ON FOREST RIDGE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
<TABLE>
<S> <C>
INCOME
Rental and Other Income ........................ $1,381,014
DIRECT OPERATING EXPENSES
Administrative and Other ....................... 111,636
Insurance ...................................... 34,263
Repairs and Maintenance ........................ 109,577
Taxes, Property ................................ 147,923
Utilities ...................................... 85,182
----------
Total Direct Operating Expenses .............. 488,581
----------
Operating income exclusive of items not compara-
ble to the proposed future operations of the
property .................................. $ 892,433
==========
</TABLE>
NOTE TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Arbors on Forest Ridge Apartments is a 210 unit garden style apartment
complex located on 8.913 acres in Bedford, Texas.
The assets comprising the property were owned by Western Rim Investors 1992-5,
L.P., an entity unaffiliated with Apple Residential Income Trust, Inc., during
the financial statement period. Apple Residential Income Trust, Inc.
subsequently purchased the property.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, amortization, professional fees and
management fees.
F-36
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Pace's Cove Apartments located in Dallas, Texas for the twelve
month period ended May 31, 1997. This statement is the responsibility of the
management of Pace's Cove Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Pace's Cove Apartments (as
defined above) for the twelve month period ended May 31, 1997, in conformity
with generally accepted accounting principles.
L.P. Martin & Co., P.C. Richmond,
Virginia
July 22, 1997
F-37
<PAGE>
PACE'S COVE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MAY 31, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income .................. $1,832,695
DIRECT OPERATING EXPENSES
Administrative and Other ................. 237,030
Insurance ................................ 42,627
Repairs and Maintenance .................. 273,102
Taxes, Property .......................... 213,985
Utilities ................................ 118,907
----------
Total Direct Operating Expenses ........ 885,651
----------
Operating income exclusive of items not
comparable to the proposed future
operations of the property .......... $ 947,044
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION
Pace's Cove Apartments is a 328 unit garden style apartment complex located on
12.97 acres in Dallas, Texas. The assets comprising the property were owned by
Intercapital Portfolio 944 I Limited Partnership, an entity unaffiliated with
Apple Residential Income Trust, Inc. during the financial statement period.
Apple Residential Income Trust, Inc. subsequently purchased the property.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, legal and professional fees and management fees.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-38
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items of items not comparable to the proposed future
operations of the property Chaparosa Apartments located in Irving, Texas for the
twelve month period ended June 30, 1997. This statement is the responsibility of
the management of Chaparosa Apartments, Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Chaparosa Apartments (as
defined above) for the twelve month period ended June 30, 1997, in conformity
with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
September 24, 1997
F-39
<PAGE>
CHAPAROSA APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income .................. $1,374,365
----------
DIRECT OPERATING EXPENSES
Administrative and Other ................. 187,182
Insurance ................................ 18,284
Repairs and Maintenance .................. 226,512
Taxes, Property .......................... 148,416
Utilities ................................ 78,209
Total Direct Operating Expenses ....... 658,603
----------
Operating income exclusive of items not
comparable to the proposed future
operations of the property ......... $ 715,762
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION
Chaparosa Apartments is a 170 unit garden and townhouse style apartment complex
located on 7.48 acres in Irving, Texas. The assets comprising the property were
owned by Hutton/Con Am Realty Pension Investors, an entity unaffiliated with
Apple Residential Income Trust, Inc., during the financial statement period.
Apple Residential Income Trust, Inc. purchased the property in August, 1997.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are property depreciation and management
fees.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-40
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Riverhill Apartments located in Irving, Texas for the twelve month
period ended June 30, 1997, This statement is the responsibility of the
management of Riverhill Apartments, Our responsibility is to express an opinion
on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards,
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Riverhill Apartments (as
defined above) for the twelve month period ended June 30, 1997, in conformity
with generally accepted accounting principles.
L.P. Martin & Co., P.C. Richmond,
Virginia
September 24, 1997
F-41
<PAGE>
RIVERHILL APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED JUNE 30, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income .................. $1,529,649
----------
DIRECT OPERATING EXPENSES
Administrative and Other ................. 210,774
Insurance ................................ 20,274
Repairs and Maintenance .................. 254,466
Taxes, Property .......................... 192,345
Utilities ................................ 115,741
Total Direct Operating Expenses ........ 793,600
Operating income exclusive of items not
comparable to the proposed future
operations of the property .......... $ 736,049
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
NOTE 1 -- ORGANIZATION
Riverhill Apartments is a 192 unit garden and townhouse style apartment complex
located on 9.33 acres in Irving, Texas. The assets comprising the property were
owned by Riverhill Apartments Limited Partnership, an entity unaffiliated with
Apple Residential Income Trust, Inc., during the financial statement period.
Apple Residential Income Trust, Inc. purchased the property in August, 1997.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property, Excluded expenses are property depreciation and management
fees.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period, Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-42
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Copper Crossing Apartments located in Fort Worth, Texas for the
twelve month period ended October 31, 1997. This statement is the responsibility
of the management of Copper Crossing Apartments. Our responsibility is to
express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Copper Crossing Apartments
(as defined above) for the twelve month period ended October 31, 1997, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
December 16, 1997
F-43
<PAGE>
COPPER CROSSING APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED OCTOBER 31, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ................................ $ 987,109
---------
DIRECT OPERATING EXPENSES
Administrative and Other ............................... 138,305
Insurance .............................................. 32,363
Repairs and Maintenance ................................ 210,279
Taxes, Property ........................................ 92,700
Utilities .............................................. 109,793
---------
Total Direct Operating Expenses ...................... 583,440
---------
Operating income exclusive of items not comparable to
the proposed future operations of the property .... $ 403,669
=========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED OCTOBER 31, 1997
NOTE 1 -- ORGANIZATION
Copper Crossing Apartments is a 200 unit garden style apartment complex located
on 6.91 acres in Fort Worth, Texas. The assets comprising the property were
owned by Cooper Crossing Investors, Ltd., an entity unaffiliated with Apple
Residential Income Trust, Inc., during the financial statement period. Apple
Residential Income Trust, Inc. subsequently purchased the property.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulations S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, management fees and entity expenses.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-44
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Main Park Apartments located in Duncanville, Texas for the twelve
month period ended December 31, 1997. This statement is the responsibility of
the management of Main Park Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Main Park Apartments (as
defined above) for the twelve month period ended December 31, 1997, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
March 25, 1998
F-45
<PAGE>
MAIN PARK APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income ................................ $1,469,496
DIRECT OPERATING EXPENSES
Administrative and Other ............................... 86,833
Insurance .............................................. 32,072
Repairs and Maintenance ................................ 242,402
Taxes, Property ........................................ 193,492
Utilities .............................................. 206,855
----------
Total Direct Operating Expenses ...................... 761,654
----------
Operating income exclusive of items not comparable to
the proposed future operations of the property .... $ 707,842
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED DECEMBER 31, 1997
NOTE 1 -- ORGANIZATION
Main Park Apartments is a 192 unit garden style apartment complex located on
10.44 acres in Duncanville, Texas. The assets comprising the property were owned
by an entity unaffiliated with Apple Residential Income Trust, Inc. during the
financial statement period. Apple Residential Income Trust, Inc. purchased the
property in February, 1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
professional fees and management fees.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management of make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-46
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Timberglen Apartments located in Dallas, Texas for the twelve month
period ended December 31, 1997. This statement is the responsibility of the
management of Timberglen Apartments. Our responsibility is to express an opinion
on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Timberglen Apartments (as
defined above) for the twelve month period ended December 31, 1997, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
April 6, 1998
F-47
<PAGE>
TIMBERGLEN APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
INCOME
Rental and Other Income .............................. $1,954,938
----------
DIRECT OPERATING EXPENSES
Administrative and Other ............................. 164,562
Insurance ............................................ 31,252
Repairs and Maintenance .............................. 178,931
Taxes, Property ...................................... 226,907
Utilities ............................................ 134,278
----------
Total Direct Operating Expenses .................... 735,930
----------
Operating income exclusive of items not comparable
to the proposed future operations of the property. $1,219,008
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED DECEMBER 31, 1997
NOTE 1 -- ORGANIZATION
Timberglen Apartments is a 304 unit garden style apartment complex located on
10.47 acres in Dallas, Texas. The assets comprising the property were owned by
Timberglen Apartments, Ltd., an entity unaffiliated with Apple Residential
Income Trust, Inc., during the financial statement period. Apple Residential
Income Trust, Inc. purchased the property in February, 1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
and management fees.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management of make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-48
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Copper Ridge Apartments located in Fort Worth, Texas for the twelve
month period ended February 28, 1998. This statement is the responsibility of
the management of Copper Ridge Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Copper Ridge Apartments
(as defined above) for the twelve month period ended February 28, 1998, in
conformity with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
April 14, 1998
F-49
<PAGE>
COPPER RIDGE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED FEBRUARY 28, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income ................................ $914,447
--------
DIRECT OPERATING EXPENSES
Administrative and Other ............................... 147,011
Insurance .............................................. 19,847
Repairs and Maintenance ................................ 282,042
Taxes, Property ........................................ 99,861
Utilities .............................................. 160,565
--------
Total Direct Operating Expenses .................... 709,326
--------
Operating income exclusive of items not comparable to
the proposed future operations of the property .. $205,121
========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED FEBRUARY 28, 1998
NOTE 1 -- ORGANIZATION
Copper Ridge Apartments is a 200 unit garden style apartment complex located on
approximately 7.0 acres in Fort Worth, Texas. The assets comprising the property
were owned by Copper Limited Partnership, an entity unaffiliated with Apple
Residential Income Trust, Inc., during the financial statement period. Apple
Residential Income Trust, Inc. purchased the property March 31, 1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
and management fees.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
NOTE 3 -- RELATED PARTY TRANSACTIONS
Repairs and maintenance includes $25,963 paid to an affiliate for various work
performed at the property by the affiliate's employee staff.
F-50
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Bitter Creek Apartments located in Grand Prairie, Texas for the
twelve month period ended March 31, 1998. This statement is the responsibility
of the management of Bitter Creek Apartments. Our responsibility is to express
an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Bitter Creek Apartments
(as defined above) for the twelve month period ended March 31, 1998, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
May 14, 1998
F-51
<PAGE>
BITTER CREEK APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income ................................ $ 2,629,983
-----------
DIRECT OPERATING EXPENSES
Administrative and Other ............................... 198,607
Insurance .............................................. 61,497
Repairs and Maintenance ................................ 392,935
Taxes, Property ........................................ 234,304
Utilities .............................................. 334,671
-----------
Total Direct Operating Expenses ........................ 1,222,014
-----------
Operating income exclusive of items not comparable to
the proposed future operations of the property ......... $ 1,407,969
===========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED MARCH 31, 1998
NOTE 1 -- ORGANIZATION
Bitter Creek Apartments is a 472 unit garden style apartment complex located on
approximately 20.7 acres in Grand Prairie, Texas. The assets comprising the
property were owned by Bitter Creek L. P., an entity unaffiliated with Apple
Residential Income Trust, Inc., during the financial statement period. Apple
Residential Income Trust, Inc. purchased the property in May, 1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, legal and professional fees, management fees and entity expenses.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-52
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Summer Tree Apartments located in Dallas, Texas for the twelve
month period ended May 31, 1998. This statement is the responsibility of the
management of Summer Tree Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Summer Tree Apartments (as
defined above) for the twelve month period ended May 31, 1998, in conformity
with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
July 16, 1998
F-53
<PAGE>
SUMMER TREE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MAY 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income ....................................... $ 1,212,080
-----------
DIRECT OPERATING EXPENSES
Administrative and Other ...................................... 163,234
Insurance ..................................................... 32,628
Repairs and Maintenance ....................................... 217,870
Taxes, Property ............................................... 118,845
Utilities ..................................................... 104,723
-----------
Total Direct Operating Expenses ........................... 637,300
-----------
Operating income exclusive of items not comparable to the
proposed future operations of the property ............. $ 574,780
===========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MAY 31, 1998
NOTE 1 -- ORGANIZATION
Summer Tree Apartments is a 232 unit garden style apartment complex located on
approximately 5.97 acres in Dallas, Texas. The assets comprising the property
were owned by Sunrise Enterprises, Inc., a Texas Corporation unaffiliated with
Apple Residential Income Trust, Inc., during the financial statement period.
Apple Residential Income Trust, Inc. purchased the property on June 1, 1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, legal fees, management fees and franchise taxes.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-54
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Park Village Apartments located in Bedford, Texas for the twelve
month period ended May 31, 1998. This statement is the responsibility of the
management of Park Village Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Park Village Apartments
(as defined above) for the twelve month period ended May 31, 1998, in conformity
with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
July 17, 1998
F-55
<PAGE>
PARK VILLAGE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED MAY 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income .................... $1,282,097
----------
DIRECT OPERATING EXPENSES
Administrative and Other ................... 133,724
Insurance .................................. 23,639
Repairs and Maintenance .................... 196,698
Taxes, Property ............................ 136,061
Utilities .................................. 118,510
----------
Total Direct Operating Expenses ........ 608,632
----------
Operating income exclusive of items not
comparable to the proposed future operations
of the property ..................... $ 673,465
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MAY 31, 1998
NOTE 1 -- ORGANIZATION
Park Village Apartments is a 238 unit garden style apartment complex located on
approximately 9.97 acres in Bedford, Texas. The assets comprising the property
were owned by Park Village Investment Partnership, an entity unaffiliated with
Apple Residential Income Trust, Inc., during the financial statement period.
Apple Residential Income Trust, Inc. purchased the property on July 1, 1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, management fees and entity expenses.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-56
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Cottonwood Crossing Apartments located in Arlington, Texas for the
twelve month period ended May 31, 1998. This statement is the responsibility of
the management of Cottonwood Crossing Apartments. Our responsibility is to
express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Cottonwood Crossing
Apartments (as defined above) for the twelve month period ended May 31, 1998, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
July 21, 1998
F-57
<PAGE>
COTTONWOOD CROSSING APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED MAY 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income ............................. $1,130,293
----------
DIRECT OPERATING EXPENSES
Administrative and Other ............................ 152,528
Insurance ........................................... 21,082
Repairs and Maintenance ............................. 171,801
Taxes, Property ..................................... 127,051
Utilities ........................................... 109,392
----------
Total Direct Operating Expenses ..................... 581,854
----------
Operating income exclusive of items not comparable to
the proposed future operations
of the property ..................................... $ 548,439
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MAY 31, 1998
NOTE 1 -- ORGANIZATION
Cottonwood Crossing Apartments is a 200 unit garden style apartment complex
located on approximately 6.77 acres in Arlington, Texas. The assets comprising
the property were owned by Cottonwood Realty Associates, an entity unaffiliated
with Apple Residential Income Trust, Inc., during the financial statement
period. Apple Residential Income Trust, Inc. purchased the property July 9,
1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation
and management fees.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-58
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Pace's Point Apartments located in Lewisville, Texas for the twelve
month period ended March 31, 1998. This statement is the responsibility of the
management of Pace's Point Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Pace's Point Apartments
(as defined above) for the twelve month period ended March 31, 1998, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
May 14, 1998
F-59
<PAGE>
PACE'S POINT APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED MARCH 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income .................... $ 2,001,209
-----------
DIRECT OPERATING EXPENSES
Administrative and Other ................... 159,320
Insurance .................................. 33,013
Repairs and Maintenance .................... 275,296
Taxes, Property ............................ 212,334
Utilities .................................. 164,368
-----------
Total Direct Operating Expenses ......... 844,331
-----------
Operating income exclusive of items not
comparable to the proposed future operations
of the property ...................... $ 1,156,878
===========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MARCH 31, 1998
NOTE 1 --- ORGANIZATION
Pace's Point Apartments is a 300 unit garden style apartment complex located on
approximately 12.623 acres in Lewisville, Texas. The assets comprising the
property were owned by Corporate Drive, L. P., an entity unaffiliated with Apple
Residential Income Trust, Inc., during the financial statement period. Apple
Residential Income Trust, Inc. has a contract to purchase the property.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, professional fees, management fees and entity expenses.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-60
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Pepper Square Apartments located in Dallas, Texas for the twelve
month period ended March 31, 1998. This statement is the responsibility of the
management of Pepper Square Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Pepper Square Apartments
(as defined above) for the twelve month period ended March 31, 1998, in
conformity with generally accepted accounting principles.
Richmond, Virginia
May 14, 1998
F-61
<PAGE>
PEPPER SQUARE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income ................................ $ 915,474
---------
DIRECT OPERATING EXPENSES
Administrative and Other ............................... 81,772
Insurance .............................................. 26,467
Repairs and Maintenance ................................ 130,420
Taxes, Property ........................................ 103,718
Utilities .............................................. 55,426
---------
Total Direct Operating Expenses ..................... 397,803
---------
Operating income exclusive of items not comparable to
the proposed future operations of the property ... $ 517,671
=========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MARCH 31, 1998
NOTE 1 -- ORGANIZATION
Pepper Square Apartments is a 144 unit garden style apartment complex located on
approximately 5.96 acres in Dallas, Texas. The assets comprising the property
were owned by Pepper Square Associates, Ltd., an entity unaffiliated with Apple
Residential Income Trust, Inc., during the financial statement period. Apple
Residential Income Trust, Inc. has a contract to purchase the property.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, professional fees, management fees and entity expenses.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-62
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Emerald Oaks Apartments located in Grapevine, Texas for the twelve
month period ended March 31, 1998. This statement is the responsibility of the
management of Emerald Oaks Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Emerald Oaks Apartments
(as defined above) for the twelve month period ended March 31, 1998, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
May 14, 1998
F-63
<PAGE>
EMERALD OAKS APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income ................................ $ 1,793,934
-----------
DIRECT OPERATING EXPENSES
Administrative and Other ............................... 145,666
Insurance .............................................. 33,368
Repairs and Maintenance ................................ 185,844
Taxes, Property ........................................ 196,202
Utilities .............................................. 156,835
-----------
Total Direct Operating Expenses ..................... 717,915
-----------
Operating income exclusive of items not comparable to
the proposed future operations of the property ... $ 1,076,019
===========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MARCH 31, 1998
NOTE 1 -- ORGANIZATION
Emerald Oaks Apartments is a 250 unit garden style apartment complex located on
approximately 13.55 acres in Grapevine, Texas. The assets comprising the
property were owned by New Emerald Texas, Ltd., an entity unaffiliated with
Apple Residential Income Trust, Inc., during the financial statement period.
Apple Residential Income Trust, Inc. has a contract to purchase the property.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, professional fees, management fees and entity expenses.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-64
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Hayden's Crossing Apartments located in Grand Prairie, Texas for
the twelve month period ended March 31, 1998. This statement is the
responsibility of the management of Hayden's Crossing Apartments. Our
responsibility is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Hayden's Crossing
Apartments (as defined above) for the twelve month period ended March 31, 1998,
in conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
May 14, 1998
F-65
<PAGE>
HAYDEN'S CROSSING APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED MARCH 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income .................... $920,520
--------
DIRECT OPERATING EXPENSES
Administrative and Other ................... 100,602
Insurance .................................. 20,159
Repairs and Maintenance .................... 123,227
Taxes, Property ............................ 85,371
Utilities .................................. 99,152
--------
Total Direct Operating Expenses ......... 428,511
--------
Operating income exclusive of items not
comparable to the proposed future
operations of the property ............ $492,009
========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MARCH 31, 1998
NOTE 1 -- ORGANIZATION
Hayden's Crossing Apartments is a 170 unit garden style apartment complex
located on approximately 7.11 acres in Grand Prairie, Texas. The assets
comprising the property were owned by Hayden's Crossing Ltd., an entity
unaffiliated with Apple Residential Income Trust, Inc., during the financial
statement period. Apple Residential Income Trust, Inc. purchased the property in
1998.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, professional fees, management fees and entity expenses.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-66
<PAGE>
APPLE RESIDENTIAL INCOME TRUST, INC.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Newport Apartments located in Austin, Texas for the twelve month
period ended March 31, 1998. This statement is the responsibility of the
management of Newport Apartments. Our responsibility is to express an opinion on
this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Newport Apartments (as
defined above) for the twelve month period ended March 31, 1998, in conformity
with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
May 14, 1998
F-67
<PAGE>
NEWPORT APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED MARCH 31, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income .................... $1,177,562
----------
DIRECT OPERATING EXPENSES
Administrative and Other ................... 142,510
Insurance .................................. 23,904
Repairs and Maintenance .................... 155,564
Taxes, Property ............................ 164,453
Utilities .................................. 104,973
----------
Total Direct Operating Expenses ......... 591,404
----------
Operating income exclusive of items not
comparable to the proposed future operations
of the property ...................... $ 586,158
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED MARCH 31, 1998
NOTE 1 -- ORGANIZATION
Newport Apartments is a 200 unit garden style apartment complex located on
approximately 6.64 acres in Austin, Texas. The assets comprising the property
were owned by New Emerald Texas, Ltd., an entity unaffiliated with Apple
Residential Income Trust, Inc., during the financial statement period. Apple
Residential Income Trust, Inc. has a contract to purchase the property.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
amortization, professional fees, management fees and entity expenses.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-68
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Apple Residential Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Estrada Oaks Apartments located in Irving, Texas for the twelve
month period ended June 30, 1998. This statement is the responsibility of the
management of Estrada Oaks Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Apple Residential Income Trust, Inc.) and excludes material
expenses, described in Note 2 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Estrada Oaks Apartments
(as defined above) for the twelve month period ended June 30, 1998, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
July 15, 1998
F-69
<PAGE>
ESTRADA OAKS APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED JUNE 30, 1998
<TABLE>
<S> <C>
INCOME
Rental and Other Income .................... $1,650,389
----------
DIRECT OPERATING EXPENSES
Administrative and Other ................... 136,212
Insurance .................................. 28,334
Repairs and Maintenance .................... 247,734
Taxes, Property ............................ 185,695
Utilities .................................. 98,819
----------
Total Direct Operating Expenses ........ 696,794
----------
Operating income exclusive of items not
comparable to the proposed future operations
of the property ..................... $ 953,595
==========
</TABLE>
NOTES TO THE STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES
EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED JUNE 30, 1998
NOTE 1 -- ORGANIZATION
Estrada Oaks Apartments is a 248 unit garden style apartment complex located on
approximately 10.12 acres in Irving, Texas. The assets comprising the property
were owned by Dallas-Fort Worth Properties, Limited Partnership, an entity
unaffiliated with Apple Residential Income Trust, Inc., during the financial
statement period. The owner has contracted to sell the property to Apple
Residential Income Trust, Inc.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE AND EXPENSE RECOGNITION
The accompanying statement of rental operations has been prepared using the
accrual method of accounting. In accordance with Rule 3-14 of Regulation S-X of
the Securities and Exchange Commission, the statement of income and direct
operating expenses excludes interest and non rent related income and expenses
not considered comparable to those resulting from the proposed future operations
of the property. Excluded expenses are mortgage interest, property depreciation,
professional fees and management fees.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management of make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REPAIRS AND MAINTENANCE
Repairs and maintenance costs are expensed as incurred, while significant
improvements, renovations and replacements are capitalized.
ADVERTISING
Advertising costs are expensed in the period incurred.
F-70
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDING JUNE
30, 1998 (UNAUDITED)
The Unaudited Pro Forma Consolidated Statement of Operations for the six month
period ended June 30, 1998 is presented as if the five property acquisitions
prior to June 30, 1998, and the eight property acquisitions after June 30, 1998,
had occurred on January 1, 1998. The Unaudited Pro Forma Consolidated Statement
of Operations assumes the Company qualifying as a REIT, distributing at least
95% of its taxable income, and, therefore, incurring no federal income tax
liability for the period presented. In the opinion of management, all
adjustments necessary to reflect the effects of these transactions have been
made.
The Unaudited Pro Forma Consolidated Statement of Operations is presented for
comparative purposes only and is not necessarily indicative of what the actual
results of the Company would have been for the three month period ended June 30,
1998 if the acquisitions had occurred at the beginning of the period presented,
nor does it purport to be indicative of the results of operations in future
periods. The Unaudited Pro Forma Consolidated Statement of Operations should be
read in conjunction with, and is qualified in its entirety by, the Company's
respective historical financial statements and notes thereto.
<TABLE>
<CAPTION>
COPPER SILVER
HISTORICAL MAIN PARK TIMBERGLEN RIDGE BROOK
STATEMENT OF PRO FORMA PRO FORMA PRO FORMA PRO FORMA
OPERATIONS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
-------------- ------------- ------------- ------------- -------------
DATE OF ACQUISITION -- 2/4/98 2/13/98 3/31/98 5/8/98
- ---------------------------------- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Rental income .................... $11,035,129 $ 122,458 $ 162,912 $ 228,612 $ 876,661
Rental expenses:
Property and maintenance ........ 2,871,674 44,674 39,814 147,405 308,738
Taxes and insurance ............. 1,462,552 18,797 21,513 29,927 98,600
Property management ............. 606,245 -- -- -- --
General and administrative....... 357,195 -- -- -- --
Amortization .................... 16,968 -- -- -- --
Depreciation of rental
property ...................... 2,080,000 -- -- -- --
----------- --------- --------- --------- ---------
Total expenses ................... 7,394,634 63,471 61,327 177,332 407,338
Income before interest income
(expense) ....................... 3,640,495 58,987 101,585 51,280 469,323
Interest income .................. 821,796 -- -- -- --
Interest expense ................. (25,831) -- -- -- --
----------- --------- --------- --------- ---------
Net income ....................... $ 4,436,460 $ 58,987 $ 101,585 $ 51,280 $ 469,323
Basic and diluted earnings per
common share .................... $ 0.28
===========
Wgt. avg. number of common
shares outstanding .............. 15,855,507
===========
<CAPTION>
SUMMER PARK HAYDEN'S PACE'S PEPPER
TREE VILLAGE COTTONWOOD CROSSING POINT SQUARE
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- ------------- ------------- ------------- ------------- -------------
DATE OF ACQUISITION 6/1/98 7/1/98 7/9/98 7/24/98 7/17/98 7/17/98
- ---------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rental income .................... $ 505,033 $ 641,049 $ 565,147 $ 460,260 $ 1,000,605 $ 457,737
Rental expenses:
Property and maintenance ........ 202,428 224,466 216,861 161,491 299,492 133,809
Taxes and insurance ............. 63,114 79,850 74,067 52,765 122,674 65,093
Property management ............. -- -- -- -- -- --
General and administrative....... -- -- -- -- -- --
Amortization .................... -- -- -- -- -- --
Depreciation of rental
property ...................... -- -- -- -- -- --
--------- --------- --------- --------- ----------- ---------
Total expenses ................... 265,542 304,316 290,928 214,256 422,166 198,902
Income before interest income
(expense) ....................... 239,491 336,733 274,219 246,004 578,439 258,835
Interest income .................. -- -- -- -- -- --
Interest expense ................. -- -- -- -- -- --
--------- --------- --------- --------- ----------- ---------
Net income ....................... $ 239,491 $ 336,733 $ 274,219 $ 246,004 $ 578,439 $ 258,835
Basic and diluted earnings per
common share ....................
Wgt. avg. number of common
shares outstanding ..............
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EMERALD
NEWPORT OAKS ESTRADA
PRO FORMA PRO FORMA PRO FORMA PRO FORMA TOTAL
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- ------------- ------------- -------------------- --------------
DATE OF ACQUISITION 7/24/98 7/24/98 7/27/98 -- --
- ---------------------------------- ------------- ------------- ------------- -------------------- --------------
<S> <C> <C> <C> <C> <C>
Rental income .................... $ 588,781 $ 896,967 $ 825,195 -- $18,366,546
Rental expenses:
Property and maintenance ........ 201,524 244,173 241,383 -- 5,337,932
Taxes and insurance ............. 94,179 114,785 107,015 -- 2,404,931
Property management ............. -- -- -- $ 403,181 (A) 1,009,426
General and administrative....... -- -- -- 71,164 (B) 428,359
Amortization .................... -- -- -- -- 16,968
Depreciation of rental
property ...................... -- -- -- 1,214,034 (C) 3,294,034
--------- --------- --------- ----------- -----------
Total expenses ................... 295,703 358,958 348,398 1,688,379 12,491,650
Income before interest income
(expense) ....................... 293,078 538,009 476,797 (1,688,379) 5,874,896
Interest income .................. -- -- -- (750,000)(D) 71,796
Interest expense ................. -- -- -- (912,786)(E) (938,617)
--------- --------- --------- ----------- -----------
Net income ....................... $ 293,078 $ 538,009 $ 476,797 ($ 3,351,165) $ 5,008,075
Basic and diluted earnings per
common share .................... $ 0.26
===========
Wgt. avg. number of common
shares outstanding .............. 3,089,213 (F) 18,944,720
=========== ===========
</TABLE>
- ------
(A) Represents the property management fees of 5% of rental income and
processing costs equal to $2.50 per apartment per month charged by the
external management company for the period not owned by the Company.
(B) Represents the advisory fee of .25% of accumulated capital contributions
under the "best efforts" offering for the period of time not owned by the
Company.
(C) Represents the depreciation expense of the properties acquired based on the
purchase price, excluding amounts allocated to land, for the period of time
not owned by the Company. The weighted average life of the property
depreciated was 27.5 years.
(D) Represents the reduction of interest to use of cash ($30 million) used to
purchase properties based on the Company's actual investment rate of 5%.
(E) Represents the interest expense for 5 of the 13 properties for the period
in which the properties were not owned for the three months period ended
March 31, 1998, interest was computed based on interest rates of the debt
assumed in effect at the time of acquisition.
(F) Represents additional common shares, after consideration of cash, assuming
the properties were acquired on January 1, 1998 with the net proceeds from
the "best efforts" offering of $10 per share (net $8.70 per share) (Also
see note D).
F- 71
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1997 (UNAUDITED)
The Unaudited Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1997 is presented as if the 12 property acquisitions during 1997
and the 13 property acquisitions during 1998 had occurred on January 1, 1997.
The Unaudited Pro Forma Consolidated Statement of Operations assumes the Company
qualifying as a REIT, distributing at least 95% of its taxable income, and,
therefore, incurring no federal income tax liability for the period presented.
In the opinion of management, all adjustments necessary to reflect the effects
of these transactions have been made.
The Unaudited Pro Forma Consolidated Statement of Operations is presented for
comparative purposes only and is not necessarily indicative of what the actual
results of the Company would have been for the year ended December 31, 1997 if
the acquisitions had occurred at the beginning of the period presented, nor does
it purport to be indicative of the results of operations in future periods. The
Unaudited Pro Forma Consolidated Statement of Operations should be read in
conjunction with, and is qualified in its entirety by, the Company's respective
historical financial statements and notes thereto.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
STATEMENT OF 1997 PRO FORMA BEFORE 1998
OPERATIONS ACQUISITIONS(F) ADJUSTMENTS ACQUISITIONS
-------------- ----------------- -------------------- --------------
DATE OF ACQUISITION
- --------------------------------------------------
<S> <C> <C> <C> <C>
Rental income .................................... $12,005,968 $ 5,392,558 -- $17,398,526
Rental expenses:
Property and maintenance ........................ 3,571,484 1,982,189 -- 5,553,673
Taxes and insurance ............................. 1,765,741 706,939 -- 2,472,680
Property management ............................. 656,267 -- $ 295,813 (A) 952,080
General and administrative ...................... 351,081 -- 67,262 (B) 418,343
Amortization .................................... 28,490 -- -- 28,490
Depreciation of rental property ................. 1,898,003 -- 792,074 (C) 2,690,077
----------- ----------- ----------- -----------
Total expenses ................................... 8,271,066 2,689,128 1,155,149 12,115,343
Income before interest income (expense) .......... 3,734,902 2,703,430 (1,155,149) 5,283,183
Interest income .................................. 222,676 -- -- 222,676
Interest expense ................................. (458,384) -- -- (458,384)
----------- ----------- ----------- -----------
Net income ....................................... $ 3,499,194 $ 2,703,430 ($ 1,155,149) $ 5,047,475
===========
Basic and diluted earnings per common share ...... $ 0.54 $ 0.53
=========== -----------
Wgt. avg. number of common shares outstanding..... 6,493,114 3,106,405 (E) 9,599,519
===========
<CAPTION>
COPPER BITTER SUMMER
MAIN PARK TIMBERGLEN RIDGE CREEK TREE
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTEMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- -------------- ------------- ------------- --------------
DATE OF ACQUISITION 2/4/98 2/13/98 3/31/98 5/8/98 6/1/98
- -------------------------------------------------- ------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Rental income .................................... $ 1,469,496 $ 1,954,938 $ 914,447 $ 2,629,983 $ 1,212,080
Rental expenses:
Property and maintenance ........................ 536,090 477,771 589,618 926,213 485,827
Taxes and insurance ............................. 225,564 258,159 119,708 295,801 151,473
Property management ............................. -- -- -- -- --
General and administrative ...................... -- -- -- -- --
Amortization .................................... -- -- -- -- --
Depreciation of rental property ................. -- -- -- -- --
----------- ----------- --------- ----------- -----------
Total expenses ................................... 761,654 735,930 709,326 1,222,014 637,300
Income before interest income (expense) .......... 707,842 1,219,008 205,121 1,407,969 574,780
Interest income .................................. -- -- -- -- --
Interest expense ................................. -- -- -- -- --
----------- ----------- --------- ----------- -----------
Net income ....................................... $ 707,842 $ 1,219,008 $ 205,121 $ 1,407,969 $ 574,780
Basic and diluted earnings per common share ......
Wgt. avg. number of common shares outstanding.....
</TABLE>
- ------
(A) Represents the property management fees of 5% of rental income and
processing costs equal to $2.50 per apartment per month charged by the
external management company for the period not owned by the Company.
(B) Represents the advisory fee of .25% of accumulated capital contributions
under the "best efforts" offering for the period of time not owned by the
Company.
(C) Represents the depreciation expense of the properties acquired based on the
purchase price, excluding amounts allocated to land, for the period of time
not owned by the Company. The weighted average life of the property
depreciated was 27.5 years.
(D) Represents the interest expense for 5 of the 13 properties for the period
in which the properties were not owned for the three months period ended
March 31, 1998, interest was computed based on interest rates on the
properties debt that was assumed at acquisition.
(E) Represents additional common shares assuming the properties were acquired
on January 1, 1997 with the net proceeds from the "best efforts" offering
of $9 per share (net $7.83 per share) for the first $15 million and $10 per
share (net $8.70 per share) above $15 million.
(F) Represents properties acquired during 1997 for the period of time during
1997 not owned by the company, see page F-74.
F- 72
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1997 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PARK HAYDENS PACE'S PEPPER
VILLAGE COTTONWOOD CROSSING POINT SQUARE
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- ------------- ------------- ------------- -------------
DATE OF ACQUISITION 7/1/98 7/9/98 7/24/98 7/17/98 7/17/98
- -------------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Rental income .............................. $ 1,282,097 $ 1,130,293 $ 920,520 $ 2,001,209 $ 915,474
Rental expenses:
Property and maintenance .................. 448,932 433,721 322,981 598,984 267,618
Taxes and insurance ....................... 159,700 148,133 105,530 245,347 130,185
Property management ....................... -- -- -- -- --
General and administrative ................ -- -- -- -- --
Amortization .............................. -- -- -- -- --
Depreciation of rental property ........... -- -- -- -- --
----------- ----------- --------- ----------- ---------
Total expenses ............................. 608,632 581,854 428,511 844,331 397,803
Income before interest income (expense) 673,465 548,439 492,009 1,156,878 517,671
Interest income ............................ -- -- -- -- --
Interest expense ........................... -- -- -- -- --
- -------------------------------------------- ----------- ----------- --------- ----------- ---------
Net income ................................. $ 673,465 $ 548,439 $ 492,009 $ 1,156,878 $ 517,671
Basic and diluted earnings per common
share .....................................
Wgt. avg. number of common shares out-
standing ..................................
<CAPTION>
EMERALD
NEWPORT OAKS ESTRADA
PRO FORMA PRO FORMA PRO FORMA PRO FORMA TOTAL
ADJUSTMENTS ADJUSTMENTS ADJUSTMENT ADJUSTMENTS PRO FORMA
------------- ------------- -------------- ---------------------- --------------
DATE OF ACQUISITION 7/24/98 7/24/98 7/27/98 -- --
- -------------------------------------------- ------------- ------------- -------------- ---------------------- --------------
<S> <C> <C> <C> <C> <C>
Rental income .............................. $ 1,177,562 $ 1,793,934 $ 1,650,389 -- $ 36,450,948
Rental expenses:
Property and maintenance .................. 403,047 488,345 482,765 -- 12,015,585
Taxes and insurance ....................... 188,357 229,570 214,029 4,944,236
Property management ....................... -- -- -- $ 1,047,121 (A) 1,999,201
General and administrative ................ -- -- -- 204,500 (B) 622,843
Amortization .............................. -- -- -- -- 28,490
Depreciation of rental property ........... -- -- -- 3,155,180 (C) 5,845,257
----------- ----------- ----------- -------------- ------------
Total expenses ............................. 591,404 717,915 696,794 4,406,801 25,455,612
Income before interest income (expense) 586,158 1,076,019 953,595 (4,406,801) 10,995,336
Interest income ............................ -- -- -- -- 222,676
Interest expense ........................... -- -- -- (1,833,108)(D) (2,291,492)
- --------------------------------------------- ----------- ----------- ----------- -------------- ------------
Net income ................................. $ 586,158 $ 1,076,019 $ 953,595 ($ 6,239,909) $ 8,926,520
============
Basic and diluted earnings per common
share ..................................... $ 0.47
============
Wgt. avg. number of common shares out-
standing .................................. 9,402,287 (E) 19,001,806
============
</TABLE>
F- 73
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1997 (UNAUDITED) (CONT.)
The following schedule provides detail of 1997 acquisitions by property included
in the Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1997.
<TABLE>
<CAPTION>
BROOKFIELD EAGLE CREST ASPEN HILLS MILL CROSSING POLO RUN WILDWOOD
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- ------------- ------------- --------------- ------------- -------------
DATE OF ACQUISITIONS 1/31/97 1/31/97 1/31/97 2/28/97 03/31/97 03/31/97
- ----------------------------------- ------------- ------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rental income ..................... $99,879 $266,385 $100,023 $151,389 $326,137 $202,389
Expenses
Property and maintenance ......... 32,430 74,735 51,643 77,882 121,983 78,111
Taxes and insurance .............. 12,720 36,546 12,099 19,230 40,508 25,216
Property management .............. -- -- -- -- -- --
General and administrative........ -- -- -- -- -- --
Depreciation of real estate....... -- -- -- -- -- --
Amortization ..................... -- -- -- -- -- --
------- -------- -------- -------- -------- --------
45,150 111,281 63,742 97,112 162,491 103,327
Income before interest income. 54,729 155,104 36,281 54,277 163,646 99,062
Interest income .................. -- -- -- -- -- --
Interest expense ................. -- -- -- -- -- --
------- -------- -------- -------- -------- --------
Net income ........................ $54,729 $155,104 $ 36,281 $ 54,277 $163,646 $ 99,062
<CAPTION>
COPPER
TOSCANA THE ARBORS PACES COVE CHAPAROSA RIVERHILL CROSSING
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- ------------- ------------- ------------- ------------- -------------
DATE OF ACQUISITIONS 03/31/97 4/25/97 6/30/97 8/6/97 8/6/97 11/25/97
- ----------------------------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rental income ..................... $270,812 $460,338 $916,348 $ 801,713 $ 892,295 $ 904,850
Expenses
Property and maintenance ......... 82,722 102,132 314,521 286,943 338,906 420,181
Taxes and insurance .............. 35,674 60,729 128,306 97,242 124,028 114,641
Property management .............. -- -- -- -- -- --
General and administrative........ -- -- -- -- -- --
Depreciation of real estate....... -- -- -- -- -- --
Amortization ..................... -- -- -- -- -- --
-------- -------- -------- --------- --------- ---------
118,396 162,861 442,827 384,185 462,934 534,822
Income before interest income. 152,416 297,477 473,521 417,528 429,361 370,028
Interest income .................. -- -- -- -- -- --
Interest expense ................. -- -- -- -- -- --
-------- -------- -------- --------- --------- ---------
Net income ........................ $152,416 $297,477 $473,521 $ 417,528 $ 429,361 $ 370,028
<CAPTION>
TOTAL
PRO FORMA
-------------
DATE OF ACQUISITIONS
- -----------------------------------
<S> <C>
Rental income ..................... $5,392,558
Expenses
Property and maintenance ......... 1,982,189
Taxes and insurance .............. 706,939
Property management .............. 0
General and administrative........ 0
Depreciation of real estate....... 0
Amortization ..................... 0
----------
2,689,128
Income before interest income. 2,703,430
Interest income .................. 0
Interest expense ................. 0
----------
Net income ........................ $2,703,430
</TABLE>
F- 74
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 (UNAUDITED)
The accompanying Unaudited Pro Forma Consolidated Balance Sheet as of June 30,
1998 is presented as if the Company had owned the properties included in the
table below as of June 30, 1998. In the opinion of management all adjustments
necessary to reflect the effects of the Offering have been made.
The Unaudited Pro Forma Consolidated Balance Sheet is presented for comparative
purposes only and is not necessarily indicative of what the actual financial
position of the Company would have been at June 30, 1998, nor does it purport to
represent the future financial position of the Company. This Unaudited Pro Forma
Consolidated Balance Sheet should be read in conjunction with, and is qualified
in its entirety by, the Company's respective historical financial statements and
notes thereto.
<TABLE>
<CAPTION>
PARK HAYDEN'S
HISTORICAL VILLAGE COTTONWOOD CROSSING
BALANCE PRO FORMA PRO FORMA PRO FORMA
SHEET ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
---------------- --------------- --------------- ---------------
DATE OF ACQUISITION 7/1/98 7/9/98 7/24/98
- ----------------------------------------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Investment in rental property
Land ......................................... $ 25,515,794 $ 856,800 $ 465,120 $ 1,042,283
Building and improvements .................... 111,419,576 6,283,200 5,348,880 3,695,369
Furniture and fixtures ....................... 1,896,013 -- -- --
------------ ------------- ------------- -------------
138,831,383 7,140,000 5,814,000 4,737,652
Less accumulated depreciation ................ (3,978,003) -- -- --
------------ ------------- ------------- -------------
134,853,380 7,140,000 5,814,000 4,737,652
Cash and cash equivalents .................... 45,877,272 (7,140,000) (5,814,000) (1,665,253)
Prepaid expenses ............................. 99,503 -- -- --
Other assets ................................. 1,128,864 -- -- --
------------ ------------- ------------- -------------
47,105,639 (7,140,000) (5,814,000) (1,665,253)
------------ ------------- ------------- -------------
Total Assets .................................. $181,959,019 $ -- $ -- $ 3,072,399
============ ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage notes payable ....................... -- -- -- $ 3,072,399
Accounts payable ............................. $ 1,235,261 -- -- --
Accrued expenses ............................. 1,710,253 -- -- --
Rents received in advance .................... 42,745 -- -- --
Tenant security deposits ..................... 588,753 -- -- --
------------ ------------- ------------- -------------
3,577,012 -- -- 3,072,399
Shareholders' equity
Common stock ................................. 178,551,942 -- -- --
Class B convertible stock .................... 20,000 -- -- --
Receivable from officer-shareholder .......... -- -- -- --
Distributions greater than net income......... (189,935) -- -- --
------------ ------------- ------------- -------------
178,382,007 -- -- --
============ ============= ============= =============
Total Liabilities and Shareholders' Equity..... $181,959,019 $ -- $ -- $ 3,072,399
============ ============= ============= =============
<CAPTION>
PACE'S PEPPER EMERALD
POINT SQUARE NEWPORT OAKS ESTRADA
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
--------------- --------------- --------------- --------------- ---------------
DATE OF ACQUISITION 7/17/98 7/17/98 7/24/98 7/24/98 7/27/98
- ----------------------------------------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in rental property
Land ......................................... $ 1,951,401 $ 1,675,594 $ 511,658 $ 881,191 $ 1,812,030
Building and improvements .................... 9,527,427 3,560,637 5,884,065 10,133,695 7,724,970
Furniture and fixtures ....................... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
11,478,828 5,236,231 6,395,723 11,014,886 9,537,000
Less accumulated depreciation ................ -- -- -- -- --
------------- ------------- ------------- ------------- -------------
11,478,828 5,236,231 6,395,723 11,014,886 9,537,000
Cash and cash equivalents .................... (3,765,211) (1,592,808) (3,351,850) (4,329,180) (9,537,000)
Prepaid expenses ............................. -- -- -- -- --
Other assets ................................. -- -- -- -- --
------------- ------------- ------------- ------------- -------------
(3,765,211) (1,592,808) (3,351,850) (4,329,180) (9,537,000)
------------- ------------- ------------- ------------- -------------
Total Assets .................................. $ 7,713,617 $ 3,643,423 $ 3,043,873 $ 6,685,706 $ --
============= ============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage notes payable ....................... $ 7,713,617 $ 3,643,423 $ 3,043,873 $ 6,685,706 --
Accounts payable ............................. -- -- -- -- --
Accrued expenses ............................. -- -- -- -- --
Rents received in advance .................... -- -- -- -- --
Tenant security deposits ..................... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
7,713,617 3,643,423 3,043,873 6,685,706 --
Shareholders' equity
Common stock ................................. -- -- -- -- 0
Class B convertible stock .................... -- -- -- -- --
Receivable from officer-shareholder .......... -- -- -- -- --
Distributions greater than net income......... -- -- -- -- --
------------- ------------- ------------- ------------- -------------
-- -- -- -- --
============= ============= ============= ============= =============
Total Liabilities and Shareholders' Equity..... $ 7,713,617 $ 3,643,423 $ 3,043,873 $ 6,685,706 $ --
============= ============= ============= ============= =============
<CAPTION>
TOTAL
PRO FORMA
----------------
DATE OF ACQUISITION
- -----------------------------------------------
<S> <C>
ASSETS
Investment in rental property
Land ......................................... $ 34,711,871
Building and improvements .................... 163,577,819
Furniture and fixtures ....................... 1,896,013
------------
200,185,703
Less accumulated depreciation ................ (3,978,003)
------------
196,207,700
Cash and cash equivalents .................... 8,681,970
Prepaid expenses ............................. 99,503
Other assets ................................. 1,128,864
------------
9,910,337
------------
Total Assets .................................. $206,118,037
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage notes payable ....................... $ 24,159,018
Accounts payable ............................. 1,235,261
Accrued expenses ............................. 1,710,253
Rents received in advance .................... 42,745
Tenant security deposits ..................... 588,753
------------
27,736,030
Shareholders' equity
Common stock ................................. 178,551,942
Class B convertible stock .................... 20,000
Receivable from officer-shareholder .......... --
Distributions greater than net income......... (189,935)
------------
178,382,007
============
Total Liabilities and Shareholders' Equity..... $206,118,037
============
</TABLE>
NOTES TO PRO FORMA BALANCE SHEET
Pro Forma adjustments represent the purchase price of the related property ,
including the 2% acquisition fee to Cornerstone Realty Income Trust, Inc.
allocated between land and building. Adjustments to cash reflect the use of net
proceeds from sales of common stock from the Company's continuous offering to
purchase properties. Adjustments to mortgage notes payable reflect the amounts
assumed on five property acquisitions.
F- 75
<PAGE>
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 Ten and 00/100 Dollars ($10.00) 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 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).
<TABLE>
<S> <C> <C> <C>
[ ] Individual [ ] Joint Tenants WROS [ ] Corporation [ ] Community Property
[ ] Tenants in Common [ ] Partnership [ ] Trust
[ ] As Custodian for
----------------------------------------------------------
[ ] For Estate of
-------------------------------------------------------------
[ ] Other
---------------------------------------------------------------------
</TABLE>
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). [ ] Liquidate funds from money market [ ] 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 effective Apple Residential Income Trust, Inc.
agreement until it is signed by a duly By
authorized agent of Apple Residential In ------------------------------------
come Trust, Inc. Date
----------------------------------
<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 Ten and 00/100 Dollars ($10.00) 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 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).
<TABLE>
<S> <C> <C> <C>
[ ] Individual [ ] Joint Tenants WROS [ ] Corporation [ ] Community Property
[ ] Tenants in Common [ ] Partnership [ ] Trust
[ ] As Custodian for
----------------------------------------------------------
[ ] For Estate of
-------------------------------------------------------------
[ ] Other
---------------------------------------------------------------------
</TABLE>
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). [ ] Liquidate funds from money market [ ] 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 effective Apple Residential Income Trust, Inc.
agreement until it is signed by a duly By
authorized agent of Apple Residential In ------------------------------------
come Trust, Inc. Date
----------------------------------
<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.
APPLE
------------------------- RESIDENTIAL
TABLE OF CONTENTS INCOME TRUST, INC.
PAGE
----
Available Information ............ i
Summary of the Offering .......... 1
Risk Factor ...................... 10
Estimated Use of Proceeds ........ 20
Compensation ..................... 21
Conflicts of Interest ............ 24
Investment Objectives and Policies 25
Distribution Policy .............. 33 PROSPECTUS
Business and Properties .......... 34
Ownership of Assets in Subsidiary
Partnerships ................... 87
Management ....................... 90
The Advisor and its Affiliates ... 97
Principal and Management
Stockholders ................... 103
Federal Income Tax Consequences .. 104
Investment by Tax-Exempt Entities 112
Capitalization ................... 114
Selected Financial Data .......... 115
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 116
Plan of Distribution ............. 120
Description of Capital Stock ..... 122 DAVID LERNER ASSOCIATES, INC.
Summary of Organizational
Documents ...................... 124
Sales Literature ................. 127
Reports to Shareholders .......... 127
Legal Opinions ................... 128
Experts .......................... 128
Experience of Prior Programs ..... 130
Glossary ......................... 135
Index to Financial Statements of
the Company .................... F-1
Subscription Agreement Exhibit A
UNTIL SEPTEMBER 22, 1998, ALL
DEALERS EFFECTING TRANSACTIONS IN THE
SHARES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED SEPTEMBER 22, 1998
TO DELIVER A COPY OF THIS PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS
OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
====================================== ======================================
<PAGE>
PART 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 ...................... $ 14,750
NASD filing fee ........................... 15,000
Printing and engraving fees ............... 70,000
Legal fees and expenses ................... 100,000
Accounting fees and expenses .............. 50,000
Blue Sky fees and expense ................. 25,000
Transfer Agent and Registrar fees ......... 10,000
Registrant travel expense ................. 30,000
Marketing Expense Allowance ............... 1,250,000
Contingency ............................... 185,250
----------
Total .................................. $1,750,000
==========
ITEM 31. SALES TO SPECIAL PARTIES.
On August 7, 1996, the Registrant sold 10 Common Shares to Apple Realty
Advisors, Inc. ("ARA") for $100 cash.
On February 10, 1997, in response to a request from Cornerstone Realty
Income Trust, Inc. ("Cornerstone"), the Registrant's Board of Directors
authorized the grant to Cornerstone of a continuing right to purchase such
number of Common Shares of the Registrant as would, following any such purchase,
be up to but not in excess of 9.8% of the total number of Common Shares of the
Registrant then outstanding. This right will continue for so long as the
Registrant's offering pursuant to this registration statement, as amended,
continues, and the purchase price for such Common Shares under such right will
be the current public offering price less the Selling Commissions and Marketing
Expense Allowance payable with respect thereto. Shares sold to Cornerstone
pursuant to this right would be in addition to, and not part of, the offering
made pursuant to this registration statement, as amended.
On April 25, 1997, Cornerstone exercised the right described above and
purchased 417,778 Common Shares of the Company for approximately $3.76 million.
Cornerstone owned approximately 2.1% of the Common Shares of the Company
outstanding on June 30, 1998.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
On August 7, 1996, the Registrant sold 10 Common Shares to ARA for $100
cash, in a transaction that was exempt from registration under the Securities
Act of 1933, as amended, pursuant to Section 4(2) thereof. On November 14, 1996,
the Registrant sold 200,000 Class B Convertible Shares to Glade M. Knight for
$20,000 cash, in a transaction that was exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.
The Company's Registration Statement on Form S-11 (File No. 333-10635) was
originally declared effective by the Securities and Exchange Commission on
November 19, 1996, and on that date the Company commenced an on-going
best-efforts offering (the Offering") of its Common Shares, no par value. The
managing dealer is David Lerner Associates, Inc. The Offering is continuing as
of the date of filing this Post-Effective Amendment. All of the Common Shares
are being sold for the account of the Company.
II-1
<PAGE>
The following tables set forth information concerning the Offering and the
use of proceeds from the Offering as of June 30, 1998:
<TABLE>
<CAPTION>
COMMON SHARES REGISTERED:
--------------------------
<S> <C> <C> <C> <C>
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
23,500,000.00 Common Shares $10 per Common Share $ 235,000,000
Totals: 25,166,666.67 Common Shares
<CAPTION>
COMMON SHARES SOLD:
--------------------
<S> <C> <C> <C> <C>
1,666,666.67 Common Shares $ 9 per Common Share $ 15,000,000
21,308,630.41 Common Shares $10 per Common Share $ 213,086,304
Totals: 22,975,297.00 Common Shares $ 228,086,304
</TABLE>
<TABLE>
<S> <C>
Expenses of Issuance and Distribution of Common Shares
1. Underwriting discounts and commissions $ 22,808,630
2. Expenses of underwriters $ --
3. Direct or indirect payments to directors or officers of the
Company or their associates, to ten percent shareholders, or
to affiliates of the Company $ --
4. Fees and expenses of third parties $ 1,030,589
Total Expenses of Issuance and Distribution of Common
Shares $ 23,839,219
Net Proceeds to the Company $204,247,085
1. Purchase of real estate (including repayment of indebted-
ness incurred to purchase real estate) $159,332,433
2. Interest on indebtedness $ 691,194
3. Working capital $ 39,225,847
4. Fees to the following (all affiliates of officers of the Compa-
ny):
a. Apple Advisors, Inc. $ 14,894
b. Apple Realty Group, Inc. $ 624,382
c. Cornerstone Realty Income Trust, Inc. $ 5,358,335
5. Fees and expenses of third parties:
a. Legal $ --
b. Accounting $ --
6. Other (specify ___________) $ --
Total of Application of Net Proceeds to the Company $204,247,085
</TABLE>
In addition to the foregoing, on April 25, 1997, the Company sold to
Cornerstone 417,778 Common Shares at $9.00 per Common Share (total proceeds of
$3,760,000) in a transaction not involving any public offering within the
meaning of Section 4(2) of the Securities Act of 1933. The offer and sale of
these Common Shares was effectuated on a negotiated basis to an accredited
institutional investor satisfying the standard described in Rule 506(b)(2)(ii)
under the Securities Act of 1933. No underwriting discounts or commissions were
paid in connection with this sale of Common Shares.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company will obtain, and pay the cost of, directors' and officers'
liability insurance coverage which insures (i) the directors and officers of the
Company from any claim arising out of an alleged wrongful act by the directors
and officers of the Company in their respective capacities as directors and
II-2
<PAGE>
officers of the Company, and (ii) the Company to the extent that the Company has
indemnified the directors and officers for such loss.
The Virginia Stock Corporation Act (the "Virginia Act") permits, and the
Registrant's Articles of Incorporation and Bylaws require, indemnification of
the Registrant's directors and officers in a variety of circumstances, which may
include liabilities under the Securities Act of 1933. Under Section 13.1-697 of
the Virginia Act, a Virginia corporation generally is authorized to indemnify
its directors in civil or criminal actions if they acted in good faith and
believed their conduct to be in the best interests of the corporation and, in
the case of criminal actions, had no reasonable cause to believe that the
conduct was unlawful. The Registrant's Articles of Incorporation and Bylaws
require indemnification of officers and directors with respect to any action
except in the case of willful misconduct, bad faith, reckless disregard of
duties or violations of the criminal law. In addition, the Registrant may carry
insurance on behalf of directors, officers, employees or agents that may cover
liabilities under the Securities Act of 1933. The Registrant's Articles of
Incorporation, as permitted by the Virginia Act, eliminate the damages that may
be assessed against a director or officer of the Registrant in a shareholder or
derivative proceeding. This limit on liability will not apply in the event of
willful misconduct or a knowing violation of the criminal law or of federal or
state securities laws. Reference also is made to the indemnification provisions
set forth in the form of Agency Agreement filed as Exhibit 1 hereto.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
None of the proceeds will be credited to an account other than the
appropriate capital share account.
ITEM 35. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
(a) Financial Statements. See Index to Financial Statements in this
Prospectus for the financial statements which are included in this
Prospectus.
(b) Financial Statement Schedules: Schedule III -- Real Estate and
Accumulated Depreciation. All other financial statement schedules have
been omitted because they are not applicable or not required or
because the required information is included elsewhere in the
financial statements or notes thereto.
II-3
<PAGE>
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION (AS OF DECEMBER 31, 1997)
<TABLE>
<CAPTION>
SUBSEQUENTLY
INITIAL COST CAPITALIZED GROSS AMOUNT CARRIED
----------------------------- --------------------- -----------------------------
ENCUM-
DESCRIPTION BRANCES LAND BLDG. & IMPR. IMPR. LAND BLDG. & IMPR.
- ---------------------------- --------- ------------- --------------- --------------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1) Brookfield $0 $ 1,146,282 $ 4,312,203 $ 487,814 $ 1,203,420 $ 4,742,879
Dallas, TX
Multi-family housing
2) Eagle Crest $0 $ 2,973,500 $12,676,500 $ 1,649,740 $ 3,077,332 $14,222,408
Irving, TX
Multi-family housing
3) Tahoe Apartments $0 $ 1,081,206 $ 4,609,354 $ 950,667 $ 1,128,570 $ 5,512,657
Arlington, TX
Multi-family housing
4) Mill Crossing $0 $ 772,501 $ 3,771,620 $ 502,787 $ 802,354 $ 4,244,554
Arlington, TX
Multi-family housing
5) Polo Run $0 $ 891,667 $ 5,967,307 $ 686,189 $ 935,852 $ 6,609,311
Arlington, TX
Multi-family housing
6) Wildwood Apartments $0 $ 832,339 $ 3,131,180 $ 426,223 $ 880,841 $ 3,508,901
Euless, TX
Multi-family housing
7) Toscana Apartments $0 $ 819,634 $ 5,034,897 $ 367,692 $ 858,233 $ 5,363,990
Dallas, TX
Multi-family housing
8) Arbors on Forest Ridge $0 $ 697,402 $ 7,051,505 $ 566,766 $ 727,692 $ 7,587,981
Bedford, TX
Multi-family housing
9) Paces Cove $0 $ 1,948,245 $ 7,329,110 $ 259,204 $ 1,838,745 $ 7,697,814
Dallas, TX
Multi-family housing
10) Remington Hills $0 $ 3,144,000 $ 9,956,000 $ 715,064 $ 3,061,324 $10,753,740
Irving, TX
Multi-family housing
11) Copper Crossing $0 $ 855,000 $ 3,895,000 $ 125,750 $ 882,460 $ 3,993,290
Fort Worth, TX
Multi-family housing
$15,161,775 $67,734,677 $ 6,737,896 (2) $15,396,823 $74,237,525
=========== =========== ============ =========== ===========
<CAPTION>
DATE OF DATE
DESCRIPTION TOTAL ACC. DEP. CONST. ACQUIRED DEP. LIFE
- ---------------------------- ---------------------- ------------- --------- --------------- ----------
<S> <C> <C> <C> <C> <C>
1) Brookfield $ 5,946,299 $ 166,694 1984 Jan. 28, 1997 27.5 yrs.
Dallas, TX
Multi-family housing
2) Eagle Crest $ 17,299,740 $ 483,740 1985 Jan. 30, 1997 27.5 yrs.
Irving, TX
Multi-family housing
3) Tahoe Apartments $ 6,641,227 $ 199,049 1979 Jan. 31, 1997 27.5 yrs.
Arlington, TX
Multi-family housing
4) Mill Crossing $ 5,046,908 $ 136,519 1979 Feb. 21, 1997 27.5 yrs.
Arlington, TX
Multi-family housing
5) Polo Run $ 7,545,163 $ 191,302 1984 Mar. 31, 1997 27.5 yrs.
Arlington, TX
Multi-family housing
6) Wildwood Apartments $ 4,389,742 $ 98,645 1984 Mar. 31, 1997 27.5 yrs.
Euless, TX
Multi-family housing
7) Toscana Apartments $ 6,222,223 $ 147,777 1986 Mar. 31, 1997 27.5 yrs.
Dallas, TX
Multi-family housing
8) Arbors on Forest Ridge $ 8,315,673 $ 187,034 1986 Apr. 25, 1997 27.5 yrs.
Bedford, TX
Multi-family housing
9) Paces Cove $ 9,536,559 $ 141,850 1982 June 24, 1997 27.5 yrs.
Dallas, TX
Multi-family housing
10) Remington Hills $ 13,815,064 $ 133,270 1985 Aug. 6, 1997 27.5 yrs.
Irving, TX
Multi-family housing
11) Copper Crossing $ 4,875,750 $ 12,123 1981 Nov. 25, 1997 27.5 yrs.
Fort Worth, TX
Multi-family housing
$ 89,634,348 (1) $1,898,003
============= ==========
</TABLE>
(Footnotes on next page)
II-4
<PAGE>
(Footnotes for preceding page)
- ----------
(1) Represents the aggregate cost for Federal Income tax purposes.
(2) Included real estate commissions, closing costs and improvements
capitalized since the date of acquisition.
(3) The following is a reconciliation of the carrying amount of real estate
owned:
Balance at January 1, 1997 .................... $ 0
Real estate purchased ......................... 84,147,726
Improvements, furniture and fixtures .......... 3,606,088
-----------
Balance at December 31, 1997 .................. $87,753,814
===========
(4) The following is a reconciliation of accumulated depreciation:
Balance at January 1, 1997 ........... $ 0
Depreciation expense ................. 1,898,003
----------
Balance at December 31,1997 .......... $1,898,003
==========
(c) Exhibits. Except as expressly noted otherwise, the Exhibits have been
previously filed under the indicated Exhibit Numbers as part of the Registrant's
previous filing on Form S-11 (File No. 333-10635) and are hereby incorporated
herein by this reference.
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. FILED HEREWITH.
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).
4.1 Loan Agreement dated as of March 1, 1997, by and between Apple
Residential Income Trust, Inc. and First Union National Bank of
Virginia.
4.2 Amendment to Loan Agreement dated as of August 1, 1997, by and between
Apple Residential Income Trust, Inc. and First Union National Bank of
Virginia.
4.3 Amended and Restated Promissory Note dated August 1, 1997, from Apple
Residential Income Trust, Inc. to the order of First Union National
Bank of Virginia.
4.4 Instruments Defining the Rights of Lenders (with respect to the Pace's
Point, Pepper Square, Emerald Oaks, Hayden's Crossing and Newport
Apartments). (Incorporated by reference to Exhibit 4 to Current Report
on Form 8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.;
File No. 0-23983).
5 Opinion of McGuire, Woods, Battle & Boothe LLP as to the legality of
the securities being registered. FILED HEREWITH
8 Opinion of McGuire, Woods, Battle & Boothe LLP as to certain tax
matters. FILED HEREWITH.
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.
II-5
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- -------- -----------------------------------------------------------------------
10.3 Property Acquisition/Disposition Agreement between the Registrant and
Apple Realty Group, Inc.
10.4 Apple Residential Income Trust, Inc. 1996 Incentive Plan.
10.5 Apple Residential Income Trust, Inc. 1996 Non-Employee Directors Stock
Option Plan.
10.6 Share Purchase Warrants Warrant Agreement.
10.7 Right of First Refusal Agreement.
10.8 Advisory Agreement Subcontract among the Registrant, Apple Residential
Advisors, Inc. and Cornerstone Realty Income Trust, Inc. Incorporated
herein by reference to Exhibit 10.4 to Form S-3 of Cornerstone Realty
Income Trust, Inc. (File No. 333-23693) filed on March 20, 1997.
10.9 Property Management Agreement Subcontract among the Registrant, Apple
Residential Management Group, Inc. and Cornerstone Realty Income Trust,
Inc. Incorporated herein by reference to Exhibit 10.5 to Form S-3 of
Cornerstone Realty Income Trust, Inc. (File No. 333-23693) filed on
March 20, 1997.
10.10 Agreement and Bill of Transfer and Assignment among the Registrant,
Apple Realty Group, Inc. and Cornerstone Realty Income Trust, Inc.
Incorporated herein by reference to Exhibit 10.6 to Form S-3 of
Cornerstone Realty Income Trust, Inc. (File No. 333-23693) filed on
March 20, 1997.
10.11 Common Share Purchase Option Agreement between the Registrant and
Cornerstone Realty Income Trust, Inc. Incorporated herein by reference
to Exhibit 10.8 to Form S-3 of Cornerstone Realty Income Trust, Inc.
(File No. 333-23693) filed on March 20, 1997.
10.12 Articles of Incorporation of Apple Limited, Inc.
10.13 Bylaws of Apple Limited, Inc.
10.14 Articles of Incorporation of Apple General, Inc.
10.15 Bylaws of Apple General, Inc.
10.16(a) Certificate of Limited Partnership of Apple REIT Limited Partnership.
10.17(a) Limited Partnership Agreement of Apple REIT Limited Partnership.
10.16(b) Certificate of Limited Partnership of Apple REIT II Limited
Partnership. (Incorporated by reference to Exhibit 10.1 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.17(b) Limited Partnership Agreement of Apple REIT II Limited Partnership.
(Incorporated by reference to Exhibit 10.6 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.16(c) Certificate of Limited Partnership of Apple REIT III Limited
Partnership. (Incorporated by reference to Exhibit 10.2 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.17(c) Limited Partnership Agreement of Apple REIT III Limited Partnrship.
(Incorporated by reference to Exhibit 10.7 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.16(d) Certificate of Limited Partnership of Apple REIT IV Limited
Partnership. (Incorporated by reference to Exhibit 10.3 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.17(d) Limited Partnership Agreement of Apple REIT IV Limited Partnership.
(Incorporated by reference to Exhibit 10.8 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
II-6
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- -------- -----------------------------------------------------------------------
10.16(e) Certificate of Limited Partnership of Apple REIT V Limited Partnership.
(Incorporated by reference to Exhibit 10.4 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.17(e) Limited Partnership Agreement of Apple REIT V Limited Partnership.
(Incorporated by reference to Exhibit 10.9 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.16(f) Certificate of Limited Partnership of Apple REIT VI Limited
Partnership. (Incorporated by reference to Exhibit 10.5 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.17(f) Limited Partnership Agreement of Apple REIT VI Limited Partnership.
(Incorporated by reference to Exhibit 10.10 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.18 Property Management Agreement for Brookfield Apartments. (Incorporated
by reference to Exhibit 10.7 to Current Report on Form 8-K dated
January 28, 1997 of Apple Residential Income Trust, Inc.; File No.
333-10635).
10.19 Property Management Agreement for Eagle Crest I & II Apartments.
(Incorporated by reference to Exhibit 10.8 to Current Report on Form
8-K dated January 28, 1997 of Apple Residential Income Trust, Inc.;
File No. 333-10635).
10.20 Property Management Agreement for Tahoe Apartments. (Incorporated by
reference to Exhibit 10.9 to Current Report on Form 8-K dated January
28, 1997 of Apple Residential Income Trust, Inc.; File No. 333-10635).
10.21 Property Management Agreement for Mill Crossing Apartments.
(Incorporated by reference to Exhibit 10.3 to Current Report on From
8-K dated February 21, 1997 of Apple Residential Income Trust, Inc.;
File No. 333-10635).
10.22 Property Management Agreement for Polo Run Apartments. (Incorporated by
reference to Exhibit 10.4 to Current Report on Form 8-K dated March 31,
1997 of Apple Residential Income Trust, Inc.; File No. 333-10635).
10.23 Property Management Agreement for Wildwood Apartments. (Incorporated by
reference to Exhibit 10.6 to Current Report on Form 8-K dated March 31,
1997 of Apple Residential Income Trust, Inc.; File No. 333-10635)
10.24 Property Management Agreement for Toscana Apartments. (Incorporated by
reference to Exhibit 10.6 to Current Report on Form 8-K dated March 31,
1997 of Apple Residential Income Trust, Inc.; File No. 333-10635).
10.25 Property Management Agreement for the Arbors on Forest Ridge
Apartments. (Incorporated by reference to Exhibit 10.2 to Current
Report on From 8-K dated April 25, 1997 of Apple Residential Income
Trust, Inc.; File No. 333-10635).
10.26 Property Management Agreement for Pace's Cove Apartments. (Incorporated
by reference to Exhibit 10.2 to Current Report on Form 8-K dated June
24, 1997 of Apple Residential Income Trust, Inc.; File No. 333-10635).
10.27 Property Management Agreement for Remington Hills at Las Colinas
(formerly Chaparosa and Riverhill) Apartments. (Incorporated by
reference to Exhibit 10.3 to Current Report on Form 8-K dated August 6,
1997 of Apple Residential Income Trust, Inc.; File No. 333-10635).
10.28 Property Management Agreement for Copper Crossing Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on Form
8-K dated November 24, 1997 of Apple Residential Income Trust, Inc.;
File No. 333-10635).
10.29 Property Management Agreement for Main Park Apartments. (Incorporated
by reference to Exhibit 10.2 to Current Report on Form 8-K dated
February 4, 1998 of Apple Residential Income Trust, Inc.; File No.
333-10635).
II-7
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- -------- -----------------------------------------------------------------------
10.30 Property Management Agreement for Timberglen Apartments. (Incorporated
by reference to Exhibit 10.2 to Current Report on Form 8-K dated
February 13, 1998 of Apple Residential Income Trust, Inc.; File No.
333-10635).
10.31 Property Management Agreement for Copper Ridge Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on Form
8-K dated March 31, 1998 of Apple Residential Income Trust, Inc.; File
No. 333-10635).
10.32 Property Management Agreement for Bitter Creek Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on Form
8-K dated May 8, 1998 of Apple Residential Income Trust, Inc.; File No.
0-23983).
10.33 Property Management Agreement for Summer Tree Apartments. (Incorporated
by reference to Exhibit 10.2 to Current Report on Form 8-K dated June
2, 1998 of Apple Residential Income Trust, Inc.; File No. 0-23983).
10.34 Property Management Agreement for Park Village Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on Form
8-K dated July 1, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.35 Property Management Agreement for Cottonwood Crossing Apartments.
(Incorporated by reference to Exhibit 10.18 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.36 Property Management Agreement for Pepper Square Apartments.
(Incorporated by reference to Exhibit 10.20 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.37 Property Management Agreement for Pace's Point Apartments.
(Incorporated by reference to Exhibit 10.19 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.38 Property Management Agreement for Emerald Oaks Apartments.
(Incorporated by reference to Exhibit 10.21 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.39 Property Management Agreement for Hayden's Crossing Apartments.
(Incorporated by reference to Exhibit 10.22 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.40 Property Management Agreement for Newport Apartments. (Incorporated by
reference to Exhibit 10.23 to Current Report on Form 8-K dated July 9,
1998 of Apple Residential Income Trust, Inc.; File No. 0-23983).
10.41 Property Management Agreement for Estrada Oaks Apartments (Incorporated
by reference to Exhibit 10.24 to Current Report on Form 8-K dated July
9, 1998 of Apple Residential Income Trust, Inc.; File No. 0-23983).
10.42 Property Management Agreement Subcontract pertaining to Pace's Point
Apartments. (Incorporated by reference to Exhibit 10.25 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.43 Property Management Agreement Subcontract pertaining to Pepper Square
Apartments. (Incorporated by reference to Exhibit 10.26 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.44 Property Management Agreement Subcontract pertaining to Emerald Oaks
Apartments. (Incorporated by reference to Exhibit 10.27 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.45 Property Management Agreement Subcontract pertaining to Hayden's
Crossing Apartments. (Incorporated by reference to Exhibit 10.28 to
Current Report on Form 8-K dated July 9, 1998 of Apple Residential
Income Trust, Inc.; File No. 0-23983).
II-8
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- -------- -----------------------------------------------------------------------
10.46 Property Management Agreement Subcontract pertaining to Newport
Apartments. (Incorporated by reference to Exhibit 10.29 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.47 Amendment to Common Share Purchase Option Agreement between the
Registrant and Cornerstone Realty Income Trust, Inc. FILED HEREWITH
10.48 Amendment to Property Acquisition/Disposition Agreement between the
Registrant and Apple Realty Group, Inc. FILED HEREWITH
21 Subsidiaries of Apple Residential Income Trust, Inc.
23.1 Consent of McGuire, Woods, Battle & Boothe LLP (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 Penelope W. Kyle. FILED HEREWITH
24.2 Power of Attorney of Bruce H. Matson. FILED HEREWITH
24.3 Power of Attorney of Lisa B. Kern. FILED HEREWITH
ITEM 36. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(b) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) That all post-effective amendments will comply with the applicable
forms, rules and regulations of the Commission in effect at the time such
post-effective amendments are filed.
(d) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The Registrant undertakes to send to each Shareholder at least on an annual
basis a detailed statement of any transactions with the Advisor or its
Affiliates, and of fees, commissions, compensation and other benefits paid or
accrued to the Advisor or its Affiliates for the fiscal year completed, showing
the amount paid or accrued to each recipient and the services performed.
II-9
<PAGE>
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-10
<PAGE>
ITEM 37.
TABLE VI: ACQUISITION OF PROPERTIES BY CORNERSTONE
Cornerstone acquired the following properties since inception in 1993. All
properties acquired are residential communities. All of Cornerstone's
acquisitions are done on a mortgage-free basis. Cost of acquisition represents
the total cost of the purchase price including any downpayment. The following
information is as of December 31, 1997.
<TABLE>
<CAPTION>
CONTRACT OTHER TOTAL AVERAGE
NAME OF DATE OF NUMBER PURCHASE ACQUISITION EXPENDITURES ACQUISITION SQUARE FT.
PROPERTY(1) LOCATION PURCHASE OF UNITS PRICE FEE CAPITALIZED COST OF UNITS
- ----------------------- ----------------- -------- -------- -------------- ------------- -------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GEORGIA
West Eagle Greens Augusta 1996 165 $ 4,020,000 $ 80,000 $ 1,956,355 $ 6,056,355 796
Savannah West Augusta 1996 456 $ 9,843,620 $ 196,080 $ 2,461,609 $ 12,501,309 872
Carlyle Club Lawrenceville 1997 243 $ 11,580,000 $ -- $ 657,864 $ 12,237,864 1,089
Ashley Run Norcross 1997 348 $ 18,000,000 $ -- $ 684,443 $ 18,684,443 1,150
Dunwoody Springs Dunwoody 1997 350 $ 15,200,000 $ -- $ 1,394,594 $ 16,594,594 948
Barrington Parc Norcross 1997 188 $ 7,850,000 $ -- $ 103,881 $ 7,953,881 937
NORTH CAROLINA
Chase Mooring Wilmington 1994 224 $ 3,594,000 $ 71,880 $ 1,508,242 $ 5,174,122 867
Wimbledon Chase Wilmington 1994 192 $ 3,300,000 $ 66,000 $ 2,095,662 $ 5,461,662 863
Osprey Landing Wilmington 1995 176 $ 4,375,000 $ 87,500 $ 2,380,454 $ 6,842,954 981
Sailboat Bay Charlotte 1995 358 $ 9,100,000 $ 182,000 $ 3,916,131 $ 13,198,131 906
Meadow Creek Charlotte 1996 250 $ 11,100,000 $ 222,000 $ 973,434 $ 12,295,434 860
Beacon Hill Charlotte 1996 349 $ 13,579,203 $ 266,000 $ 672,592 $ 14,517,795 734
Hanover Landing Charlotte 1995 192 $ 5,725,000 $ 114,500 $ 1,425,357 $ 7,264,857 832
Bridgetown Bay Charlotte 1996 120 $ 5,025,000 $ 100,000 $ 638,770 $ 5,763,770 868
Summerwalk Charlotte 1996 160 $ 5,660,000 $ 114,000 $ 1,365,674 $ 7,139,674 963
The Meadows Asheville 1996 176 $ 6,200,000 $ 124,000 $ 1,136,262 $ 7,460,262 1,066
Glen Eagles Winston Salem 1995 166 $ 7,300,000 $ 146,000 $ 1,417,487 $ 8,863,487 952
Mill Creek Winston Salem 1995 220 $ 8,550,000 $ 171,000 $ 674,861 $ 9,395,861 897
Wind Lake Greensboro 1995 299 $ 8,760,000 $ 175,200 $ 881,850 $ 9,817,050 727
The Landing Durham 1996 200 $ 8,345,000 $ 168,000 $ 1,314,290 $ 9,827,290 961
The Hollows Raleigh 1993 176 $ 4,200,000 $ 84,000 $ 1,578,730 5,862,730 903
The Trestles Raleigh 1994 280 $ 10,350,000 $ 207,000 $ 788,191 $ 11,345,191 926
Paces Glen Charlotte 1996 172 $ 7,425,000 $ -- $ 602,477 $ 8,027,477 905
Signature Place Greenville 1996 171 $ 5,462,948 $ -- $ 1,264,487 $ 6,727,435 1,037
Heatherwood Charlotte 1996 476 $ 17,630,457 $ -- $ 1,273,485 18,903,942 942
Highland Hills Carrboro 1996 264 $ 12,100,000 $ -- $ 1,801,839 $ 13,901,839 1,000
Parkside at Woodlake Durham 1996 266 $ 14,663,886 $ -- $ 266,022 $ 14,929,908 865
Deerfield Durham 1996 204 $ 10,675,000 $ -- $ 420,295 $ 11,095,295 888
Paces Arbor/Forest Raleigh 1997 218 $ 12,061,700 $ -- $ 568,234 $ 12,629,934 891
Charleston Place Charlotte 1997 214 $ 9,475,000 $ -- $ 532,406 $ 10,007,406 806
Clarion Crossing Raleigh 1997 228 $ 10,600,000 $ -- $ 212,429 $ 10,812,429 769
Sterling Arbor Raleigh 1997 180 $ 9,800,000 $ -- $ 87,449 $ 9,887,449 840
Sterling Place Raleigh 1997 136 $ 7,900,000 $ -- $ 82,291 $ 7,982,291 1,098
SOUTH CAROLINA
Polo Club Greenville 1993 365 $ 4,300,000 $ 86,000 $ 2,518,635 $ 6,904,635 842
Magnolia Run Greenville 1995 212 $ 5,500,000 $ 110,000 $ 1,140,125 $ 6,750,125 849
Breckinridge Greenville 1995 236 $ 5,600,000 $ 112,000 $ 1,184,124 $ 6,896,124 726
Stone Ridge Columbia 1993 191 $ 3,325,000 $ 66,500 $ 2,221,092 $ 5,612,592 1,027
Arbors at Windsor Columbia 1997 228 $ 10,875,000 $ -- $ 464,651 $ 11,339,651 948
Westchase Charleston 1997 352 $ 11,000,000 $ -- $ 1,199,764 $ 12,199,764 706
VIRGINIA
County Green Lynchburg 1993 180 $ 3,800,000 $ 76,000 $ 1,327,820 $ 5,203,820 1,000
Ashley Park Richmond 1996 272 $ 12,205,000 $ 244,100 $ 493,702 $ 12,942,802 765
Trolley Square Richmond 1996 320 $ 10,242,575 $ 120,000 $ 2,184,434 $ 12,547,009 559
Trophy Chase Charlottesville 1996 185 $ 3,710,000 $ 72,000 $ 2,699,964 $ 6,481,964 803
Bay Watch Pointe Virginia Beach 1995 160 $ 3,372,525 $ 67,451 $ 1,441,932 $ 4,881,908 911
Harbour Club Virginia Beach 1994 214 $ 5,250,000 $ 105,000 $ 749,145 $ 6,104,145 813
Arbor Trace Virginia Beach 1996 148 $ 5,000,000 $ 100,000 $ 767,816 $ 5,867,816 850
Mayflower Seaside Virginia Beach 1993 263 $ 7,634,144 $ 152,683 $ 1,731,086 $ 9,517,913 698
Tradewinds Hampton 1995 284 $ 10,200,000 $ 204,000 $ 485,492 $ 10,889,492 929
Hampton Glen Richmond 1996 232 $ 11,599,931 $ -- $ 857,570 $ 12,457,501 788
Greenbrier Fredericksburg 1996 185 $ 11,099,525 $ -- $ 714,289 $ 11,813,814 851
</TABLE>
Note: (1) Cornerstone does not have any mortgages on its properties nor
have down payments outstanding. In addition all cash expenditures incurred in
the acquisition of a community are capitalized.
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Richmond, Commonwealth of Virginia, on September 22,
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
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 September 22, 1998
- ------------------------- President, the Registrant's Principal
Glade M. Knight Executive Officer, Principal Financial
Officer and Principal Accounting
Officer
* Director September 22, 1998
- -------------------------
Penelope W. Kyle
* Director September 22, 1998
- -------------------------
Bruce H. Matson
* Director September 22, 1998
- -------------------------
Lisa B. Kern
*By: /s/ Glade M. Knight
-------------------------
Glade M. Knight, as attorney-in-
fact for the above-named persons
</TABLE>
II-12
<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. FILED HEREWITH.
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).
4.1 Loan Agreement dated as of March 1, 1997, by and between Apple
Residential Income Trust, Inc. and First Union National Bank of
Virginia.
4.2 Amendment to Loan Agreement dated as of August 1, 1997, by and between
Apple Residential Income Trust, Inc. and First Union National Bank of
Virginia.
4.3 Amended and Restated Promissory Note dated August 1, 1997, from Apple
Residential Income Trust, Inc. to the order of First Union National
Bank of Virginia.
4.4 Instruments Defining the Rights of Lenders (with respect to the Pace's
Point, Pepper Square, Emerald Oaks, Hayden's Crossing and Newport
Apartments). (Incorporated by reference to Exhibit 4 to Current Report
on Form 8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.;
File No. 0-23983).
5 Opinion of McGuire, Woods, Battle & Boothe LLP as to the legality of
the securities being registered. FILED HEREWITH
8 Opinion of McGuire, Woods, Battle & Boothe LLP as to certain tax
matters. FILED HEREWITH.
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.
- ------------
* Except as expressly indicated otherwise, all Exhibits are incorporated
herein by reference to the Exhibit of the same number filed as part of the
Registrant's previous filing on Form S-11 (File No. 333-10635) and are
hereby incorporated herein by this reference.
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- -------- -----------------------------------------------------------------------
10.11 Common Share Purchase Option Agreement between the Registrant and
Cornerstone Realty Income Trust, Inc. Incorporated herein by reference
to Exhibit 10.8 to Form S-3 of Cornerstone Realty Income Trust, Inc.
(File No. 333-23693) filed on March 20, 1997.
10.12 Articles of Incorporation of Apple Limited, Inc.
10.13 Bylaws of Apple Limited, Inc.
10.14 Articles of Incorporation of Apple General, Inc.
10.15 Bylaws of Apple General, Inc.
10.16(a) Certificate of Limited Partnership of Apple REIT Limited Partnership.
10.17(a) Limited Partnership Agreement of Apple REIT Limited Partnership.
10.16(b) Certificate of Limited Partnership of Apple REIT II Limited
Partnership. (Incorporated by reference to Exhibit 10.1 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.17(b) Limited Partnership Agreement of Apple REIT II Limited Partnership.
(Incorporated by reference to Exhibit 10.6 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.16(c) Certificate of Limited Partnership of Apple REIT III Limited
Partnership. (Incorporated by reference to Exhibit 10.2 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.17(c) Limited Partnership Agreement of Apple REIT III Limited Partnrship.
(Incorporated by reference to Exhibit 10.7 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.16(d) Certificate of Limited Partnership of Apple REIT IV Limited
Partnership. (Incorporated by reference to Exhibit 10.3 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.17(d) Limited Partnership Agreement of Apple REIT IV Limited Partnership.
(Incorporated by reference to Exhibit 10.8 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.16(e) Certificate of Limited Partnership of Apple REIT V Limited Partnership.
(Incorporated by reference to Exhibit 10.4 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.17(e) Limited Partnership Agreement of Apple REIT V Limited Partnership.
(Incorporated by reference to Exhibit 10.9 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.16(f) Certificate of Limited Partnership of Apple REIT VI Limited
Partnership. (Incorporated by reference to Exhibit 10.5 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.17(f) Limited Partnership Agreement of Apple REIT VI Limited Partnership.
(Incorporated by reference to Exhibit 10.10 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.18 Property Management Agreement for Brookfield Apartments. (Incorporated
by reference to Exhibit 10.7 to Current Report on Form 8-K dated
January 28, 1997 of Apple Residential Income Trust, Inc.; File No.
333-10635).
10.19 Property Management Agreement for Eagle Crest I & II Apartments.
(Incorporated by reference to Exhibit 10.8 to Current Report on Form
8-K dated January 28, 1997 of Apple Residential Income Trust, Inc.;
File No. 333-10635).
10.20 Property Management Agreement for Tahoe Apartments. (Incorporated by
reference to Exhibit 10.9 to Current Report on Form 8-K dated January
28, 1997 of Apple Residential Income Trust, Inc.; File No. 333-10635).
10.21 Property Management Agreement for Mill Crossing Apartments.
(Incorporated by reference to Exhibit 10.3 to Current Report on From
8-K dated February 21, 1997 of Apple Residential Income Trust, Inc.;
File No. 333-10635).
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- -------- -----------------------------------------------------------------------
10.22 Property Management Agreement for Polo Run Apartments. (Incorporated by
reference to Exhibit 10.4 to Current Report on Form 8-K dated March 31,
1997 of Apple Residential Income Trust, Inc.; File No. 333-10635).
10.23 Property Management Agreement for Wildwood Apartments. (Incorporated by
reference to Exhibit 10.6 to Current Report on Form 8-K dated March 31,
1997 of Apple Residential Income Trust, Inc.; File No. 333-10635)
10.24 Property Management Agreement for Toscana Apartments. (Incorporated by
reference to Exhibit 10.6 to Current Report on Form 8-K dated March 31,
1997 of Apple Residential Income Trust, Inc.; File No. 333-10635).
10.25 Property Management Agreement for the Arbors on Forest Ridge
Apartments. (Incorporated by reference to Exhibit 10.2 to Current
Report on From 8-K dated April 25, 1997 of Apple Residential Income
Trust, Inc.; File No. 333-10635).
10.26 Property Management Agreement for Pace's Cove Apartments. (Incorporated
by reference to Exhibit 10.2 to Current Report on Form 8-K dated June
24, 1997 of Apple Residential Income Trust, Inc.; File No. 333-10635).
10.27 Property Management Agreement for Remington Hills at Las Colinas
(formerly Chaparosa and Riverhill) Apartments. (Incorporated by
reference to Exhibit 10.3 to Current Report on Form 8-K dated August 6,
1997 of Apple Residential Income Trust, Inc.; File No. 333-10635).
10.28 Property Management Agreement for Copper Crossing Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on Form
8-K dated November 24, 1997 of Apple Residential Income Trust, Inc.;
File No. 333-10635).
10.29 Property Management Agreement for Main Park Apartments. (Incorporated
by reference to Exhibit 10.2 to Current Report on Form 8-K dated
February 4, 1998 of Apple Residential Income Trust, Inc.; File No.
333-10635).
10.30 Property Management Agreement for Timberglen Apartments. (Incorporated
by reference to Exhibit 10.2 to Current Report on Form 8-K dated
February 13, 1998 of Apple Residential Income Trust, Inc.; File No.
333-10635).
10.31 Property Management Agreement for Copper Ridge Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on Form
8-K dated March 31, 1998 of Apple Residential Income Trust, Inc.; File
No. 333-10635).
10.32 Property Management Agreement for Bitter Creek Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on Form
8-K dated May 8, 1998 of Apple Residential Income Trust, Inc.; File No.
0-23983).
10.33 Property Management Agreement for Summer Tree Apartments. (Incorporated
by reference to Exhibit 10.2 to Current Report on Form 8-K dated June
2, 1998 of Apple Residential Income Trust, Inc.; File No. 0-23983).
10.34 Property Management Agreement for Park Village Apartments.
(Incorporated by reference to Exhibit 10.2 to Current Report on Form
8-K dated July 1, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.35 Property Management Agreement for Cottonwood Crossing Apartments.
(Incorporated by reference to Exhibit 10.18 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.36 Property Management Agreement for Pepper Square Apartments.
(Incorporated by reference to Exhibit 10.20 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.37 Property Management Agreement for Pace's Point Apartments.
(Incorporated by reference to Exhibit 10.19 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.38 Property Management Agreement for Emerald Oaks Apartments.
(Incorporated by reference to Exhibit 10.21 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- -------- -----------------------------------------------------------------------
10.39 Property Management Agreement for Hayden's Crossing Apartments.
(Incorporated by reference to Exhibit 10.22 to Current Report on Form
8-K dated July 9, 1998 of Apple Residential Income Trust, Inc.; File
No. 0-23983).
10.40 Property Management Agreement for Newport Apartments. (Incorporated by
reference to Exhibit 10.23 to Current Report on Form 8-K dated July 9,
1998 of Apple Residential Income Trust, Inc.; File No. 0-23983).
10.41 Property Management Agreement for Estrada Oaks Apartments (Incorporated
by reference to Exhibit 10.24 to Current Report on Form 8-K dated July
9, 1998 of Apple Residential Income Trust, Inc.; File No. 0-23983).
10.42 Property Management Agreement Subcontract pertaining to Pace's Point
Apartments. (Incorporated by reference to Exhibit 10.25 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.43 Property Management Agreement Subcontract pertaining to Pepper Square
Apartments. (Incorporated by reference to Exhibit 10.26 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.44 Property Management Agreement Subcontract pertaining to Emerald Oaks
Apartments. (Incorporated by reference to Exhibit 10.27 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.45 Property Management Agreement Subcontract pertaining to Hayden's
Crossing Apartments. (Incorporated by reference to Exhibit 10.28 to
Current Report on Form 8-K dated July 9, 1998 of Apple Residential
Income Trust, Inc.; File No. 0-23983).
10.46 Property Management Agreement Subcontract pertaining to Newport
Apartments. (Incorporated by reference to Exhibit 10.29 to Current
Report on Form 8-K dated July 9, 1998 of Apple Residential Income
Trust, Inc.; File No. 0-23983).
10.47 Amendment to Common Share Purchase Option Agreement between the
Registrant and Cornerstone Realty Income Trust, Inc. FILED HEREWITH
10.48 Amendment to Property Acquisition/Disposition Agreement between the
Registrant and Apple Realty Group, Inc. FILED HEREWITH
21 Subsidiaries of Apple Residential Income Trust, Inc.
23.1 Consent of McGuire, Woods, Battle & Boothe LLP (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 Penelope W. Kyle. FILED HEREWITH
24.2 Power of Attorney of Bruce H. Matson. FILED HEREWITH
24.3 Power of Attorney of Lisa B. Kern. FILED HEREWITH
Exhibit 1.1
5,000,000 SHARES
APPLE RESIDENTIAL INCOME TRUST, INC.
COMMON STOCK
AGENCY AGREEMENT
David Lerner Associates, Inc.
477 Jericho Turnpike
Syosset, New York 11791
Dear Sirs:
Apple Residential Income Trust, Inc., a Virginia corporation (the
"Company"), is a corporation that qualifies as a real estate investment trust
pursuant to Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended ( the "Code"). Subject to the terms and conditions stated herein, the
Company proposes to engage David Lerner Associates, Inc. as its managing dealer
(the "Agent") to solicit offers to buy and obtain purchasers for shares of
common stock, no par value, of the Company as offered by the Prospectus which is
part of the Form S-11 Registration Statement under the Securities Act of 1933
(File No. 333-_____) as filed with the Securities and Exchange Commission on
September 22, 1998. The term "Shares" refers to the shares of common stock, no
par value, of the Company registered pursuant to the Registration Statement
referred to in the preceding sentence. This will confirm our agreement
respecting your engagement as the exclusive agent to solicit offers to buy and
obtain purchasers for the Shares on a "best efforts" basis.
1. Representations and Warranties. The Company represents and warrants
to, and agrees with, the Agent that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-11 (File No.
333-_____), and as a part thereof a preliminary prospectus, both as amended by
such amendments thereto as may have been required to the date hereof, with
respect to the registration of the Shares under the Securities Act of 1933, as
amended (the "Act"); any preliminary prospectus included in such registration
statement or filed with the Commission pursuant to Rule 424 of the Commission
under the Act is hereinafter called a "Preliminary Prospectus"; the registration
statement, as amended at the time it becomes effective under the Act, and the
prospectus filed as a part thereof or mailed for filing pursuant to Rule 424(b)
of the Act are hereinafter called the "Registration Statement" and "Prospectus,"
respectively; except that (A) if the Company files a post-effective amendment to
the registration statement, then the term "Registration Statement" shall refer
to the registration statement as amended by such post-effective amendment
thereto and the term "Prospectus" shall refer to the amended prospectus then on
file with the Commission, and (B) if the prospectus, including any sticker
supplement thereto not theretofore consolidated into a post-effective amendment,
filed by the Company pursuant to either Rule 424(b) or (c) of the rules and
regulations of the Commission under the Act (the "Regulations"), shall differ
from the prospectus on file at the time the Registration Statement or any
post-effective amendment thereto shall have become effective, the term
"Prospectus" shall refer to the prospectus, including any such sticker
supplement, filed pursuant to either Rule 424(b) or (c), as the case may be,
from and after the date on which it shall have been filed. The Company will not
at any time after the Registration Statement initially becomes effective file
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus to which you shall object in writing or which shall be
disapproved by your counsel;
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the Regulations, and did not contain any untrue
statement of a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that this
representation and warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished to the Company by
you, and relating to you, expressly for use therein;
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(c) The Registration Statement and the Prospectus, when effective
or filed with the Commission, as the case may be, conformed or will conform, in
all material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder and did not and will not as of the
applicable effective date as to the Registration Statement and any amendment
thereto and as of the applicable filing date as to the Prospectus and any
amendment or supplement thereto contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, however, that this
representation and warranty shall not apply to any statements or omissions made
in reliance upon and in conformity with information furnished to the Company by
you, and relating to you, expressly for use therein;
(d) There are no contracts or other documents that are required to
be filed as exhibits to the Registration Statement which have not been so filed;
(e) The Company and each of its subsidiaries has been duly
incorporated or organized, is validly existing, and if a corporation is in good
standing, under the laws of Virginia, with power and authority (corporate or
other) to own its properties and conduct its business as described in the
Prospectus, and has been duly qualified as a foreign entity for the transaction
of business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership of property or the
conduct of business, except such jurisdictions, if any, in which the failure to
be so qualified will not have a material adverse effect on the respective
company;
(f) The Company and each of its subsidiaries possesses all
material licenses, permits, authorizations, consents and orders required for the
contemplated method of operation of its business as described in the Prospectus;
(g) The Company has an authorized capitalization as set forth in
the Prospectus; all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and nonassessable
and conform to the description of the capital stock of the Company contained in
the Prospectus; there are no preemptive or other rights to subscribe for or to
purchase any shares of capital stock of the Company; except as described in the
Prospectus, there are no warrants or options to purchase any shares of capital
stock of the Company; and neither the filing of the Registration Statement nor
the offering or sale of the Shares as contemplated by this Agreement gives rise
to any rights for or relating to the registration of any shares of the capital
stock of the Company;
(h) The Shares to be issued and sold by the Company pursuant to
this Agreement have been duly and validly authorized and, when issued and
delivered against payment therefor as provided herein, will be duly and validly
issued and fully paid and nonassessable and will conform to the description of
the Shares contained in the Prospectus;
(i) The Company has the corporate power to enter into this
Agreement, and the issue and sale of the Shares by the Company and the
performance of such Agreement and the consummation by the Company of the
transactions herein contemplated will not result in a breach or violation of any
terms or provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which the
Company, is subject, nor will such action result in any violation of the
provisions of the Articles of Incorporation or Bylaws of the Company, or any
statute or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its properties; and no
consent, approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the issue and
sale of the Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except such consents, approvals, authorizations,
registrations or qualifications as may be required under the Act and under state
securities or Blue Sky laws in connection with the distribution of the Shares by
the Agent;
(j) This Agreement has been duly authorized, executed and
delivered by the Company, and constitutes a valid and binding agreement of the
Company, enforceable in accordance with its terms, except to the extent that
enforceability may be limited by bankruptcy, insolvency or other laws affecting
the enforcement of creditors' rights generally or by general principles of
equity, and except to the extent that the enforceability of the indemnity and
contribution provisions contained in this Agreement may be limited under
applicable laws;
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<PAGE>
(k) Both the Advisory Agreement and the subcontract relating
thereto pursuant to which Cornerstone Realty Income Trust, Inc. ("Cornerstone")
will provide advisory services has been duly authorized, executed and delivered
by the parties thereto and constitutes or will constitute a valid and binding
agreement of the parties thereto enforceable in accordance with its terms,
except to the extent that enforceability may be limited by bankruptcy,
insolvency or other laws affecting the enforcement of creditors' rights
generally or by general principles of equity;
(l) Ernst & Young LLP, which has certified the financial
statements of the Company, constitutes an independent public accountant as
required by the Act and the rules and regulations of the Commission thereunder;
(m) The financial statements of the Company, together with related
notes, as set forth in the Registration Statement and the Prospectus, presently
fairly the financial position of the Company at the indicated date;
(n) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, neither the Company nor any of
its subsidiaries has experienced any material adverse change or any development
involving a prospective material adverse change in the general affairs,
management, financial position, properties or results of operations of the
Company, or any of its subsidiaries, otherwise than as set forth in the
Prospectus; and neither the Company nor any of its subsidiaries have entered
into any material transactions other than as described in the Prospectus; and
the capitalization, indebtedness, properties, material liabilities and business
of the Company and its subsidiaries conform to the descriptions thereof
contained in the Prospectus;
(o) There are no legal or governmental proceedings pending to
which the Company or any of its subsidiaries is a party or of which any property
of the Company or any of its subsidiaries is the subject, other than as set
forth or contemplated in the Prospectus, which, individually or in the
aggregate, would have a material adverse effect on the financial position,
stockholders' equity or results of operations of the Company or any of its
subsidiaries and, to the best of their knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened or
contemplated by others;
(p) The Company is not and will not be an "investment company," or
under the control of an investment company as defined in the Investment Company
Act of 1940, as amended; and
(q) The Company is organized in conformity with the requirements
for qualification as a real estate investment trust under Sections 856 through
860 of the Code and the rules and regulations thereunder. The contemplated
method of operation of the Company's business as described in the Prospectus
will allow the Company to satisfy the operational requirements for qualification
as a real estate investment trust under such Sections and such rules and
regulations.
2. Offering and Sale of Shares -- Closing Dates
(a) On the basis of the representations, warranties and covenants
herein contained, but subject to the terms and conditions herein set forth, the
Agent is hereby appointed the selling agent of the Company during the term
herein specified (the "Offering Period") for the purpose of finding subscribers
for the Shares for the account and risk of the Company through a public
offering. Your agency hereunder, which is subject to the conditions of Section 6
hereof, shall continue as long as Shares are being offered through the
Commission filing 333-_____ and any amendments thereto. However, your agency may
be terminated by the Company if you cease to be a member in good standing of the
NASD or if you become subject to an order or other action of or by the
Securities and Exchange Commission or other securities authority substantially
restricting or impairing your ability to offer and sell the Shares under this
Agreement, or if there is a material default by you under this Agreement which
is not promptly cured. Subject to the performance by the Company of all of its
obligations to be performed hereunder, and to the completeness and accuracy of
all the representations and warranties contained herein, the Agent hereby
accepts such agency and agrees on the terms and conditions herein set forth to
use its best efforts during the Offering Period to find subscribers for the
Shares at the current public offering price (each subscriber being required to
invest at least $5,000, or $2,000 in the case of a Qualified Plan, as defined in
the Prospectus). The time for each issuance of and payment for Shares is herein
referred to as a "Closing Date."
(b) If less than all the Shares shall have been subscribed and
paid for at the initial Closing Date (the "Initial Closing Date"), then, at
periodic intervals to be mutually agreed upon by you and the Company during the
Offering Period,
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<PAGE>
there shall be subsequent closings for the payment to the Company of the
purchase price of additional Shares sold by you ("Subsequent Closing Date(s)")
as described in Section 2(c).
(c) Subsequent closing(s) will take place at such time(s), date(s)
and place(s) as determined by the Company, with the concurrence of the Agent.
Shares will be issued to subscribers and compensation will be paid to the Agent
at each Closing Date.
(d) As compensation for your services under this Agreement, you
will be paid, on each Closing Date, a commission equal to 7.5% of the public
offering price for each Share subscribed and paid for at each Closing Date which
was sold by you or a Selected Dealer engaged by you. In addition, you will be
paid, on each Closing Date, a non-accountable Marketing Expense Allowance equal
to 2.5% of the public offering price for each Share subscribed and paid for on
the applicable Closing Date which was sold by you or a Selected Dealer engaged
by you.
(e) Subscriptions for Shares may be solicited by certain dealers
selected by you (the "Selected Dealers") and sales by Selected Dealers shall be
made under a Selected Dealer Agreement in substantially the form attached as
Exhibit A, which sets forth the terms and conditions, including compensation, of
the other dealers participating. Each such Selected Dealer shall be a member in
good standing of the National Association of Securities Dealers, Inc. ("NASD").
Subscribers' checks are to be made payable to the Agent. Selected Dealers must
transmit all such checks directly to the Agent by noon of the next business day
after receipt.
(f) Neither you, the Company, the Agent, nor any Selected Dealer
participating in the offering of the Shares shall, directly or indirectly, pay
or award any finder's fees, commissions or other compensation to any person
engaged by a potential investor for investment advice as an inducement to such
adviser to advise the purchase of Shares; provided, however, that normal sales
commissions payable to a registered broker-dealer or other properly licensed
person for selling Shares shall not be prohibited hereby.
3. Covenants of the Company
The Company agrees that:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective and will notify you immediately and
confirm in writing (i) when the Registration Statement and any amendments
thereto shall have become effective, or any supplement to the Prospectus or any
amended Prospectus shall have been filed, (ii) of any request by the Commission
for any amendment to the Registration Statement or any amendment or supplement
to the Prospectus or for additional information, (iii) of the happening of any
event which makes untrue any statement of a material fact made in the
Registration Statement or the Prospectus, or which requires the making of a
change in the Registration Statement or the Prospectus, in order to make any
material statement therein not misleading; and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of the initiation of any proceedings for that purpose, or of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the institution of any proceedings for such purpose; and the
Company will make every reasonable effort to prevent the issuance by the
Commission or any governmental agency pursuant to the securities laws of any
jurisdiction of any stop order and, if such stop order shall at any time be
issued, to obtain the lifting thereof at the earliest possible moment;
(b) It will, promptly from time to time take such actions as you
may reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with such
laws so as to permit the continuance of sales of Shares therein in such
jurisdictions for so long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith neither the Company nor its
subsidiaries shall be required to qualify as a foreign corporation or to file a
general consent to service of process in any jurisdiction;
(c) The Company will deliver to you, as soon as available, a copy
of the Registration Statement as originally filed and each amendment thereto
(including exhibits);
(d) The Company will deliver promptly to you, as soon as the
Registration Statement becomes effective and thereafter from time to time during
the period when the Prospectus is required to be delivered under the Act, such
number of copies of the Prospectus (as amended or supplemented), as you may
reasonably request; and the Company consents to
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<PAGE>
the use of the Prospectus and any amendments or supplements thereto by you and
by any Selected Dealers for the purposes contemplated by the Act and this
Agreement;
(e) During the period when the Prospectus is required to be
delivered under the Act, the Company will comply, so far as it is able and at
the Company's expense, with all requirements imposed upon it by the Act, as now
and as hereafter amended, so far as necessary to permit the continuation of
sales of the Shares during such period in accordance with the provisions of this
Agreement and of the Prospectus;
(f) If any event relating to or affecting the Company shall occur
as a result of which it is necessary, in the opinion of your counsel, to amend
or supplement the Prospectus in order to make the Prospectus not misleading in
the light of the circumstances existing at the time it is delivered to a
subscriber, the Company will forthwith prepare and furnish to you, without
expense to you, a reasonable number of copies of an amendment or amendments of,
or a supplement or supplements to, the Prospectus (in form and substance
reasonably satisfactory to your counsel) which will amend or supplement the
Prospectus so that, as amended or supplemented, it will not contain an untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances existing at
the time the Prospectus is delivered to a subscriber, not misleading. For the
purposes of this subsection, the Company will furnish such information with
respect to the Company and any Company properties as you may from time to time
reasonably request;
(g) The Company will furnish to its Shareholders as soon as
practicable after the end of each fiscal year an annual report (including a
balance sheet and statements of income and cash flows of the Company certified
by independent public accountants) and, as soon as practicable after the end of
each of the first three quarters of each fiscal year (beginning with the fiscal
quarter ending after the effective date of the Registration Statement), summary
financial information of the Company for such quarter in reasonable detail;
(h) During a period of five years from the effective date of the
Registration Statement, the Company will furnish to you copies of all reports or
other communications (financial or other) furnished to securityholders, and
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any national
securities exchange on which any class of securities of the Company is listed;
and (ii) such additional information concerning the business and financial
condition of the Company as you may from time to time reasonably request;
(i) The Company, will not, at any time before or after the
Registration Statement becomes effective, file any amendment to the Registration
Statement or any amendment or supplement to the Prospectus to which you shall
reasonably object in writing or which shall be reasonably disapproved by your
counsel promptly after notice thereof; will deliver to you, from time to time,
all supplemental sales materials (whether designated solely for broker-dealer
use or otherwise) proposed to be used or delivered by the Company in connection
with the offering of Shares, prior to the use or delivery to third parties of
such material, and it will not use or deliver any such material to which you
shall object or which shall be disapproved by your counsel; and
(j) Subsequent to the date of this Agreement and through each
Closing Date, except as described, contemplated or permitted in the Registration
Statement, the Company will not take any action (or refrain from taking any
action) that will result in the Company incurring any material liability or
obligation, direct or contingent, or enter into any material transaction not in
the ordinary course of business, and there will not be any material change in
the capital stock, long-term debt, notes payable or short-term borrowings of the
Company or any issuance of options, warrants or rights to purchase capital stock
of the Company, or any declaration or payment or commitment to pay or
anticipated payment of any dividend or other distribution on the capital stock
of the Company, except as contemplated in the Prospectus, which has resulted in
or reasonably could be expected to result in a material adverse change in the
business or financial position of the Company, taken as a whole.
4. Expenses. The Company covenants and agrees with you that, except as
otherwise agreed by you and the Company, the Company will pay the following: (i)
the fees, disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement and the Prospectus and amendments and supplements thereto
and the mailing and delivering of copies thereof to you and the Selected
Dealers; (ii) the cost of printing or producing this
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Agreement, any Blue Sky Surveys, all sales material and any other documents in
connection with the offering, purchase, sale and delivery of the Shares; (iii)
the cost of preparing stock certificates, if any; (iv) the costs or expenses of
any depositary, escrow agent, transfer agent or registrar; (v) all travel,
lodging and other expenses incurred by the Company for advertising, publicity
and selling materials used in connection therewith; and (vi) all other costs and
expenses incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section. It is understood, however,
that you will pay all of your own costs and expenses, including the fees of your
counsel and any advertising expenses incurred by you in making offers and sales
of the Shares. Also, notwithstanding the foregoing, we understand that you have
agreed to pay the filing and examination fees of the Securities and Exchange
Commission, the National Association of Securities Dealers, Inc. and the various
states, but the Company will reimburse you such amounts following the Initial
Closing Date.
5. Covenants of Agent. Insofar as the distribution of the offering is
within your control and not the Company's, you agree that the distribution of
the offering will comply with the terms of the Prospectus, the Act, the
Securities Exchange Act of 1934 and the securities laws (including applicable
suitability standards, if any) of all jurisdictions in which you offer the
Shares or whose laws are applicable to your offering of the Shares, and all
rules promulgated under such Acts and laws, and all applicable rules of the
NASD. You agree to provide, from time to time as requested by the Company,
written certificates of compliance by you with the terms of this Agreement.
6. Conditions to Closing. Your obligations hereunder shall be subject,
in your discretion, to the condition that all representations and warranties and
other statements of the Company herein are, at and as of the date hereof, and
each Closing Date, true and correct, and the condition that the Company shall
have performed all of its obligations hereunder theretofore to be performed, and
the following additional conditions:
(a) If required by law, the Prospectus shall have been filed with
the Commission pursuant to Rule 424(b) under the Act within the applicable time
period prescribed for such filing by the rules and regulations under the Act and
in accordance with Section 1(a) of this Agreement; no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the
Commission; and all requests for additional information on the part of the
Commission shall have been complied with to your reasonable satisfaction;
(b) (i) The Company shall not have sustained since the date of the
latest audited financial statement included in the Prospectus, any loss or
interference with its business, fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus, and (ii) since the respective dates as of which
information is given in the Prospectus there shall not have been any change in
the capital stock or long-term debt of the Company as a whole or any change, or
any development involving a prospective change, in or affecting the general
affairs, management, financial position, shareholders' equity or results of
operation of the Company otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause (i) or
(ii), is in your reasonable judgment so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Shares being issued at such Closing Date on the terms and in the manner
contemplated by the Prospectus;
(c) On or after the date hereof there shall not have occurred any
of the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or the American Stock
Exchange; (ii) a general moratorium on commercial banking activities in New York
declared by either Federal or New York State Authorities; (iii) the engagement
by the United States in hostilities which have resulted in the declaration of a
national emergency or war if the effect of any such event specified in this
clause in your reasonable judgment makes it impracticable or inadvisable to
proceed with the public offering or the delivery of the Shares being issued at
such Closing Date on the terms and in the manner contemplated in the Prospectus;
or (iv) such a material adverse change in general economic, political, financial
or international conditions affecting financial markets in the United States
having a material adverse impact on trading prices of securities in general, as,
in your reasonable judgment makes it inadvisable to proceed with the sale of the
Shares through you; and
(d) If requested by you, the Company shall have furnished or
caused to be furnished to you at such Closing Date certificates of officers of
the Company satisfactory to you as to the accuracy of the representations and
warranties of the Company, herein at and as of such Closing Date and as to the
performance by the Company of all of its obligations hereunder to be performed
at or prior to such Closing Date.
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<PAGE>
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless you and each Selected Dealer against any losses, claims, damages
or liabilities, joint or several, to which you and such Selected Dealer may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, any Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto (including any sales
literature furnished to you by any of them), or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
arise out of or are based upon any misrepresentation or breach of warranty or
any alleged misrepresentation or breach of warranty set forth in Section 1 of
this Agreement, or arise out of or are based upon the failure of the Company to
comply with Sections 1 or 3 of this Agreement; and will reimburse you and each
Selected Dealer for any legal or other expenses reasonably incurred by you and
such Selected Dealer in connection with investigating or defending any such
action or claim; provided, however, that the Company shall not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement or Prospectus or
any such amendment or supplement in reliance upon and in conformity with
information furnished to the Company by you or any Selected Dealer, relating to
you or such Selected Dealer, expressly for use therein; and provided further
that as to any Preliminary Prospectus, this agreement to indemnify and hold
harmless shall not inure to the benefit of you or any Selected Dealer if such
person failed to give or send a copy of the Prospectus, as the same may be
amended or supplemented, to an investor within the time required by the Act and
Regulations, and the untrue statement or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact in such
Preliminary Prospectus was corrected in the Prospectus or any supplement or
amendment thereto.
(b) You and each Selected Dealer will indemnify and hold harmless
the Company (which term shall be deemed to include its subsidiaries) against any
losses, claims, damages or liabilities to which the Company may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of a failure by you or a
Selected Dealer to comply with any covenants contained in Section 5 of or
elsewhere in this Agreement or a Selected Dealer Agreement, or arise out of or
are based upon an untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or the Prospectus, or any amendment
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with information furnished to the Company by you or such Selected
Dealer relating to you or such Selected Dealer expressly for use therein; and
will reimburse the Company for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such action or claim.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof,
other than reasonable costs of investigation.
(d) If the indemnification provided for in this Section 7 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and you or a Selected
Dealer on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
subsection (c) above, then
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<PAGE>
each indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of Company, on the one hand and
you or a Selected Dealer on the other in connection with the statements or
omissions which resulted in such losses, claims, and damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company, on the one hand
and you or a Selected Dealer on the other shall be deemed to be in the same
proportion as the total proceeds from the offering received by the Company bear
to the total compensation received by you or such Selected Dealer. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company, on the one hand or you or a Selected Dealer on the other, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and you agree that it
would not be just and equitable if contributions pursuant to this subsection (d)
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this subsection (d). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this subsection (d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section ll(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation.
(e) The obligations of the Company under this Section 7 shall be
in addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who controls
you and any Selected Dealer within the meaning of the Act; and the obligations
of you or any Selected Dealer under this Section 7 shall be in addition to any
liability which you and the respective Selected Dealers may otherwise have and
shall extend, upon the same terms and conditions, to each officer and director
of the Company (including any person who, with his consent, is named in the
Registration Statement as proposed to become a director of the Company) and to
each person, if any, who controls the Company within the meaning of the Act.
8. Survival. The respective indemnities, agreements, representations,
warranties and other statements of the Company and you, as set forth in this
Agreement or made by you or on your behalf pursuant to this Agreement, shall
remain in full force and effect, regardless of any investigation (or any
statement as to the results thereof) made by you or on behalf of you or any
controlling person of you or the Company, or any officer or director or
controlling person of the Company, and shall survive each Closing Date.
9. Effective Date of This Agreement. This Agreement shall become
effective (the "Effective Date") upon the date of your acceptance hereof, as set
forth below.
10. Notices. All statements, requests, notices and agreements hereunder
shall be in writing, and if to you shall be sufficient in all respects if
delivered by hand or sent by registered or certified mail, or by reputable
overnight courier service, to you in care of David Lerner Associates, Inc., at
477 Jericho Turnpike, Syosset, New York 11791, Attention: Daniel E. Chafetz.,
and if to the Company shall be sufficient in all respects if delivered by hand
or sent by registered or certified mail, or by reputable overnight courier
service, to the address of the Company as set forth in the Registration
Statement, Attention: Glade M. Knight.
11. Binding Effect. This Agreement shall be binding upon, and inure
solely to the benefit of you and the Company (including its subsidiaries) and to
the extent provided in Sections 7 and 8 hereof, the officers and directors of
the Company (including its subsidiaries) and each person who controls the
Company (including its subsidiaries) or you, and their respective heirs,
executors, administrators, and successors under or by virtue of this agreement.
12. Governing Law. This Agreement shall be construed in accordance with
the laws of the Commonwealth of Virginia.
13. Counterparts. This Agreement may be executed by any one or more of
the parties in any number of counterparts, each of which shall be deemed to be
an original, but all such counterparts shall together constitute one and the
same instrument.
8
<PAGE>
If the foregoing is in accordance with your understanding,
please sign and return to us four counterparts hereof, and upon the acceptance
hereof by you, this letter and such acceptance hereof shall constitute a binding
agreement among you and the Company.
Very truly yours,
APPLE RESIDENTIAL INCOME TRUST, INC
By:__________________________________
Title:_______________________________
Accepted as of the ____ day of ____________, 1998 .
DAVID LERNER ASSOCIATES, INC., AS
MANAGING DEALER
By:__________________________________
Title: _______________________________
9
<PAGE>
Exhibit A
APPLE RESIDENTIAL INCOME TRUST, INC.
Common Shares
SELECTED DEALER AGREEMENT
_______________, 199_
Gentlemen:
We have agreed to use our best efforts to sell up to 5,000,000 common
shares (the "Shares") in Apple Residential Income Trust, Inc., a Virginia
corporation (the "Company"), as described in the enclosed prospectus (the
"Prospectus"). The Shares are being offered by David Lerner Associates, Inc., as
Sales Agent for the Company ("DLA"), pursuant to an agency agreement (the
"Agency Agreement") among us and the Company. We have been advised by the
Company that the registration statement relating to the Shares (and including
the Prospectus) (the "Registration Statement") filed by the Company under the
Securities Act of 1933, as amended (the "Act"), has become effective with the
Securities and Exchange Commission.
We are hereby inviting you, subject to the other terms and conditions
set forth below and in the Prospectus, to solicit subscriptions for the Shares.
You confirm that you are a member in good standing of the National Association
of Securities Dealers, Inc. (the "NASD") and that you are currently registered
as a dealer under the Securities Exchange Act of 1934, as amended (the "1934
Act"). You hereby agree to comply with the provisions of Section 34 of Article
III of the Rules of Fair Practice of the NASD. In addition, you hereby agree to
comply with the provisions of Sections 8, 24, 25 and 36 of the Rules of Fair
Practice of the NASD to the extent such sections are applicable to your
activities in connection with this offering.
1. You agree to offer the Shares at a purchase price of $10.00 per
Share. Upon the admission of subscribers to the Company, you shall be paid a
commission equal to $___ (____%) per Share for each Share purchased by an
Investor provided by you. Commissions will be payable to you only with respect
to transactions that are lawful in the jurisdiction wherein they occur.
2. Subscriptions may be taken by you from your customers in accordance
with the procedures described in the Prospectus. Each subscription solicited by
you shall be promptly forwarded by you, in accordance with the requirements of
SEC Rule 15c2-4, together with a check payable to "___________________________,"
for the full purchase price of the Shares subscribed for, to: David Lerner
Associates, Inc., 477 Jericho Turnpike, Syosset, New York 11791. Such forwarding
shall take place by noon of the next business day after receipt by you from your
customer of such subscription and payment. Notwithstanding the foregoing, any
subscribers' checks not properly completed as described above shall be promptly
returned to such subscribers not later than the next business day following
receipt by you of such checks. With respect to each subscription solicited by
you, you shall obtain and furnish to the Company in the case of United States
residents, (i) the subscriber's name, address, taxpayer identification number,
the number of Shares to be acquired by each subscriber, (ii) the certification
as to non-foreign status as required by Temp. Treas. Reg. ss. 1.1445-2T(b), and
(iii) Form W-9.
All acceptable subscriptions solicited by you will be strictly subject
to acceptance thereof by the Company, which has reserved the right to refuse to
accept in whole or in part any subscription and related payment and to refuse to
accept as a purchaser any person for any reason whatsoever. Subscriptions
delivered to the Company will be accepted or rejected within 30 days of their
receipt; provided, however that the Company may at any time reject in whole or
in part any subscription in its sole and absolute discretion if the total
offering for the Company is oversubscribed, or if the Company would be
prohibited from accepting such subscription by any Blue Sky or other applicable
securities law or regulation. If the Company rejects a subscription in whole or
in part, it will arrange for the Sales Agent to return to such subscriber within
____ days after rejection of the subscription by the Company, any payment made
by him applicable to the portion of the
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<PAGE>
subscription which has been rejected.
3. Neither you nor any other person is authorized to give any
information or make any representations in connection with the sale of any of
the Shares other than those contained in the Prospectus or in the supplemental
sales material authorized for use in connection with this offering, as described
below. No dealer is authorized to act as agent for us when offering any of the
Shares to the public or otherwise, it being understood that you and each other
Selected Dealer are independent contractors with us. Nothing herein contained
shall constitute you or any other Selected Dealer an association or partner with
us.
4. We understand that the Company will provide you with such number of
copies of the enclosed Prospectus and such number of copies of amendments and
supplements thereto as you may reasonably request. We also understand that the
Company may provide you with certain supplemental sales literature for Shares in
the Company. You agree that such material shall not be used in connection with
the solicitation of subscribers for Shares unless accompanied or preceded by the
Prospectus as then currently in effect and as it may be amended or supplemented
in the future. You agree that neither you nor any person under your control will
deliver or show to any prospective subscriber for Shares any supplementary sales
material other than the Prospectus (including, inter alia, transmittal letters,
underwriting memoranda, summary descriptions, graphics, supplemental exhibits,
media advertising, charts, pictures, written scripts or outlines), except as
supplied by the Company and described under the caption "SALES LITERATURE" in
the Prospectus, or otherwise specifically described in written advice from the
Company authorizing the type and manner of use. The delivery or showing of any
such other supplementary sales materials to prospective subscribers is expressly
prohibited except to the extent specified in such written advice.
5. You agree that neither you nor any person under your control shall
directly or indirectly pay or award any finder's fees, commissions or other
compensation to any person engaged by a potential investor for investment advice
as an inducement to such advisor to advise the purchase of Shares; provided,
however, that this provision shall not prohibit the normal sales commission
payable to any registered broker-dealer or other properly licensed person for
selling Shares. In addition, you agree not to receive any rebates or give-ups or
participate in any reciprocal business arrangements which would violate any
restriction on the Company contained in the Prospectus.
6. You represent that neither you nor any of your directors, officers,
partners or "persons associated with" you (as defined in the By-laws of the
NASD), nor, to your knowledge, any related person (as defined by the NASD in its
Interpretation with respect to Review of Corporate Financing) have participated
or intend to participate in any transaction or dealing as to which documents or
information are required to be filed with the NASD pursuant to such
Interpretation.
7. This Agreement shall terminate simultaneously with the termination
of the Agency Agreement, but may be terminated by us prior thereto at any time
by written or telegraphic notice. Upon termination, rights and obligations
hereunder shall cease, except rights and obligations accrued or unsatisfied at
the date of termination.
8. You agree that in selling Shares of the Company you will comply with
the applicable provisions of the Act, the 1934 Act, the applicable rules and
regulations of the Securities and Exchange Commission thereunder, the laws of
the jurisdictions in which the Shares are offered and sold and the applicable
rules and regulations of the NASD. We shall have full authority to take such
action as we may deem advisable in respect to all matters pertaining to the
offering. We shall be under no liability to you except for lack of good faith
and for obligations expressly assumed by us in this Agreement. Nothing contained
in this paragraph is intended to operate as, and the provisions of this
paragraph shall not constitute, a waiver by you of compliance with any provision
of the Act, the 1934 Act, or the rules and regulations thereunder.
9. Upon application to us, we will inform you as to the states and
other jurisdictions of the United States in which we believe the Shares have
been qualified for the sale under, or are exempt from the requirements of, the
respective securities laws of such jurisdictions, but we assume no
responsibility or obligation as to your right to sell the Shares in any
jurisdiction. You covenant and agree that you will not effect sales in any
jurisdiction where the Shares are not qualified or exempt from qualification.
You further agree to provide us, promptly upon our request, with geographic
distribution information, setting forth (a) the number of Shares sold, (b) the
number of transactions done, (c) the jurisdictions where sold, and (d) the types
of purchasers.
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<PAGE>
10. You confirm that you are familiar with Securities Act Release No.
4968 and Rule 15c2-8 under the 1934 Act, relating to the distribution of
preliminary and final prospectuses, and that you have complied and will continue
to comply therewith.
11. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless DLA and each
Selected Dealer against any losses, claims, damages or liabilities, joint or
several, to which they may become subject, under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement, any Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto (including
any sales literature furnished to you by the Company), or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or arise out of or are based upon any misrepresentation or breach of
warranty or any alleged misrepresentation or breach of warranty set forth in
Section 1 of the Agency Agreement, or arise out of or are based upon the failure
of the Company to comply with Sections 1 or 3 of the Agency Agreement; and will
reimburse DLA and each Selected Dealer for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such action or claim; provided, however, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in the Registration Statement or Prospectus
or any such amendment or supplement in reliance upon and in conformity with
information furnished to the Company by DLA or any Selected Dealer, relating to
them, expressly for use therein; and provided further that as to any Preliminary
Prospectus, this agreement to indemnify and hold harmless shall not inure to the
benefit of DLA or any Selected Dealer if such person failed to give or send a
copy of the Prospectus, as the same may be amended or supplemented, to an
investor within the time required by the Act and Regulations, and the untrue
statement or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact in such Preliminary Prospectus was corrected
in the Prospectus or any supplement or amendment thereto.
(b) DLA and each Selected Dealer will indemnify and hold harmless
the Company (which term shall be deemed to include its subsidiaries) against any
losses, claims, damages or liabilities to which the Company may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of a failure by DLA or a
Selected Dealer to comply with any covenants contained in Section 8 of or
elsewhere in this Agreement, or arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement or the Prospectus or
any such amendment or supplement in reliance upon and in conformity with
information furnished to the Company by you or such Selected Dealer relating to
you or such Selected Dealer expressly for use therein; and will reimburse the
Company for any legal or other expenses reasonably incurred by any of them in
connection with investigating or defending any such action or claim.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the idemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation.
(d) If the indemnification provided for in this Section is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion
3
<PAGE>
as is appropriate to reflect the relative benefits received by the Company on
the one hand and DLA or a Selected Dealer on the other from the offering of the
Shares. If, however, the allocation provided by the immediately preceding
sentence is not permitted by applicable law or if the indemnified party failed
to give the notice required under subsection (c) above, then each indemnifying
party shall contribute to such amount paid or payable by such indemnified party
in such proportion as is appropriate to reflect not only such relative benefits
but also the relative fault of Company on the one hand and DLA or a Selected
Dealer on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and DLA or a Selected Dealer on
the other shall be deemed to be in the same proportion as the total proceeds
from the offering received by the Company bear to the total compensation
received by DLA or such Selected Dealer. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
DLA or a Selected Dealer on the other, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and we agree that it would not be just and
equitable if contributions pursuant to this subsection (d) were determined by
pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to above in this subsection
(d). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof) referred
to above in this subsection (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section ll(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls DLA and
any Selected Dealer within the meaning of the Act; and the obligations of DLA or
any Selected Dealer under this Section shall be in addition to any liability
which DLA and the respective Selected Dealers may otherwise have and shall
extend, upon the same terms and conditions, to each officer and director of the
Company, the Advisor and Apple Realty (including any person who, with his
consent, is named in the Registration Statement as about to become a director of
the Company) and to each person, if any, who controls the Company (including its
subsidiaries) within the meaning of the Act.
12. This Agreement shall be subject to and interpreted consistently
with the Agency Agreement. All representations, warranties, and covenants and
agreements made by you herein shall inure to the benefit of David Lerner
Associates, Inc. and the Company (including its subsidiaries).
Any notice from us to you shall be deemed to have been duly given if
mailed or telegraphed to you at your address as specified below.
Please confirm your agreement hereby by signing and returning to us at
477 Jericho Turnpike Syosset, New York 11791, Attn: Daniel E. Chafetz, an
original of this letter.
Upon receipt thereof, this letter and such signed copy will evidence
the agreement among us.
Very truly yours,
DAVID LERNER ASSOCIATES, INC.
By: ___________________________
Title: ________________________
READ AND AGREED TO:
- ----------------------------
By: _______________________
Title: ____________________
Address: ___________________
- ----------------------------
4
Exhibit 5
September 22, 1998
Board of Directors
Apple Residential Income Trust, Inc.
306 East Main Street
Richmond, Virginia 23219
Dear Sirs:
We have acted as counsel to Apple Residential Income Trust, Inc. (the
"Company"), a Virginia corporation, in connection with the preparation of the
registration statement on Form S-11 to which this opinion is an exhibit (the
"Registration Statement"), which is being filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act"), for the
registration under the Act of 5,000,000 Common Shares of the Company. Terms not
otherwise defined herein shall have the meanings assigned to them in the
Registration Statement.
We have reviewed originals or copies of (i) the Articles of
Incorporation, Bylaws and other corporate documents of the Company, (ii) certain
resolutions of the Board of Directors of the Company, and (iii) the Registration
Statement and the prospectus included therein (the "Prospectus"). In addition,
we have reviewed such other documents and have made such legal and factual
inquiries as we have deemed necessary or advisable for purposes of rendering the
opinions set forth below.
Based upon and subject to the foregoing we are of the opinion that:
1. The Company is duly organized and validly existing under the laws of
the Commonwealth of Virginia; and
2. The Common Shares to be registered under the Registration Statement
have been duly authorized and, when issued and paid for as described in the
Registration Statement, will be validly issued, fully paid and nonassessable.
We hereby consent to the reference to our firm under the captions
"Legal Opinions," "Federal Income Tax Consequences" and "Risk Factors - Federal
Income Tax Risks" in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement. In giving this consent, we
do not admit
<PAGE>
Board of Directors
September 22, 1998
Page 2
that we are in the category of persons whose consent is required by Section 7 of
the Act, or the rules and regulations promulgated thereunder by the Securities
and Exchange Commission.
Very truly yours,
/s/ McGuire, Woods, Battle & Boothe LLP
Exhibit 8
September 22, 1998
Board of Directors
Apple Residential Income Trust, Inc.
306 East Main Street
Richmond, VA 23219
Dear Sirs:
We have acted as counsel to Apple Residential Income Trust, Inc. (the
"Company"), a Virginia corporation, in connection with the preparation of the
registration statement on Form S-11 to which this opinion is attached as an
exhibit (the "Registration Statement"). The Company is filing the Registration
Statement (File No. __________) with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act"), to register under the
Act 5,000,000 Common Shares of the Company. Terms not otherwise defined herein
shall have the meanings assigned to them in the Registration Statement.
We have reviewed originals or copies of (i) the Articles of
Incorporation, Bylaws and other corporate documents of the Company, (ii) certain
resolutions of the Board of Directors of the Company, (iii) the Registration
Statement and the prospectus included therein (the "Prospectus"), and (iv) the
form of Advisory Agreement between the Company and Apple Residential Advisors,
Inc., a Virginia corporation (the "Advisor"), as amended by the Advisory
Agreement Subcontract among the Company, the Advisor and Cornerstone Realty
Income Trust, Inc., a Virginia corporation included in the Registration
Statement as an exhibit. In addition, we have reviewed such other documents and
have made such legal and factual inquiries as we have deemed necessary or
advisable for purposes of rendering the opinions set forth below.
We understand and assume that the Company has duly elected to be
treated as a real estate investment trust ("REIT") for federal income tax
purposes commencing with its taxable year ended December 31, 1996. The Company's
initial and continuing qualification as a REIT depends upon the satisfaction of
various requirements under the Internal Revenue Code of 1986, as amended (the
"Code"). The satisfaction of those requirements generally will be within the
control of the Company's Board of Directors and the Advisor, which has been
engaged to conduct the affairs of the Company under the supervision of the Board
of Directors. The Advisor and appropriate officers of the Company have made the
<PAGE>
Board of Directors
September 22, 1998
Page 2
following representations to us with respect to the operation of the Company:
1. The Company will operate in compliance with the Articles of
Incorporation and the Bylaws;
2. The Company will not operate so that it becomes either (i) a
financial institution referred to in Section 582(c)(5) of the Code, or (ii) an
insurance company to which subchapter L of the Code applies;
3. The Company will have at least 100 Shareholders for at least 335
days of each full taxable year, or proportionate part of any shorter taxable
year, after its first taxable year and will not be closely held as defined in
Section 856(h) of the Code;
4. The Company will use a calendar year for federal income tax
purposes;
5. The Company will elect to be treated as a REIT under the Code, and
will not elect to be treated as an S Corporation, a real estate mortgage
investment conduit, a regulated investment company, or any entity other than a
REIT for federal income tax purposes;
6. The Company will not revoke its election to be treated as a REIT and
will satisfy all relevant filing and other administrative requirements
established by the Internal Revenue Service that must be met to elect and to
maintain REIT status;
7. The Company will not have, as of the close of any taxable year, any
earnings and profits accumulated in any year during which the Company was not
treated as a REIT under the Code;
8. The Company will conduct its operations as described in the
Registration Statement (including the Prospectus), will operate in a manner so
as to qualify for taxation as a REIT under the Code, and intends to continue to
operate in such a manner;
9. The Company will invest in assets that, when acquired by the
Company, will cause the Company to satisfy (i) the asset test described in the
Prospectus, and (ii) the sources of income tests described in the Prospectus;
10. The Company will not hold any assets for sale to customers in the
ordinary course of a trade or business and will attempt to comply with the terms
of safe-harbor provisions in the
<PAGE>
Board of Directors
September 22, 1998
Page 3
Code prescribing when asset sales by a REIT will not be characterized as
prohibited transactions;
11. The Company expects that substantially all of the operating gross
income from the properties of the Company will be considered "rents from real
property" within the meaning of Section 856(d) of the Code;
12. The Company will comply with the distribution requirements of the
Code applicable to REITs;
13. The Company will comply for each taxable year with the Treasury
regulations prescribed for the purpose of ascertaining the actual ownership of
outstanding Shares of the Company; and
14. The Company anticipates that it will be a "domestically controlled
REIT," within the meaning of Section 897(h) of the Code.
Based on the foregoing documents, representations, and assumptions
being, and continuing to be, accurate, we are of the opinion that:
1. The Company qualified as a REIT for its taxable year ended December
31, 1996 and December 31, 1997, and, as of the date hereof, its proposed method
of operation should enable it to continue to meet the requirements for
qualification as a REIT under the Code;
2. Provided that a Shareholder which is an Exempt Organization does not
incur any "acquisition indebtedness" as defined in Section 514(c) of the Code in
connection with its acquisition of Shares, dividends paid by the Company to such
Shareholder will not constitute unrelated business taxable income under Section
512 of the Code even if the Company owns "debt-financed property" as that term
is defined in Section 514(b) of the Code; and
3. The statements and legal conclusions contained in the Registration
Statement under the captions "Risk Factors--Federal Income Tax Risks" and
"Federal Income Tax Consequences" describe the material federal income tax
aspects of the offering made by the Registration Statement applicable to the
Company and the Shareholders, are correct in all material respects, and the
discussion thereunder does not omit any material provision with respect to the
matters covered.
With respect to our opinion contained in paragraph 1 above, you should
note that qualification of the Company as a REIT will depend, in part, upon the
Company's ability, through its actual
<PAGE>
Board of Directors
September 22, 1998
Page 4
operations, to meet the qualification tests as described in the Prospectus.
The foregoing opinions are based solely on the provisions of the Code,
the Treasury regulations promulgated thereunder and the judicial and
administrative rulings, pronouncements and decisions now in effect, all of which
are subject to change, which change may be retroactively applied, or possible
differing interpretations that may affect the conclusions stated herein. To the
extent this opinion relies upon recent tax legislation, and recently promulgated
Treasury regulations, no assurance can be given as to the interpretations of
such recent legislation that will be reflected in applicable Internal Revenue
Service rulings and future Treasury regulations, which could be applied
retroactively. Further, this opinion does not purport to deal with any aspects
of state law that may affect particular investors nor with certain types of
investors subject to special treatment under the federal income tax laws.
We hereby consent to the reference to our firm under the captions
"Federal Income Tax Consequences," "Risk Factors Federal Income Tax Risks" and
"Legal Opinions" in the Registration Statement and to the filing of this opinion
as an exhibit to the Registration Statement. In giving this consent, we do not
admit that we are in the category of persons whose consent is required by
Section 7 of the Act or the rules and regulations promulgated thereunder by the
Securities and Exchange Commission.
Very truly yours,
EXHIBIT 10.47
AMENDMENT TO COMMON SHARE PURCHASE OPTION AGREEMENT
This Amendment to Common Share Purchase Option Agreement (this "Amendment")
is made and entered into as of September 17, 1998, by and between Cornerstone
Realty Income Trust, Inc. ("Cornerstone"), a Virginia corporation, and Apple
Residential Income Trust, Inc. ("Apple"), a Virginia corporation.
RECITALS
A. Cornerstone and Apple have previously entered into a certain Common
Share Purchase Option Agreement dated as of February 10, 1997 (the
"Agreement"), pursuant to which Apple granted to Cornerstone the right
to purchase common shares of Apple ("Common Shares") in the amounts,
on the conditions, and for the period of time set forth in the
Agreement.
B. Under Section 4 of the Agreement the obligation of Apple to sell
Common Shares, and the correlative right of Cornerstone to purchase
Common Shares, under the Agreement was to terminate upon the
termination of the public offering of Common Shares pursuant to
Apple's Registration Statement with File No. 333-10635, as amended
from time to time.
C. Apple has decided to register with the SEC for sale to the public five
million additional Common Shares (at a public offering price of $10
per Common Share) for an aggregate public offering price of $50
million (the "Additional Offering").
D. Apple and Cornerstone desire to enter into this Amendment to the
Agreement to extend the term of the Agreement and Apple's obligations
and Cornerstone's rights thereunder until the termination of the
Additional Offering.
NOW THEREFORE, for and in consideration of the mutual promises and
covenants contained herein and for the other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties do
hereby agree as follows:
1. Capitalized Terms. Capitalized terms used and not otherwise defined in
this Amendment shall have the meanings set forth in the Agreement.
2. Extension of Agreement. The rights and obligations of Apple and
Cornerstone under the Agreement shall be extended for the period
during which the Additional Offering continues. Accordingly, Section 4
of the Agreement shall be deemed to be amended to provide that Apple's
obligations and Cornerstone's rights to sell and purchase,
respectively, Common Shares in accordance with the Agreement shall
terminate upon the termination of the Additional Offering. The
purchase price of Common Shares purchased by Cornerstone under the
Agreement as modified by this Amendment shall be calculated in the
manner set forth in Section 2 of the Agreement, except the current
public offering price of Common Shares shall be as set forth in the
Prospectus used in connection with the Additional Offering, as
supplemented and amended from time to time (the "Prospectus").
3. Registration Rights. The registration rights contemplated by Section 7
of the Agreement shall also apply to the Common Shares purchased under
this Amendment. The Registration Rights Agreement referred to in such
Section shall be entered into upon demand of Cornerstone and shall
provide for the filing of a Registration Statement at such times as
required by Cornerstone but not more frequently than is now set forth
in Section 7(b) of the Agreement.
<PAGE>
4. Certain Other Interpretive Matters. Common Shares purchased in the
extension provided by this Amendment shall be subject to all
provisions of the Agreement that apply to Common Shares, as if any
such Common Shares had been purchased pursuant to the Agreement
without giving effect to this Amendment, except where this Amendment
expressly otherwise provides or as the context otherwise requires.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
Common Share Purchase Option Agreement on and as of the date first above
written.
Cornerstone Realty Income Trust, Inc.,
a Virginia Corporation
By: /s/ S.J. Olander, Jr.
----------------------------------
Name: S.J. Olander, Jr.
---------------------------------
Title: Chief Financial Officer
----------------------------------
Apple Residential Income Trust, Inc.,
a Virginia Corporation
By: /s/ Glade M. Knight
----------------------------------
Name: Glade M. Knight
---------------------------------
Title: President
----------------------------------
2
EXHIBIT 10.48
AMENDMENT TO PROPERTY ACQUISITION/DISPOSITION AGREEMENT
This Amendment to Property Acquisition/Disposition Agreement (this
"Amendment") is made and entered into as of the 17th day of September, 1998, by
and between Apple Residential Income Trust, Inc., a Virginia corporation (the
"Owner"), and Cornerstone Realty Income Trust, Inc., a Virginia corporation (the
"Agent"), as successor to Apple Realty Group, Inc.
RECITALS
A. The Owner and Apple Realty Group, Inc. entered into a certain Property
Acquisition/ Disposition Agreement dated as of November 1, 1996
(sometimes referred to as the "Agreement"), under which Apple Realty
Group, Inc. was to provide services to the Owner in connection with
the acquisition and disposition of residential apartment complexes in
exchange for certain compensation described in the Agreement.
B. As of March 1, 1997, the Agent acquired all of the assets of Apple
Realty Group, Inc., consisting principally of the Property
Acquisition/Disposition Agreement, and in connection with such
acquisition agreed to perform the services of the agent under the
Agreement, in exchange for the consideration described in the
Agreement.
C. The Property Acquisition/Disposition Agreement provides that the fee
payable to the Agent in connection with the acquisition of properties
is not payable with respect to the portion of the purchase price
represented by indebtedness assumed or incurred in connection with the
acquisition, until the repayment of such indebtedness.
D. In July 1998, the Owner (through newly-organized, single-purpose
subsidiary limited partnerships) purchased five apartment complexes
that involved the assumption of debt that is not prepayable without
penalty. The Owner, in consultation with the Agent, determined that
the acquisition of these apartment complexes with the assumption of
the existing debt was in the best interests of the Owner
(notwithstanding the Owner's general intention to purchase and own its
properties on an "all-cash" or unleveraged basis) because of the
favorable interest rate on the indebtedness encumbering these five
properties.
E. In connection with the acquisition of the five properties referred to
above, the Agent rendered on behalf of the Owner certain special and
extraordinary services so as to permit the acquisition of the
properties by the Owner, including obtaining consent from the lenders
for the acquisitions and proposing and effectuating the organization
of special purpose subsidiaries of the Owner to acquire and own such
properties.
F. In consideration and in recognition of the special circumstances
associated with the indebtness encumbering the five properties
referred to above, and the special and extraordinary services rendered
by the Agent in connection with the acquisition of the properties, the
Owner desires to enter into an amendment to the Property
Acquisition/Disposition Agreement so as to permit the immediate
payment of the two percent (2%) fee on the indebtedness assumed in
connection with such acquisitions.
NOW, THEREFORE, in consideration of the promises herein contained, and
other valuable consideration, receipt of which is hereby acknowledged, the
parties agree as follows:
1. Amendment to Property Acquisition/Disposition Agreement. This is an
amendment to the Property Acquisition/Disposition Agreement dated as
of November 1, 1996 by and between the Owner and the Agent, as
successor to Apple Realty Group, Inc. Capitalized terms used and not
otherwise defined herein shall have the meaning set forth in the
Property Acquisition/Disposition Agreement.
<PAGE>
2. Payment of Fee on Indebtedness Assumed in Connection With Certain
Acquisitions. In recognition and consideration of the special
circumstances associated with the assumption by subsidiary
partnerships of the Owner of certain existing indebtedness encumbering
the apartment complexes known as Pace's Point Apartments, Pepper
Square Apartments, Emerald Oaks Apartments, Hayden's Crossing
Apartments and Newport Apartments (including that such indebtedness is
not payable without penalty but bears favorable interest rates), and
the special and extraordinary services rendered by the Agent to the
Owner in connection with the identification, review and closing on the
acquisitions of such properties with the assumption of such debt
(including negotiations with the lenders in obtaining the lender's
consent to such acquisitions, and proposing and effectuating the
organization of special purpose subsidiaries of the Owner to acquire
and own such properties), the Owner agrees to pay, and shall
immediately upon execution of this Amendment shall pay, to the Agent
the two percent (2%) fee upon the indebtedness so assumed. The
following table sets forth the indebtedness assumed with respect to
each such property and the fee payable with respect to the
indebtedness assumed:
<TABLE>
<CAPTION>
AMOUNT OF FEE PAYABLE WITH RESPECT
NAME OF PROPERTY INDEBTEDNESS ASSUMED TO INDEBTEDNESS ASSUMED
- -------------------------------------- ---------------------- -------------------------
<S> <C> <C>
Pace's Point Apartments .............. $7,713,617 $154,272
Pepper Square Apartments ............. 3,643,424 72,868
Emerald Oaks Apartments .............. 6,685,706 133,714
Hayden's Crossing Apartments ......... 3,072,399 61,448
Newport Apartments ................... 3,043,873 60,877
</TABLE>
3. No Further Amendment or Implication of Further Amendment. Nothing
contained in this Amendment shall be construed as amending the
Property Acquisition/Disposition Agreement except as expressly set
forth herein, nor shall anything contained in this Amendment be deemed
to imply that there will be any further amendments to the Property
Acquisition/Disposition Agreement unless a separate and independent
decision is made with respect to any such subsequent amendment.
IN WITNESS WHEREOF, the parties hereto executed this Amendment to the
Property Acquisition/Disposition Agreement as of the day first above written.
OWNER:
Apple Residential Income Trust, Inc.,
a Virginia Corporation
By: /s/ Glade M. Knight
----------------------------------
Title: President
----------------------------------
AGENT:
Cornerstone Realty Income Trust, Inc.,
a Virginia Corporation
By: /s/ S.J. Olander, Jr.
----------------------------------
Title: Chief Financial Officer
----------------------------------
2
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 13, 1998 in the Registration Statement
(Form S-11 No. 333-0000) and related Prospectus of Apple Residential Income
Trust, Inc. for the registration of 5,000,000 shares of its common stock.
Our audits also included the financial statement schedule of Apple
Residential Income Trust, Inc. listed in Item 35(b). This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
Richmond, Virginia /s/ Ernst & Young LLP
September 17, 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- ) of Apple
Residential Income Trust, Inc. filed with the Securities and Exchange
Commission by Apple Residential Income Trust, Inc., and in the Prospectus
(including supplements thereto) included therein and to the references to us
under "Experts" therein:
(1) Our report dated March 19, 1997 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Brookfield Apartments for the twelve-month
period ended December 31, 1996, (2) our report dated March 27, 1997 with respect
to the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Eagle Crest
Apartments for the twelve-month period ended December 31, 1996, (3) our report
dated April 11, 1997 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Tahoe Apartments for the twelve-month period ended
December 31, 1996, (4) our report dated April 29, 1997 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Mill Crossing
Apartments for the twelve-month period ended January 31, 1997, (5) our report
dated May 21, 1997 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Polo Run Apartments for the twelve-month period ended February 28,
1997, (6) our report dated June 4, 1997 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Wildwood Apartments for the twelve-month
period ended February 28, 1997, (7) our report dated June 4, 1997 with respect
to the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Toscana Apartments
for the twelve-month period ended February 28, 1997, (8) our report dated June
4, 1997 with respect to the statement of income and direct operating expenses
exclusive of items not comparable to the proposed future operations of the
property The Arbors on Forest Ridge Apartments for the twelve-month period ended
February 28, 1997, (9) our report dated July 22, 1997 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Paces Cove
Apartments for the twelve-month period ended May 31, 1997, (10) our report dated
September 24, 1997 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Chaparosa Apartments for the twelve-month period ended June 30,
1997, (11) our report dated September 24, 1997 with respect to the statement of
income and direct operating expenses exclusive of items not comparable to the
proposed future operations of the property Riverhill Apartments for the
twelve-month period ended June 30, 1997, (12) our report dated December 16, 1997
with respect to the statement of income and direct operating expenses exclusive
of items not comparable to the proposed future operations of the property Copper
Crossing Apartments for the twelve-month period ended October 31, 1997 (13) our
report dated March 25, 1998 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Main Park Apartments for the twelve-month period
ended December 31, 1997, (14) our report dated April 6, 1998 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Timberglen
Apartments for the twelve-month period ended December 31, 1997, (15) our report
dated April 14, 1998 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Copper Ridge Apartments for the twelve-month period
ended February 28, 1998, (16) our report dated May 14, 1998 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Bitter Creek
Apartments for the twelve-month period ended March 31, 1998, (17) our report
dated July 16, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Summer Tree Apartments for the twelve-month period ended May 31,
1998, (18) our report dated July 17, 1998 with respect to the statement of
income and direct operating expenses exclusive of items not comparable to the
proposed future operations of the property Park Village Apartments for the
twelve-month period ended May 31, 1998, (19) our report dated July 21, 1998 with
respect to the statement of income and direct operating expenses exclusive of
items not comparable to the proposed future operations of the property
Cottonwood Crossing Apartments for the twelve-month period ended May 31, 1998,
(20) our report dated May 14, 1998 with respect to the statement of income and
direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Pace's Point Apartments for the twelve-month
period ended March 31, 1998, (21) our report dated May 14, 1998 with respect to
the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Pepper Square
Apartments for the twelve-month period ended March 31, 1998, (22) our report
dated May 14, 1998 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Emerald Oaks Apartments for the twelve-month period ended March 31,
1998, (23) our report dated May 14, 1998 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Hayden's Crossing Apartments for the
twelve-month period ended March 31, 1998, (24) our report dated May 14, 1998
with respect to the statement of income and direct operating expenses exclusive
of items not comparable to the proposed future operations of the property
Newport Apartments for the twelve-month period ended March 31, 1998, and (25)
our report dated July 15, 1998 with respect to the statement of income and
direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Estrada Oaks Apartments for the twelve-month
period ended June 30, 1998.
Richmond, Virginia /s/ L. P. Martin & Co., P.C.
September 21, 1998
EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Glade M. Knight as her
attorney-in-fact, to execute on her behalf, individually and in each capacity
stated below, and to file, any documents referred to below relating to the
registration of up to $50 million of the common shares of Apple Residential
Income Trust, Inc. (the "Company"), such documents being: a Registration
Statement to be filed with the Securities and Exchange Commission; such
statements with, or applications to, the regulatory authorities of any state in
the United States as may be necessary to permit such shares to be offered and
sold in such states; and any and all amendments to any of the foregoing, with
all exhibits and documents required to be filed in connection therewith. the
undersigned further grants unto said attorney full power and authority to
perform each and every act necessary to be done in order to accomplish the
foregoing registrations as fully as she herself might do.
IN WITNESS WHEREOF, the undersigned has signed this power of attorney as of
this 17th day of September, 1998.
/s/ Penelope W. Kyle
-----------------------------
Penelope W. Kyle,
Director of the Company
EXHIBIT 24.2
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Glade M. Knight as his
attorney-in-fact, to execute on his behalf, individually and in each capacity
stated below, and to file, any documents referred to below relating to the
registration of up to $50 million of the common shares of Apple Residential
Income Trust, Inc. (the "Company"), such documents being: a Registration
Statement to be filed with the Securities and Exchange Commission; such
statements with, or applications to, the regulatory authorities of any state in
the United States as may be necessary to permit such shares to be offered and
sold in such states; and any and all amendments to any of the foregoing, with
all exhibits and documents required to be filed in connection therewith. the
undersigned further grants unto said attorney full power and authority to
perform each and every act necessary to be done in order to accomplish the
foregoing registrations as fully as he himself might do.
IN WITNESS WHEREOF, the undersigned has signed this power of attorney as of
this 17th day of September, 1998.
/s/ Bruce H. Matson
-----------------------------
Bruce H. Matson,
Director of the Company
EXHIBIT 24.3
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Glade M. Knight as her
attorney-in-fact, to execute on her behalf, individually and in each capacity
stated below, and to file, any documents referred to below relating to the
registration of up to $50 million of the common shares of Apple Residential
Income Trust, Inc. (the "Company"), such documents being: a Registration
Statement to be filed with the Securities and Exchange Commission; such
statements with, or applications to, the regulatory authorities of any state in
the United States as may be necessary to permit such shares to be offered and
sold in such states; and any and all amendments to any of the foregoing, with
all exhibits and documents required to be filed in connection therewith. the
undersigned further grants unto said attorney full power and authority to
perform each and every act necessary to be done in order to accomplish the
foregoing registrations as fully as she herself might do.
IN WITNESS WHEREOF, the undersigned has signed this power of attorney as of
this 17th day of September, 1998.
/s/ Lisa B. Kern
-----------------------------
Lisa B. Kern,
Director of the Company
