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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
December 31, 1998 0-23983
APPLE RESIDENTIAL INCOME TRUST, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1816010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
306 EAST MAIN STREET
RICHMOND, VA 23219
(Address of principal executive offices) (Zip Code)
(804) 643-1761
(Registrant's telephone number, including area code)
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<PAGE>
The undersigned company (the "Company") hereby amends its Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 as follows:
By adding the Exhibit 99.10 referred to on the attached Exhibit Index.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report on Form 10-K/A
to be signed on its behalf by the undersigned, thereunto duly authorized, this
4th day of May, 1999.
APPLE RESIDENTIAL INCOME TRUST, INC.
By: /s/ Glade M. Knight
-------------------------
Glade M. Knight,
Chairman of the Board,
Chief Executive Officer
and President
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
99.10 Portions of pages 25 through 33 of the Company's Prospectus dated
October 16, 1998 filed with the Securities and Exchange Commission
pursuant to Rule 424(b)(3) on October 29, 1998.
EXHIBIT 99.10
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
THE COMPANY INTENDS TO INVEST IN EXISTING RESIDENTIAL APARTMENT
COMMUNITIES IN TEXAS AND THE SOUTHWESTERN REGION OF THE UNITED STATES. Pending
such investment, the proceeds of this offering may be invested in U.S.
Government securities, certificates of deposit from banks located in the United
States having a net worth of at least $50,000,000, bank repurchase agreements
covering the securities of the U.S. Government or U.S. governmental agencies
issued by banks located in the U.S. having a net worth of at least $50,000,000,
bankers' acceptances, prime commercial paper or similar highly liquid
investments (such as money market funds selected by the Company) or evidences of
indebtedness. In addition, to the extent the proceeds are not invested in real
estate as described herein, the Company has the ability to invest in such
securities. All proceeds of this offering received by the Company must be
invested or committed for investment in properties or allocated to working
capital reserves or used for other proper Company purposes within the later of
two years after commencement of the offering or one year after termination of
the offering; any proceeds not invested or committed for investment or allocated
to working capital reserves or used for other proper Company purposes by the end
of such time period shall be returned to investors, within 30 days after the
expiration of such period, but the Company may elect to return such proceeds
earlier if, and to the extent, required by applicable law (including to the
extent necessary to avoid characterization as an "investment company").
The principal investment objectives of the Company are:
(i) to preserve and protect the capital of the Company;
(ii) to provide quarterly distributions to Shareholders, a portion of which
may constitute a nontaxable return of capital (rather than current
taxable income); and
(iii)to provide long-term capital appreciation in the value of the
Company's investments.
The Company anticipates that achievement of such objectives will enable it
to provide the Shareholders with appreciation in the value of their Shares.
There can be no assurance that the Company will achieve such objectives.
Attainment of the objectives is contingent in part upon the Company's ability to
acquire suitable properties. To the extent such objectives cannot simultaneously
be pursued or achieved, the Company plans to pursue the objective of regular
quarterly distributions to Shareholders in preference to the objective of
long-term capital appreciation in the value of Company investments and in the
value of Shares.
The Company's primary business objectives are to increase distributions per
Share and the value of its properties by:
(i) increasing occupancy rates and rental income at properties;
(ii) implementing expense controls; and
(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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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. 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. See "Ownership of Assets in Subsidiary Partnership
- -- Subsequent Property Acquisitions."
<PAGE>
One purpose of borrowing could be to permit the Company's acquisition of
additional properties through the "leveraging" of Shareholders' equity
contributions. Alternatively, the Company might find it necessary to borrow to
permit the payment of operating deficits at properties already owned.
Furthermore, although not anticipated, properties may be financed or refinanced
if the Board of Directors deems it in the best interests of Shareholders
because, for example, indebtedness can be incurred on favorable terms and the
incurring of indebtedness is expected to improve the Shareholders' after-tax
cash return on invested capital. See "Sale and Refinancing Policies," below. See
"Risk Factors -- 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 and its Affiliates, subject to review
by the Board of Directors. For such services, the Advisor and its Affiliates
will receive a monthly Property Management Fee equal to 5% of the monthly gross
revenues of the properties. The Company intends that the Advisor and its
Affiliates will also be responsible for the accounting and financial reporting
responsibilities for each of the properties the Company acquires. The Advisor
and its Affiliates 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 and its Affiliates 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 and its Affiliates 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."
<PAGE>
Depending on the location of the Company's real property investments,
unaffiliated, independent property management companies may also render
day-to-day property management services pursuant to contracts with the Company.
Such contracts with the Company may provide for unaffiliated property managers
to receive either fixed or performance-based incentive fees for property
management services, subject to the condition that compensation to such property
managers must be fair, competitive and commercially reasonable. It is intended
that the management capabilities of the property managers will maximize rental
revenues of specific properties through renewing leases at higher market rates,
renovating and retenanting under-performing properties, and constructing
additional rental space on the sites of existing properties, where appropriate.
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
<PAGE>
of 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. 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."
<PAGE>
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.
