As filed with the Securities and Exchange Commission on June 29, 1999
Registration No. 2-78066
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
Registration Statement Under The Securities Act of 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 31 [X]
and/or
Registration Statement Under The Investment Company
Act of 1940 [ ]
Amendment No. 34 [X]
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Registrant's Name, Address and Telephone Number:
American Federation of Labor and Congress of Industrial Organizations
Housing Investment Trust
1717 K Street, N.W.
Suite 707
Washington, D.C. 20006
(202) 331-8055
Name and Address of Agent for Service:
Kenneth G. Lore
Swidler Berlin Shereff Friedman, LLP
3000 K Street, N.W., Suite 300
Washington, D.C. 20007
Approximate Date of Proposed Public Offering:
Public Offering Commenced February 9, 1983
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It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
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[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Rule 24f-2(a)(1) Declaration:
An indefinite number of Units of Beneficial Interest of the Registrant
are being registered by this Registration Statement pursuant to Rule 24f-2
under the Investment Company Act of 1940. Registrant's most recent Rule 24f-2
Notice was filed on February 22, 1999 and registration fees totaling
$93,398.37 were paid. Future Rule 24f-2 Notices will be filed and further
filing fees paid as prescribed in Rule 24f-2.
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AFL-CIO
HOUSING INVESTMENT TRUST
[LOGO]
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PROSPECTUS
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The principal goal of the American Federation of Labor and Congress of
Industrial Organizations Housing Investment Trust (the "Trust") is to generate
current income, consistent with the preservation of capital over time by
investing in mortgage-backed securities, construction and long-term mortgage
loans and secured bridge loans which carry competitive market yields. Other
important goals of the Trust are to encourage the construction of housing and
promote employment for union members in the construction trades and related
industries.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus sets forth information about the Trust that you should
know before investing. You should read and retain this Prospectus for future
reference.
The date of this Prospectus is June 29, 1999.
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TABLE OF CONTENTS
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THE TRUST - SUMMARY
WHAT ARE THE TRUST'S GOALS?.................................. 1
WHAT ARE THE TRUST'S MAIN INVESTMENT STRATEGIES?............. 1
WHAT ARE THE MAIN RISKS OF INVESTING IN THE TRUST?........... 1
WHO SHOULD INVEST IN THE TRUST?.............................. 2
TRUST PERFORMANCE............................................ 3
FEES AND EXPENSES OF THE TRUST............................... 4
INVESTMENT OBJECTIVES, PRINCIPAL STRATEGIES AND RELATED RISKS
INVESTMENT OBJECTIVES........................................ 4
PERMISSIBLE INVESTMENTS AND PRINCIPAL INVESTMENT STRATEGIES.. 5
PRINCIPAL INVESTMENT RISKS................................... 8
FINANCIAL HIGHLIGHTS........................................ 11
MANAGEMENT'S DISCUSSION OF THE TRUST'S PERFORMANCE.......... 13
BUYING AND SELLING UNITS IN THE TRUST
ELIGIBLE INVESTORS......................................... 15
PURCHASING UNITS........................................... 15
SELLING OR REDEEMING UNITS................................. 16
DISTRIBUTION CHARGES (RULE 12B-1 FEES)..................... 16
MANAGEMENT AND STRUCTURE
MANAGEMENT................................................. 16
TRUST STRUCTURE............................................ 17
GENERAL INFORMATION
DISTRIBUTIONS AND TAXES.................................... 17
YEAR 2000.................................................. 18
FOR MORE INFORMATION...............................Back Cover
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THE TRUST - SUMMARY
The American Federation of Labor and Congress of Industrial Organizations
Housing Investment Trust (the "Trust")is an open-end investment company,
commonly called a mutual fund.
This section of the Prospectus gives you a brief summary of the Trust's
investment goals, strategies and primary risks, as well as performance and fee
information. More detailed information about the Trust follows this summary
and is also contained in the Trust's Statement of Additional Information (the
"SAI").
WHAT ARE THE TRUST'S GOALS?
The Trust's primary investment goal is to generate current income,
consistent with the preservation of capital over time, by investing in
mortgage-backed securities and other mortgage-backed obligations, construction
and long-term mortgage loans and secured bridge loans (collectively, "Mortgage
Investments") which carry competitive market yields. Other important goals of
the Trust are to encourage the construction of housing and to facilitate
employment for union members in the construction trades and related
industries. As a result, the Trust will invest in Mortgage Investments which
are secured (directly or indirectly) by new construction projects or projects
being rehabilitated only if the construction or rehabilitation work is to be
performed by union labor.
WHAT ARE THE TRUST'S MAIN INVESTMENT STRATEGIES?
At least 70% of the mortgage-backed securities and mortgage loans in
which the Trust invests or that back the Trust's investments are either
federally insured or guaranteed or are issued or guaranteed by Fannie Mae or
Freddie Mac. Up to 30% of the assets of the Trust may be invested in a wide
variety of other Mortgage Investments, including privately collateralized
investments, state and local government-related investments and secured bridge
loans. The types of Mortgage Investments in which the Trust invests are
described in more detail below under the heading "INVESTMENT OBJECTIVES,
PRINCIPAL STRATEGIES AND RELATED RISKS." Real estate securing the Trust's
investments includes multifamily housing projects, single-family housing and
health care facilities, including hospitals, intermediate care facilities and
nursing homes.
The Trust also uses other strategies to mitigate risk and enhance the
value of its portfolio. These strategies include managing the duration of the
portfolio within a range comparable to that of the Lehman Brothers Aggregate
Index and negotiating prepayment restrictions for most of its long-term
investments.
In selecting Mortgage Investments, the Trust looks for market-rate and
affordable housing projects that are economically viable and involve
developers, contractors and mortgage bankers with a strong record of success
in the real estate industry. The Trust also seeks projects that will enhance
local community development efforts and/or have financial or other support
from the local or state government, such as tax credits or subsidies that make
the housing more affordable.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE TRUST?
As with any mutual fund, the value of the Trust's investments and units
of beneficial interest in the Trust ("Units") may go up or down and you could
lose money. The Trust's principal risks are those of investing in mortgage-
backed securities and mortgage loans, which include the following types of
risks:
-Interest Rate Risk: as with any fixed income investment, the market
value of the Trust's investments will fall below the principal amount of
those investments at times when market interest rates rise above the
interest rates on the investments. Participants in the Trust
("Participants") who sell Units at such times may suffer a
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loss. Rising interest rates may also extend the term of mortgage
investments beyond the expected time of prepayment, which could in turn
increase the portfolio's sensitivity to rising interest rates.
-Default Risk: there is a risk that the borrowers under the mortgage
loans which secure (directly or indirectly) the Trust's investments may
default under their mortgage loans. In the event of such defaults, the
Trust may experience a loss on the related investments. Under certain
circumstances, and to a limited extent, this is true even for mortgage
loans which are federally insured or guaranteed. The Trust will obtain
some type of credit enhancement for almost all of its investments to
help protect the Trust against losses from mortgage loan defaults. To
the extent that credit enhancement for a Trust investment is provided by
a private entity or a state or local housing agency, there is a risk
that the credit enhancer will not make the payments it has agreed to
make in the event of a mortgage loan default. In addition, if the
credit rating of any such credit enhancer is downgraded, the value of
investments guaranteed by that credit enhancer may be reduced to less
than the principal amount of the investment.
-Prepayment Risk: generally, the market value of the Trust's investments
will rise above the principal amount of those investments at times when
market interest rates fall below the interest rates on the investments.
However, at such times, borrowers may prepay the mortgage loans backing
the Trust's investments more quickly than expected. This would force
the Trust to reinvest the proceeds in other investments bearing lower
interest rates.
Other risks include the fact that the Trust concentrates its investments
in mortgage-backed securities and mortgage-backed loans backed by
specific types of housing and health care facilities, rather than
investing in securities backed by a broad range of industries. As a
result, if securities and loans backed by real estate, particularly
housing and health care facilities, are more adversely affected by
changing economic conditions than securities backed by assets in other
sectors of the economy, then the value of the Trust assets may be
adversely affected. Also, there may be a limited resale market for
certain types of privately collateralized investments, state and local
government-related investments and secured bridge loans. If the resale
market is limited, the Trust may experience a loss in the event that it
must liquidate investments to meet redemption requests or to meet other
obligations of the Trust.
Although as of December 31, 1998, 98% of the Trust's long-term
investments were federally insured or guaranteed or issued or guaranteed by
Fannie Mae or Freddie Mac, an investment in the Trust is not insured by the
federal government, any government agency, Fannie Mae, Freddie Mac or any
other firm or entity. For more information about the risks associated with
the Trust and the Trust's risk management strategies, see "INVESTMENT
OBJECTIVES, PRINCIPAL STRATEGIES AND RELATED RISKS--PRINCIPAL INVESTMENT
RISKS" below.
WHO SHOULD INVEST IN THE TRUST?
The Trust may be an appropriate investment for eligible labor
organizations and eligible pension funds which:
- are seeking a fixed income investment with a high degree of security
- are looking for an investment with a history of providing highly
competitive risk-adjusted returns
- desire the portfolio diversification that can be obtained from
single-family and multifamily mortgage investments
- want to invest in a national mortgage investment program
- prefer an investment program with one of the most cost-effective
operating structures in the industry
- are seeking a long-term investment with monthly liquidity
- wish to encourage union employment in housing construction and
community revitalization
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TRUST PERFORMANCE
The following bar chart and table show the Trust's annual returns and
long-term performance. They provide an indication of the risks of investing
in the Trust by showing changes in the Trust's performance from year to year
over the past 10 years and by showing how the Trust's average annual gross
returns for one, five and ten years compare to those of various broad-based
securities market indices. During the 10-year period shown in the bar chart,
the highest net return for a quarter was 9.27% (quarter ending June 30, 1989)
and the lowest net return for a quarter was -2.15% (quarter ending March 31,
1994). Past performance does not mean that the Trust will achieve similar
results in the future.
<TABLE>
<CAPTION>
ANNUAL TOTAL RETURNS
<S> <C>
1989 17.65%
1990 10.25%
1991 14.90%
1992 6.25%
1993 10.17%
1994 (2.15%)
1995 20.11%
1996 5.59%
1997 11.22%
1998 6.71%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL PAST ONE YEAR PAST 5 YEARS PAST 10 YEARS
RETURNS (%)
(for the periods ending December 31, 1998)
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<S> <C> <C> <C>
Trust's Total Gross
Rate of Return 8.71% 8.45% 10.10%
Lehman Brothers
Aggregate Bond Index 8.69 7.27 9.26
Salomon Brothers
Mortgages Index 6.99 7.24 9.18
</TABLE>
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FEES AND EXPENSES OF THE TRUST
Investors pay certain fees and expenses in connection with investing in a
mutual fund. The purpose of the following table is to assist you in
understanding the various costs and expenses that you may pay if you buy and
hold Units in the Trust. The Trust does not charge any sales charge (load) on
the purchase of Units, any fee on the sale or redemption of Units or any other
exchange fee or account fee. The expenses shown under "Annual Trust Operating
Expenses" are based upon those incurred in the fiscal year ended December 31,
1998.
Annual Trust Operating Expenses (expenses that are deducted from Trust assets)
(as a percentage of average net assets)
Management Fees 0%
Distribution (12b-1) Fees .03%
Other Expenses .36%
Total Fund Operating Expenses .39%
EXAMPLE
This example is intended to help you compare the cost on investing in the
Trust with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Trust for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return each
year and that the Trust's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs
would be:
1 year 3 years 5 years 10 years
$40.95 $122.85 $204.75 $409.50
INVESTMENT OBJECTIVES, PRINCIPAL STRATEGIES,
RELATED RISKS AND DEFAULT HISTORY
INVESTMENT OBJECTIVES
The Trust's primary investment goal is to generate current income,
consistent with the preservation of capital over time, by investing in
Mortgage Investments which carry competitive market yields. The Trust was
established under the sponsorship of the AFL-CIO. Therefore, another
important goal of the Trust is to encourage housing and to facilitate
employment for union members in the construction trades and related
industries. As a result, the Trust will invest in Mortgage Investments which
are secured (directly or indirectly) by new construction projects or projects
being rehabilitated only if the construction or rehabilitation work is to be
performed by union labor. This increases the amount of financing available
for housing and other projects and creates job opportunities for union labor
in the construction trades and related industries that provide materials,
furnishings, appliances and services related to housing construction. Real
estate securing the Trust's investments includes multifamily housing projects,
single-family housing and health care facilities, including hospitals,
intermediate care facilities and nursing homes.
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PERMISSIBLE INVESTMENTS AND PRINCIPAL INVESTMENT STRATEGIES
PERMISSIBLE INVESTMENTS
The Trust concentrates its investments in the real estate industry. It
invests primarily in Mortgage Investments that are directly or indirectly
secured by mortgages or liens on real estate. The Trust must invest at least
70% of its assets in Mortgage Investments which are federally insured or
guaranteed or which are issued or guaranteed by Fannie Mae or Freddie Mac,
directly or indirectly. The policies described in this paragraph are
fundamental policies of the Trust and may not be changed without the approval
of the holders of a majority of the Trust's outstanding Units.
The types of Mortgage Investments in which the Trust will invest are
described below.
FEDERALLY INSURED OR GUARANTEED MORTGAGE INVESTMENTS; FANNIE MAE/FREDDIE
MAC-RELATED MORTGAGE INVESTMENTS. The Trust must invest a minimum of 70% and
may invest up to 100% of its assets in these types of Mortgage Investments.
These Mortgage Investments include:
-construction and permanent mortgage loans which are insured or
guaranteed by the federal government or an agency of the federal
government, including the United States Department of Housing and Urban
Development ("HUD" or "FHA"), the Department of Veterans Affairs ("VA")
and the Government National Mortgage Association ("Ginnie Mae");
-mortgaged-backed securities which are secured by mortgage loans and/or
securities which are insured or guaranteed by the federal government or
an agency of the federal government and are rated AAA or AA by a
nationally recognized rating agency;
-loans, securities or other obligations which are issued or guaranteed by
Fannie Mae or Freddie Mac (including Fannie Mae mortgage-backed
securities and Freddie Mac participation certificates). Fannie Mae and
Freddie Mac are federally chartered corporations engaged principally in
providing a secondary market for mortgage obligations. As of March 3,
1999, each had a senior unsecured debt rating of "AAA" from Standard &
Poor's Rating Services, a division of The McGraw Hill Companies, Inc.
("S&P") and a long-term senior unsecured debt rating of "Aaa" from
Moody's Investor Service, Inc. ("Moody's"). The United States
government does not insure or guarantee Fannie Mae or Freddie Mac
obligations.
-securities which are backed by Fannie Mae or Freddie Mac and are rated
AAA or AA by a nationally recognized rating agency when issued.
As of December 31, 1998, these types of Mortgage Investment represented 98% of
the Trust's total long-term investment portfolio. The Trust intends to
concentrate its investments in these types of Mortgage Investments to the
extent that market conditions permit, consistent with the overall objectives
of the Trust; however, there is no assurance that this concentration of
Mortgage Investments can be maintained.
PRIVATELY COLLATERALIZED MORTGAGE INVESTMENTS; STATE/LOCAL GOVERNMENT
RELATED INVESTMENTS; SECURED BRIDGE LOANS. The Trust may invest up to 30% of
its assets in privately collateralized mortgage obligations and state and
local government-related investments, including secured bridge loans for low-
income housing tax credit projects. Certain of the investments in this
category are subject to further caps, expressed as a maximum percentage of the
Trust's total portfolio, as set forth below. All of the investments in this
category are subject to the requirement that at least 90% of the Trust's
assets must be liquid (i.e., that they are readily marketable and convertible
into cash within 120 days without a discount from their market value). As of
December 31, 1998, these types of investments constituted 2% of the Trust's
total long-term investment portfolio. To date these types of investments have
never represented more than 2% of the Trust's total long-term investment
portfolio. It is possible, however, that the percentage of the Trust's assets
invested in these types of investments could rise above the current level.
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Investments in this category include the following types of loans (as well
as interests in and securities backed by these types of loans):
-construction and/or permanent loans which have credit enhancement as
required by the Trust's Declaration of Trust from a state or local
government (or an agency or instrumentality thereof), including state
and local housing finance agencies;
-construction and/or permanent loans which are made by a state or local
government entity or any other lender, as long as the loan (or
securities backed by the loan) is secured by a cash escrow or a letter
of credit, insurance or another form of guaranty issued by an entity
which meets credit rating requirements imposed by the Trust's
Declaration of Trust;
-construction and/or permanent loans which have evidence of support from
a state or local government (or an agency or instrumentality thereof)
and meet underwriting criteria specified in the Trust's Declaration of
Trust, including requirements that the loan-to-value ratio may not
exceed 60% (or 75% if the Trust receives required credit enhancement or
the project receives low income housing tax credits), that the state or
local government or a tax-exempt foundation must make or facilitate a
financial contribution in the project and that the minimum debt service
coverage for these projects must be at least 1.15, based upon
projections of future income and expenses. The total principal amount
of the investments in this category outstanding from time to time may
not exceed 4% of the value of all of the Trust's assets;
-secured bridge loans for low-income housing tax credit projects where
the Trust receives a required form of credit enhancement. The total
principal amount of the investments in this category outstanding from
time to time may not exceed 5% of the value of all of the Trust's
assets.
The Trust may also invest in privately collateralized investments or state
and local government-related investments which have any combination of the
types of credit enhancement required for Trust investments, as long as the
total principal portion of the investment is fully collateralized by
acceptable forms of credit enhancement. The multiple forms of credit
enhancement may be combined either concurrently or sequentially.
The Mortgage Investments described in this section are not federally insured
or guaranteed or issued or guaranteed by Fannie Mae or Freddie Mac. In
addition, these Mortgage Investments do not have to be rated or ratable,
although some of these Mortgage Investments must have credit enhancement which
is provided by an entity which has a rating which is equal to or better than a
specified level. The Trust's Declaration of Trust contains very detailed and
specific criteria for these types of investments. For more information about
these types of investments and the criteria which apply to each, see
"INVESTMENT OBJECTIVES, POLICIES AND RISKS--PRIVATELY COLLATERALIZED MORTGAGE
INVESTMENTS; STATE/LOCAL GOVERNMENT RELATED INVESTMENTS" in the SAI.
PRINCIPAL INVESTMENT STRATEGIES
The Trust's principal investment strategies are as follows:
-The Trust intends to maximize the portion of its long-term portfolio
which is invested in investments which are federally insured or
guaranteed or issued or guaranteed by Fannie Mae or Freddie Mac,
directly or indirectly, to the extent that market conditions permit,
consistent with the overall objectives of the Trust;
-At least 90% of the value of the Trust's assets must be invested in
investments that are readily marketable and convertible into cash within
120 days without a discount from their market value.
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-To mitigate interest rate risk, the Trust sells and acquires securities
in order to be "market neutral" and does not employ interest rate
anticipation strategies. The Trust periodically compares the effective
duration of its portfolio to the fixed-income market, as
defined as the Lehman Brothers Aggregate Index. It is the Trust's
policy to maintain the effective duration of the Trust's portfolio
within the range of plus or minus one-half year of the effective
duration of the Lehman Brothers Aggregate Index. For the 5-year period
ended on December 31, 1998, the Trust's annualized portfolio turnover
rate was 26.5%, which reflects the implementation of this policy to
manage interest rate risk.
-It is the policy of the Trust to negotiate prepayment restrictions for
its long-term multifamily Mortgage Investments to mitigate prepayment
risk. Such prepayment restrictions, also known as "call protection",
for the Trust's investments can take the form of prepayment lockouts,
prepayment penalties, yield maintenance penalties or a combination of
the foregoing. As of December 31, 1998, 98% of the Trust's long-term
multifamily Mortgage Investments were subject to some form of call
protection, ranging from prepayment lockouts of 10 years from the
completion of the related project to prepayment penalties of 0.125% of
the amount prepaid. As of December 31, 1998, 42% of the Trust's
multifamily Mortgage Investments were subject to prepayment lockouts of
5 years or more, followed by a period during which prepayment penalties
of up to 5% would apply and 4% of the Trust's multifamily Mortgage
Investments could be prepaid with a prepayment penalty of 2% or less.
In addition, the Trust seeks to structure implied call protection in
certain single family mortgage investments that enhance cash flow
stability and reduce prepayment risk. As of December 31, 1998, the
Trust's portfolio consisted of 55% multifamily investments,
43% single family investments and 2% cash and cash equivalents.
-The majority of the Trust's multifamily Mortgage Investments are made
pursuant to forward commitments, in which the Trust agrees to purchase
an investment in or backed by mortgage loans that have not yet been
made. For multifamily projects and health care facilities, the Trust
sets a fixed rate for future delivery. For single-family mortgage
loans, the Trust generally sets either a fixed rate or a maximum rate
that may be adjusted downward prior to the closing of the mortgage loan
if market interest rates decline. In periods of declining interest
rates, all of the investments for which the Trust has issued commitments
may not be delivered to the Trust. The Trust usually requires a good
faith deposit at the time the commitment is issued (generally 1/2 to 4
points) on investments backed by multifamily or health care facilities
and retains the deposit if the investment is not delivered to the Trust.
Whenever possible, the Trust also includes mandatory-delivery clauses in
commitments for investments backed by these facilities and projects.
Both mechanisms help assure delivery of the related investments, but
there is no guarantee that all investments the Trust commits to purchase
will actually be delivered to the Trust.
-Pending investment in Mortgage Investments, the Trust's assets are held
in various short-term instruments, including United States Government
issues, repurchase agreements, federal agency issues, mutual funds that
invest in such securities, commercial paper, collateral loans and
warehousing agreements and instruments which are liquid but which may or
may not be secured by real estate or by federal guarantees or insurance
("Short-term Investments").
-It is the current policy of the Trust not to invest in interest-only
("IO") and principal-only ("PO") collateralized mortgage obligations.
IO and PO investments can be highly volatile and their value can fall
dramatically in response to rapid or unexpected changes in the mortgage
or interest rate environment.
For more information about the Trust's investments, see "INVESTMENT
OBJECTIVES, POLICIES AND RISKS" in the SAI.
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PRINCIPAL INVESTMENT RISKS
As with any investment fund, there can be no guarantee that the Trust
will meet its goals, or that the Trust's performance will be positive over any
period of time. This section contains a summary discussion of the primary
risks which can affect the value of an investment in the Trust.
INTEREST RATE RISK
The net asset value, or "NAV", of each Unit in the Trust reflects the
market value of the Trust's portfolio of Mortgage Investments. The value of
the Trust's portfolio, and the resulting NAV of the Units, will fluctuate,
primarily in response to changing interest rates. Generally, when market
interest rates rise, the NAV will fall and conversely, when market interest
rates fall, the NAV will rise. If market interest rates rise above the
interest rates on the Trust's Mortgage Investments, the value of the Trust's
Mortgage Investment will fall below the principal amount of those investments.
Participants who redeem Units at such times may suffer a loss.
Duration is a risk measure used to express the price (value) sensitivity
of a fixed-income security as it relates to changes in the general level of
interest rates. It measures this sensitivity more accurately than maturity
because it takes into account the time value of the cash flows generated by
the security over its life. Future interest and principal payments are
discounted to reflect their present value and then are multiplied by the
number of years they will be received to produce a value expressed in years-
the duration. Effective duration takes into account call features and
prepayment expectations that may shorten or extend a security's life.
As a risk mitigation strategy, the Trust periodically buys or sells
Mortgage Investments in order to prevent fluctuations in the weighted average
maturity of the portfolio, manage the duration of the portfolio and maintain a
desirable level of portfolio diversification. However, the value of an
investment at the time of its liquidation may be more or less than its value
when it was acquired by the Trust.
PREPAYMENT RISK
When market interest rates fall, the value of the Trust's Mortgage
Investments will increase in value, but mortgage-backed securities and
mortgage loans, unlike most other fixed-income investments, may be hurt when
interest rates fall, because borrowers tend to refinance. The loss of high-
yielding mortgage-backed securities and mortgage loans and the reinvestment of
proceeds at lower interest rates can: reduce the potential price increase in
mortgage-backed securities and mortgage loans in response to falling interest
rates; reduce the yield on mortgage-backed securities and mortgage loans; and,
cause prices of mortgage-backed securities and mortgage loans to fall below
what the investor paid for it, resulting in a capital loss. Any of these
developments could cause a decrease in a fund's income and/or share price. As
described above, the Trust seeks to negotiate various forms of prepayment
restrictions on its long-term Mortgage Investments to mitigate this risk.
DEFAULT RISKS AND DEFAULT HISTORY
Most of the Trust's Mortgage Investments are (directly or indirectly)
federally insured or guaranteed or issued or guaranteed by Fannie Mae or
Freddie Mac to give the Trust protection against losses on a default. In
addition, almost all of the Trust's other Mortgage Investments will have some
form of credit enhancement to protect against losses in the event of default.
Notwithstanding this, the Trust may experience losses in the event of defaults
under the loans which directly or indirectly back the Trust's Mortgage
Investments; to a limited extent, this is true even for federally insured or
guaranteed loans. If a private entity or a state or local government entity
provides credit enhancement for a Mortgage Investment and fails to meet its
obligations under the credit enhancement in the event of a default under the
underlying mortgage loan, the Trust would be subject to the risks that apply
to real estate investments generally with respect to that Mortgage Investment.
The very small portion of the Trust's Mortgage Investments which do not have
any form of credit enhancement will be subject to all the risks inherent in
investing in loans secured by real estate. In
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the case of securities or loans backed by health care facilities, economic
performance may also be affected by state and federal laws and regulations
affecting the operation of the underlying facility, as well as state and
federal reimbursement programs and delays or reduction in reimbursements. For
more information about real estate-related risks and potential losses, see
"RISK FACTORS -- Real Estate-Related Risks" and "RISK FACTORS Defaults on
Loans" in the SAI.
Most of the privately collateralized investments and state and local
government-related investments that the Trust may make are expected to have
credit enhancement given by an entity which possesses a specified credit
rating. Such investments themselves do not have to be rated or ratable.
There is no assurance that a rated credit enhancement provider would retain
the required rating level for the life of the investment. Instead, as is the
case with any rating, the rating could be revised downward or withdrawn
entirely at any time by the rating entity which issued it, if the rating
agency deemed it appropriate to do so. A rating downgrade or the withdrawal
of a rating would indicate an increase in the risk of default by the credit
enhancement provider in the event of a default on the related Mortgage
Investment and may also result in a reduction in the value of the investment
and/or make it illiquid. The Trust is not required to dispose of any Mortgage
Investment solely because the rating of any entity providing credit
enhancement for such investment has been downgraded or withdrawn.
As noted above, the Trust may invest a limited portion of its assets in
Mortgage Investments which are not rated. A rating does not provide any
assurance of repayment and is subject to revision or withdrawal at any time by
the rating agency, but ratings do provide a prospective investor with some
indication that the proposed structure and revenue analysis for the investment
satisfy the rating agency's internal criteria for the applicable rating.
Unrated investments may also be less liquid than rated investments.
During the three years ended on December 31, 1998, the Trust did not
realize any losses as a result of defaults under Mortgage Investments. During
the five years ended on December 31, 1998, the Trust realized losses of less
than 0.02% of the Trust's average net assets in connection with defaults under
certain FHA-insured multifamily mortgage loans.
RESALE RISK
Mortgage Investments which are federally insured or guaranteed or are issued
or guaranteed by Fannie Mae or Freddie Mac are very liquid and an active
secondary market for such investments exists. There may be a limited resale
market for certain of the Trust's privately collateralized investments, state
or local government-related investments or secured bridge loans. If the
resale market is limited and Trust had to sell such investments quickly for
any reason, the Trust may be able to sell them only at a discount from their
market value. However, in the aggregate, privately collateralized
investments, state or local government-related investments and secured bridge
loans may not exceed more than 30% of the Trust's total assets. As of
December 31, 1998, these types of investments constituted only 2% of the
Trust's long-term Mortgage Investments and to date these types of investments
have never represented more than 2% of the Trust's total long-term investment
portfolio.
RISKS ASSOCIATED WITH SECURED BRIDGE LOANS
Secured bridge loans are somewhat different than any of the other types of
investments which the Trust may make because in some cases the secured bridge
loan does not constitute a lien on the related project and because the loan is
designed to "bridge" the gap between the construction financing for the
project and the total costs of the project until the low income housing tax
credit investors for the project make their payments into the project as it is
constructed or completed. As a result, this type of Mortgage Investment is
subject to the real estate related risks that other Mortgage Investments are
subject to as well as other risks which are unique to this type of investment.
These risks are described in "RISK FACTORS Defaults on Secured Bridge Loans"
in the SAI. However, as described in the SAI under the heading "INVESTMENT
OBJECTIVES, POLICIES AND RISKS--PRIVATELY COLLATERALIZED MORTGAGE INVESTMENTS;
STATE/LOCAL GOVERNMENT RELATED INVESTMENTS", the Trust will obtain credit
9
<PAGE>
<PAGE>
enhancement to protect against these risks and this type of investment cannot
constitute more than 5% of the total assets of the Trust at any time.
LIQUIDITY RISK
Certain legal restrictions require the Trust to invest at least 90% of
the value of its assets in Mortgage Investments which are readily marketable
and convertible into cash withing 120 days without a discount from their
market value. As a result, not more than 10% of the value of the Trust's
assets may be invested in Mortgage Investments which are not readily
marketable and convertible into cash within 120 days without a discount from
their market value. See, "RISK FACTORS Investment Restrictions" in the SAI.
As of December 31, 1998, 98% of the Trust's net assets were liquid and only 2%
of the Trust's net assets were illiquid. However, to the extent that the
total amount of the illiquid Mortgage Investments held by the Trust ever
exceeds 10% of the value of the Trust's assets, Mortgage Investments must be
liquidated even if they have to be liquidated at a substantial discount from
market value.
For more information about the risks of an investment in the Trust,
please see "INVESTMENT OBJECTIVES, POLICIES AND RISKS- RISK FACTORS" in the
SAI.
10
<PAGE>
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Trust's financial performance for the past 5 years. Certain information
reflects financial results for a Unit. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in the Trust (assuming reinvestment of all income and distributions and prior
to the deductions for administrative expenses). The information for the years
ended December 31, 1997 and December 31, 1998 was audited by Arthur Andersen
LLP. The information for the years ended December 31, 1996, December 31, 1995
and December 31, 1994 was audited by KPMG, LLP. Arthur Andersen's report,
along with the Trust's financial statements, is included in the annual report,
which is available upon request.
<TABLE>
<CAPTION>
Financial Highlights
(amounts in thousands)
- -------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1994 1995 1996 1997 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period 1,102.58 991.40 1,098.53 1,072.98 1,040.30
Net Investment Income 81.66 81.12 79.11 79.06 77.48
Net Gains (Losses) on
investments -
realized and unrealized (111.18) 107.13 (25.55) 31.32 9.78
Dividends (from net
investment income)<F1> (81.66) (80.77) (78.76) (79.10) (77.48)
Undistributed Investment
Income --- (.35) (.35) .04 .07
Distributions (from
capital gains) --- --- --- (.48) (1.30)
Net Asset Value,
End of Period 991.40 1,098.53 1,072.98 1,104.30 1,114.08
Total Gross Return (2.15%) 20.11% 5.59% 11.22% 8.71%
<F1> Includes income distributed for the quarterly periods ended March 31, June 30, September 30,
and December 31, 1994, 1995 and 1996, and for the monthly periods ended December 31, 1997
and December 31, 1998.
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
- -------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1994 1995 1996 1997 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Assets,
End of Period 935,264,189 1,166,893,471 1,383,163,166 1,671,744,859 2,023,371,045
Ratio of Expenses
to Average Net Assets 0.5% 0.5% 0.5% 0.4% 0.4%
Ratio of Net Income
to Average Net Assets 7.8% 7.6% 7.3% 7.2% 6.8%
Portfolio Turnover Rate 27.5% 31.2% 20.3% 15.3% 39.5%
- -------
Primarily as a result of fluctuations in market interest rates, the net unrealized gains (losses)
on investments fluctuate from month to month. Return on investment calculated on a market value
basis would consist of both net investment income and net realized and unrealized gains (losses)
on investments.
</TABLE>
12
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<PAGE>
MANAGEMENT'S DISCUSSION OF THE TRUST'S PERFORMANCE
The factors that materially influenced our performance during the most
recently completed fiscal year are discussed in our 1998 annual report to
shareholders, currently on file with the SEC and available upon request
without charge from the Trust.
The following line graph and table illustrates the net and gross account
value of $50,000 (minimum initial investment)invested in the Trust on January
1, 1989 at the end of each of the past ten years, compared to the account
value of $50,000 invested on the same date at total rate of return of the
Lehman Brothers Aggregate Bond Index and Salomon Brothers Mortgages Index and
the Trust's average annual total returns for one, five and ten years.
<TABLE>
<CAPTION>
COMPARATIVE RATES OF RETURN 1989 - 1998
- ------------------------------------------------------------------------------
TOTAL VALUE OF INVESTMENT FOR YEAR ENDING
1989 1990 1991 1992 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AFL-CIO Housing
Investment Trust 58,825 64,855 74,518 79,175 87,227
AFL-CIO Housing
Investment Trust
(Net of Expenses) 58,525 64,184 73,362 77,588 85,091
Lehman Brothers
Aggregate Bond
Index 57,265 62,396 72,373 77,736 85,323
Salomon Brothers
Mortgages Index 57,575 63,851 73,837 79,286 84,852
</TABLE>
13
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
COMPARATIVE RATES OF RETURN 1988 - 1997 (continued)
- ------------------------------------------------------------------------------
TOTAL VALUE OF INVESTMENT FOR YEAR ENDING
1994 1995 1996 1997 1998
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AFL-CIO Housing
Investment Trust 85,352 102,516 108,247 120,392 130,878
AFL-CIO Housing
Investment Trust
(Net of Expenses) 82,793 98,988 104,066 115,243 124,785
Lehman Brothers
Aggregate Bond
Index 89,770 106,467 110,300 120,933 121,238
Salomon Brothers
Mortgages Index 83,639 97,673 102,938 112,480 120,342
</TABLE>
Trust's Annualized Total Gross Returns
One-year ended Five years ended Ten years ended
December 31, 1998 December 31, 1998 December 31, 1998
8.71% 8.45% 10.10%
PAST PERFORMANCE OF AN INVESTMENT IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
RISK-ADJUSTED RETURN
THE FOLLOWING CHART PLOTS BOTH RISK AND RETURN TO PROVIDE A VIEW
OF THE TRUST'S HISTORICAL RISK-ADJUSTED OUT-PERFORMANCE OF ITS
BENCHMARKS, WHERE RISK IS MEASURED BY VOLATILITY. CONSISTENT WITH
CAPITAL ASSET PRICING THEORY, IN THIS ANALYSIS, RISK IS REPRESENTED BY
THE ANNUALIZED STANDARD DEVIATION OF MONTHLY RETURNS OVER A FIVE
YEAR PERIOD, MEASURING THE VOLATILITY OF MONTHLY RETURNS. IN THE
CHART, VERTICAL AND HORIZONTAL LINES HAVE BEEN DRAWN THROUGH THE TRUST'S
PRIMARY BENCHMARK, THE LEHMAN BROTHERS AGGREGATE INDEX. INVESTMENTS
WHICH FALL TO THE LEFT AND ABOVE THOSE LINES WOULD HAVE PROVIDED A
HIGHER RETURN WITH LESS RISK. AS SHOWN IN THE CHART BELOW FOR THE
FIVE YEAR PERIOD ENDING ON DECEMBER 31, 1998, RELATIVE TO THE LEHMAN
BROTHERS AGGREGATE INDEX, THE TRUST OBTAINED 117 BASIS POINT (16%)
MORE RETURN WITH 53 BASIS POINTS (15%) LESS RISK. PAST PERFORMANCE
DOES NOT MEAN THAT THE TRUST WILL ACHIEVE SIMILAR RESULTS IN THE FUTURE.
<TABLE>
<CAPTION>
RISK RETURN ANALYSIS
Five Years Ending 12/98: Monthly Data
Annualized Return Annualized Standard Deviation
----------------- -----------------------------
<S> <C> <C>
AFL-CIO Housing
Investment Trust 8.45% 3.54%
Salomon Mortgage
Index 7.24% 3.27%
Lehman Aggregate
Index 7.28% 4.07%
</TABLE>
14
<PAGE>
<PAGE>
BUYING AND SELLING UNITS IN THE TRUST
ELIGIBLE INVESTORS
Units in the Trust may be purchased only by "Labor Organizations" and
"Eligible Pension Plans." A Labor Organization means an organization in which
employees participate, directly or through affiliated organizations, and which
exists for the purpose, in whole or in part, of dealing with employers
concerning terms or conditions of employment. The term "Labor Organization"
also includes any employee benefit plan of a Labor Organization and any other
organization which is, in the discretion of the Board of Trustees of the
Trust, affiliated with or sponsored by such a Labor Organization. Eligible
Labor Organizations include 72 national and international unions and 651 state
and local central bodies directly affiliated with the AFL-CIO, the great
number of local unions and state and local central bodies affiliated directly
with those national and international unions and other labor organizations.
An Eligible Pension Plan is a pension plan constituting a qualified trust
under Section 401(a) of the Internal Revenue Code of 1986, as amended, that
has beneficiaries who are represented by a Labor Organization and the
management of which has the discretionary right to invest funds of
beneficiaries without the direct intervention or control of those
beneficiaries.
To inquire about the purchase or sale of Units in the Trust, please
contact our Director of Investor Relations - Marketing at the address and
telephone number on the back cover.
PURCHASING UNITS
Units in the Trust may be purchased only from the Trust and a minimum
initial investment of $50,000 is required. Whole or fractional Units may be
purchased. Units may be purchased only on the last business day of each
month. Each purchase order will be processed and priced on the last business
day of the month in which it is received. You must remit your purchase order
and the required payment for your Units by check or wire transfer to the Trust
on or before the actual purchase date. The Trust will hold all purchase
payments in Short-term Investments until the actual purchase date. A copy of
the subscription agreement under which the Trust will hold your purchase
payment is available upon request. There is no charge payable in connection
with the subscription agreement and all Units are sold without any sales
charge (load) or commission. Units are issued and redeemed by bookkeeping
entry and without physical delivery of any securities.
The price of all Units purchased will be equal to their net asset value,
or NAV, at the close of business on the date of purchase. The NAV is
calculated by dividing the total value of the Trust (the value of all of the
Trust's assets minus all of the Trust's liabilities) by the total number of
Units outstanding on the date of calculation. The Trust calculates the NAV of
the Units only on the last business day of each month.
The Trust's Short-term Investments are valued based upon market
quotations or, if not readily available, at fair value as determined in good
faith under procedures approved by the Board of Trustees. The Trust has
retained an independent firm to perform the monthly valuation of all long-term
investments. All long-term investments are valued based upon fair value
determined in good faith under procedures approved by the Board of Trustees.
In addition, each month the Trust reviews the proposed valuations of all
investments and makes appropriate adjustments to reflect the effect of income
(collected or accrued), realized and unrealized gains and losses, expenses,
the existence and quality of any credit enhancement and any material
impairments in value arising from the specific facts and circumstances of the
investment (e.g., mortgage in default). This process, commonly referred to as
"marking to market", helps ensure that the valuation of the assets in the
Trust's portfolio accurately reflects current market pricing of each
investment, based on its unique characteristics. For more information on the
valuation methodology the Trust uses, see "VALUATION OF UNITS" in the SAI.
15
<PAGE>
<PAGE>
SELLING OR REDEEMING UNITS
You may not sell or transfer your Units to anyone other than the Trust
and you may not pledge your Units. Although the SEC has given the Trust
permission to value its assets and accept redemption requests no more often
than quarterly, the Trust currently accepts and satisfies redemption requests
as of the last business day of each month. Whole or fractional Units may be
redeemed. If you want to sell your Units, you must submit a redemption
request to the Trust in writing and the Trust must receive it at least 15 days
before the last business day of the month. Redemption requests may be
submitted by facsimile. Redemption requests received less than 15 days before
the last business day of the month will be satisfied as of the last business
day of the following month.
The Trust will redeem Units, without charge, at their NAV as of the last
business day of the applicable month. It usually takes from 7 to 10 business
days to calculate the Trust's NAV after the last business day of the month.
The Trust will pay the proceeds of any redemption request by check or wire
transfer as soon as practicable after the NAV has been calculated, but no
later than 7 business days after the NAV has been calculated.
If the redeeming Participant agrees, the Trust may deliver securities,
mortgages or other Trust assets in full or partial satisfaction of a
redemption request. A Participant which receives such assets may incur
expenses in selling or disposing of such assets for cash.
DISTRIBUTION CHARGES (RULE 12B-1 FEES)
The Trust has adopted a plan under Rule 12b-1 that allows the Trust to
pay distribution fees for the sale and distribution of its Units. For the
year ended December 31, 1998, these fees were $535,613, representing 0.03% of
the Trust's average net assets. The Trust expects that these fees will not
exceed $550,000 for calendar year 1999. These types of fees and expenses
primarily include the printing and mailing of prospectuses to other than
current Participants, compensation to sales personnel (salaries plus fringe
benefits), travel and meeting expenses, office supplies, consulting fees and
expenses and expenses for printing and mailing of sales literature. Any
change in the plan for distribution that materially increases the amount of
distribution expenses paid by the Trust requires the approval of the holders
of a majority of the Trust's outstanding Units.
Because these fees are paid out of the Trust's assets on an on-going
basis, over time these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
MANAGEMENT AND STRUCTURE
MANAGEMENT
Overall responsibility for the management of the Trust is vested in its
Board of Trustees. Up to 12 of the trustees may be officers of the AFL-CIO or
its member unions ("Union Trustees"); up to 12 trustees may be (i) officers or
management employees of organizations which contribute to an Eligible Pension
Plan or officers or management employees of an Eligible Pension Plan and (ii)
up to 2 of such trustees may be officers, directors or trustees of an housing
industry organization or federal, state or local government officials
("Management Trustees"). One trustee, the Chairman, must be an individual who
is not an officer, trustee or employee of any organization that participates
in the Trust. As of March 1, 1999, the Board of Trustees consisted of the
Chairman, 12 Union Trustees and 8 Management Trustees. The number of
Management Trustees may not exceed the number of Union Trustees, unless a
Trustee dies or resigns before the expiration of his or her term.
Between meetings of the full Board of Trustees, the Executive Committee
of the Board of Trustees, currently consisting of the Chairman, one Union
Trustee and one Management Trustee, acts for the Board in overseeing Trust
affairs. The Chief Executive Officer, the Chief Investment Officer, the
General Counsel, the Executive Vice President -
16
<PAGE>
<PAGE>
Marketing, the Controller and the Portfolio Manager are responsible for the
Trust's day to day administration, including the selection, purchase and sale
of Mortgage Investments (other than certain short-term investments) and
communication with existing and potential investors.
Some of the Trust's short-term and intermediate-term liquid assets are
managed by an investment adviser, Wellington Management Company, LLP, a
Massachusetts limited liability partnership ("Wellington Management"). As of
December 31, 1998, the value of all short-term and intermediate-term Trust
assets managed by Wellington Management was $34,767,314 which represented 1.7%
of the Trust's total net assets at that date. Wellington Management is a
registered investment adviser and its principal offices are located at 75
State Street, Boston, Massachusetts 02109. Its Managing Partners are Robert
W. Doran, Duncan M. McFarland and John R. Ryan. Wellington Management
provides investment advisory services to investment companies, employee
benefit plans, endowment funds, foundations and other institutions and
individuals.
Wellington Management is responsible for managing the investment and
reinvestment of the short-term and intermediate-term assets which it manages
for the Trust, including determining which assets shall be purchased, retained
and sold and carrying out those decisions. The Trust pays Wellington
Management an advisory fee of 0.16% per annum of the market value of the
assets Wellington Management manages for the Trust. This fee is payable
quarterly, based upon the average monthly market value of the assets under
management.
TRUST STRUCTURE
The Trust is organized in the District of Columbia as a common law
business trust. The majority of jurisdictions in the United States recognize
such a trust as a separate legal entity, wholly distinct from its
beneficiaries. In those jurisdictions, the beneficiaries are not liable for
the debts or other obligations of a business trust. A few jurisdictions,
particularly Texas and Kansas, do not recognize "business trusts" as separate
legal entities and hold the beneficiaries of such trusts personally liable for
actions of the business trusts. The Trust will not exclude otherwise eligible
investors in Kansas and Texas and other such jurisdictions from investing in
Units.
The Declaration of Trust requires that every written contract that the
Trust executes include a provision which states that the contract is not
binding upon any Participant personally and that any person or entity dealing
with the Trust can look only to Trust property (and not to any Participant) to
satisfy any obligation or liability of the Trust under the contract. In most
jurisdictions, Participants will have no personal liability under any contract
which contains this provision. However, in jurisdictions that do not
recognize the separate legal status of a trust such as the Trust, Participants
could be held personally liable for claims against the Trust. These claims
could include contract claims where the contract does not limit personal
liability, tort claims, tax claims and certain other statutory liabilities.
If such liability were ever imposed upon Participants, Participants would be
liable only to the extent that the Trust's assets and insurance were not
adequate to satisfy the claims.
GENERAL INFORMATION
DISTRIBUTIONS AND TAXES
The Trust typically distributes net income monthly and any capital gains
at the end of each year. Participants may elect to receive these
distributions in cash or have them reinvested in additional Units.
The Trust has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves the Trust from paying federal income tax on income and net
capital gains distributed to Participants. Participation in the Trust is
limited to certain Labor Organizations and Eligible Pension Plans which
establish to the Trust that they are exempt from federal income taxation.
Tax-exempt organizations are subject to tax on unrelated business income.
17
<PAGE>
<PAGE>
The foregoing is a summary of some of the important federal income tax
considerations affecting Participants and is not a complete analysis of all
relevant tax considerations, nor is it a complete listing of all potential tax
risks involved in purchasing or holding Units. Participants should consult
their own tax advisors regarding specific questions of federal, state, local
or foreign tax considerations, including the application of the unrelated
business income tax. The Trust has not and will not make any determination as
to the tax-exempt status of any Participant.
YEAR 2000
The Trust has implemented a Year 2000 program to ensure that its computer
system and applications will function properly beyond 1999. The Trust
believes that it has allocated adequate resources for this purpose and expects
its Year 2000 date conversion program to be successfully completed on a timely
basis. However, there can be no assurance that this will be the case. The
Trust does not expect to incur significant expenditures to address this issue.
The performance of the Trust's assets is dependent upon the ability of
third parties, such as borrowers, lenders and other issuers, servicers and
credit enhancement providers, to adequately address their Year 2000 issues.
The Trust cannot control whether these third parties adequately address these
issues. There can be no assurance that the failure of the Trust or these
third parties to address and solve their respective Year 2000 issues will not
have a material adverse effect on the Trust's business, financial condition,
cash flows and results of operations.
18
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<PAGE>
AFL-CIO
HOUSING INVESTMENT TRUST
[LOGO]
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information ("SAI") (legally considered to be
part of this Prospectus) which includes additional information about the Trust
has been filed with the Securities and Exchange Commission ("SEC"). The SAI,
including our audited financial statements for the year ended December 31,
1998, is incorporated by reference in this Prospectus.
PARTICIPANT REPORTS
Additional information about our investments is available in our annual
and semi-annual reports to Participants in the Trust.
FOR MORE INFORMATION
Both the SAI and our annual and semi-annual reports are available upon
request without charge from our headquarters. Please call our Director of
Investor Relations collect at 202-331-8055 to: request the SAI; request our
annual or semi-annual report; or request other information about us. You may
also obtain this information by writing:
Director of Investor Relations
AFL-CIO Housing Investment Trust
1717 K Street, N.W., Suite 707
Washington, D.C. 20006
Information about the Trust (including the SAI) can be reviewed and
copied at the Securities and Exchange Commission's ("Commission") Public
Reference Room in Washington, D.C. Information on the operation of the public
reference room may be obtained by calling the Commission at 1-800-SEC-0330.
Reports and other information about the Trust are available on the
Commission's Internet site at http://www.sec.gov and copies of this
information may be obtained, upon payment of a duplicating fee, by writing the
Public Reference Section of the Commission, Washington, D.C. 20549-6009.
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE
IS AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
Investment Company Act File #811-3493.
<PAGE>
<PAGE>
PART B. STATEMENT OF ADDITIONAL INFORMATION
AFL-CIO
HOUSING INVESTMENT TRUST
1717 K Street, N.W.
Suite 707
Washington, D.C. 20006
(202) 331-8055
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
The American Federation of Labor and Congress of Industrial Organizations
Housing Investment Trust (the "Trust")is an open-end investment company,
commonly called a mutual fund. The principal goal of the Trust is to generate
current income, by investing in mortgage-backed securities and other mortgage-
backed obligations, construction and long-term mortgage loans and secured
bridge loans which carry competitive market yields. Another important goal of
the Trust is to encourage the construction of housing and to facilitate
employment for union members in the construction trades and related
industries. There can be no assurance that the investment goals or objectives
of the Trust will be achieved.
This Statement of Additional Information is not a Prospectus and should
be read in conjunction with the Prospectus of the American Federation of Labor
and Congress of Industrial Organizations Housing Investment Trust ("Trust"),
dated June 29, 1999 (the "Prospectus") and the 1998 annual report to
Participants, which have been filed with the Securities and Exchange
Commission (the "SEC") and can be obtained, without charge, from the Trust by
calling collect 202-331-8055, or by writing to the address listed above. This
Statement of Additional Information incorporates by reference the Prospectus
and the 1998 annual report.
The date of this Statement of Additional Information is June 29, 1999.
<PAGE>
<PAGE>
TABLE OF CONTENTS
PAGE
HISTORY....................................................................1
EXEMPTIONS FROM SPECIFIC REQUIREMENTS OF THE INVESTMENT
COMPANY ACT.........................................................1
NONDIVERSIFICATION....................................................1
REDEMPTION RESTRICTIONS...............................................2
INVESTMENT OBJECTIVES, POLICIES AND RISKS..................................2
GENERAL...............................................................2
FEDERALLY INSURED OR GUARANTEED MORTGAGE INVESTMENTS .................3
FANNIE MAE AND FREDDIE MAC INVESTMENTS................................3
CONTINGENT INTEREST MORTGAGE LOANS....................................5
EARLY REPAYMENT LOANS.................................................5
PASS-THROUGH AND PAY-THROUGH SECURITIES...............................6
PRIVATELY COLLATERALIZED MORTGAGE INVESTMENTS;
STATE AND LOCAL GOVERNMENT-RELATED INVESTMENTS........................6
MORTGAGE INVESTMENTS SUPPORTED BY MORE THAN ONE FORM OF CREDIT
ENHANCEMENT..........................................................14
PRE-CONSTRUCTION COMMITMENTS.........................................14
FORWARD COMMITMENTS..................................................15
TEMPORARY INVESTMENTS................................................15
RETENTION OF TECHNICAL CONSULTANTS...................................15
OTHER POLICIES.......................................................16
INVESTMENT RESTRICTIONS..............................................16
<PAGE>
<PAGE>
RISK FACTORS.........................................................17
MANAGEMENT OF THE TRUST...................................................25
THE RETIREMENT PLAN..................................................35
THE 401(K) PLAN......................................................36
PRINCIPAL HOLDERS OF SECURITIES...........................................37
INVESTMENT ADVISER........................................................37
SALES AND DISTRIBUTION ACTIVITIES.........................................39
PURCHASING UNITS..........................................................40
REDEMPTION OF UNITS.......................................................41
VALUATION OF UNITS........................................................41
DISTRIBUTIONS AND TAX ISSUES..............................................44
DISTRIBUTIONS........................................................44
TAX ISSUES...........................................................44
PERFORMANCE DATA..........................................................45
GENERAL INFORMATION.......................................................46
SECURITIES OFFERED...................................................46
AUDITORS.............................................................47
CUSTODIAN............................................................47
LEGAL MATTERS........................................................47
REPORTS TO SHAREHOLDERS..............................................47
ADDITIONAL INFORMATION...............................................47
FINANCIAL STATEMENTS......................................................47
APPENDIX A - S&P DEBT RATING DEFINITIONS.................................A-1
APPENDIX B - S&P STATE AGENCY RATINGS....................................B-1
APPENDIX C - S&P STATE HOUSING FINANCE AGENCY G. O. DEBT CRITERIA....... C-1
APPENDIX D - THOMSON BANKWATCH INC. BANK RATING
CHARACTERISTICS..........................................D-1
<PAGE>
<PAGE>
HISTORY
The American Federation of Labor and Congress of Industrial Organizations
Housing Investment Trust ("Trust") is a common law trust created under the
laws of the District of Columbia pursuant to a Declaration of Trust originally
executed September 19, 1981. The name of the Trust was changed from "AFL-CIO
Pooled Investment Trust" on May 27, 1982.
The Trust acquired all the assets of the AFL-CIO Mortgage Investment
Trust ("Mortgage Trust") in exchange for Units of the Trust on the basis of
relative net asset values as of September 30, 1984. The exchange was approved
by order of the SEC dated October 1, 1984. Trust Units received in the
exchange were distributed on a pro rata basis to Mortgage Trust participants
as of September 30, 1984 and the Mortgage Trust was thereupon liquidated.
The Trust has registered as an investment company under the Investment
Company Act of 1940, as amended ("Investment Company Act"), and accordingly is
subject to the regulatory authority of the Securities and Exchange Commission
(the "SEC"). The Trust has been exempted from certain investor protection
provisions of the Investment Company Act.
EXEMPTIONS FROM SPECIFIC REQUIREMENTS OF THE INVESTMENT COMPANY ACT
On April 21, 1982 the Trust obtained from the SEC an order under Section
6(c) of the Investment Company Act, exempting the Trust from certain
requirements of that Act (SEC Release No. 12387). The following is a brief
summary of certain of these exemptions.
NONDIVERSIFICATION
The Investment Company Act provides that no registered investment company
shall change its subclassification from diversified to nondiversified without
the shareholders' authorization. Under Section 5(b) of the Investment Company
Act, a "diversified company" is:
A management company which meets the following requirements: At least 75
per centum of the value of its total assets is represented by cash and
cash items (including receivables), Government securities, securities of
other investment companies and other securities for the purposes of this
calculation limited in respect of any one issuer to an amount not greater
in value than five per centum of the value of the total assets of such
management company and to not more than 10 per centum of the outstanding
voting securities of such issuer.
A "nondiversified company" means any management company other than a
diversified company.
The Trust will seek to remain as diversified as practicable. Because,
however, the mortgages in which it proposes to invest are often offered in
large denominations, the Trust may shift from time to time from diversified to
nondiversified status. The Trust has obtained an exemption from the
requirement of a shareholder vote before shifting its diversification status.
The terms "diversified" and "non-diversified" as used herein are not
intended to describe the geographical locations or concentrations of mortgaged
properties represented in the Trust's portfolio. Such properties are spread
throughout the United States and it is the Trust's intention to maintain such
geographical diversity.
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REDEMPTION RESTRICTIONS
Section 22(c) of the Investment Company Act and SEC Rule 22c-1 thereunder
provide that no registered investment company issuing a redeemable security
and no principal underwriter of such company shall sell or redeem any such
security except at a price based on the current net asset value of such
security that is next computed after receipt of a tender of such security for
redemption or of an order to purchase such security. Section 22(e) provides
that no registered investment company shall postpone the date of payment upon
redemption of a redeemable security in accordance with its terms for more than
seven days after the tender of such security for redemption except in certain
limited circumstances. The Trust's redemption policies do not conform to
these requirements. See "BUYING AND SELLING UNITS IN THE TRUST--Selling or
Redeeming Units" in the Prospectus. The Trust has obtained exemption from
generally applicable redemption requirements on the grounds that the interests
of its Participants will make investment and redemption other than on a
quarterly basis unnecessary and that daily valuation of the Trust portfolio of
mortgage loans would be unduly burdensome. Effective October 1, 1987, the
Board of Trustees authorized investments and redemptions on a monthly basis
instead of a quarterly basis.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
GENERAL
The Trust is an open-end, non-diversified investment company, commonly
called a mutual fund. The Trust's primary investment goal is to generate
current income consistent with the preservation of capital, by investing in
mortgage-backed securities secured by mortgages or other liens upon real
estate and other mortgage-backed obligations, construction and long-term
mortgage loans and secured bridge loans ("Mortgage Investments") which carry
competitive market yields.
The Trust concentrates its investments in the real estate industry. For
purposes of the Investment Company Act, "concentration" means more than
twenty-five percent of asset value in any one industry. At least 70% of the
mortgage-backed securities or mortgages which are acquired by the Trust or
which back Mortgage Investments acquired by the Trust will be federally
insured or guaranteed or will be issued or guaranteed by Fannie Mae or the
Federal Home Loan Mortgage Corporation ("Freddie Mac"). The Trust will
acquire Mortgage Investments involving new construction or rehabilitation work
only if the new construction or rehabilitation work is to be done by union
labor. These are fundamental policies and may not be changed without the
approval of the holders of a majority of the Trust's outstanding Units.
Other Mortgage Investments that the Trust is authorized to make are
contingent interest mortgage loans, early repayment loans, pass-through and
pay-through securities, construction and/or permanent mortgage loans secured
by a bank letter of credit, insurance or other guaranty, state and local
government-related investments, pre-construction commitments and secured
bridge loans, in each case as described below and subject to the restrictions
noted below.
The Trust will acquire only Mortgage Investments with yields competitive
with those then generally prevailing on similar investments having comparable
terms and conditions taking into account differences in risk including those
resulting from differences in properties, borrowers and loan terms.
Certain of the Trust's authorized investments are tied to ratings at
various levels by one or more nationally recognized statistical rating
agencies. A description of the debt rating definitions of Standard & Poor's
Rating Services, a division of The McGraw-Hill Companies, Inc. ("S&P") is set
forth in Appendix B-1. The debt rating categories of other nationally
recognized statistical rating agencies are similar to those of S&P. A
description of S&P's state agency ratings is set forth in Appendix B-2 and a
description of S&P's State Housing Finance Agency General Obligation Debt
Criteria is set forth in Appendix B-3. Appendix B-4 contains a description of
the rating categories used by Thomson Bankwatch, Inc.("Thomson Bankwatch"), is
a proprietary credit ratings and consulting service.
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Please see "Investment Objectives, Principal Strategies and Related
Risks" in the Prospectus for a summary of the investment objectives, policies
and risks of the Trust.
FEDERALLY INSURED OR GUARANTEED MORTGAGE INVESTMENTS
The Trust may invest up to 100% of its total assets in Mortgage
Investments which are federally insured or guaranteed. Under existing federal
housing programs, the federally insured or guaranteed mortgage loans eligible
for direct purchase by the Trust are first or second mortgage loans insured by
the Department of Housing and Urban Development ("HUD") acting by and through
the Federal Housing Administration (the "FHA") to finance the purchase and
ownership of completed single-family dwellings and, in some circumstances, the
construction or renovation of single-family dwellings, or to provide
construction and/or permanent financing for multifamily housing projects and
certain health care facilities, including hospitals, intermediate care
facilities and nursing homes. FHA-insured single-family mortgage loans
typically have a 30 year term. FHA-insured multifamily mortgage loans have
maturities that range from 10 to 40 years from project completion and
commencement of principal repayments. The Trust may also purchase mortgage
loans guaranteed by the VA to finance the purchase of single-family dwellings.
Obligations of FHA are backed by the General Insurance Fund established
pursuant to the National Housing Act of 1934, as amended. Obligations of the
VA are backed by the Loan Guaranty Revolving Fund.
The Trust may also purchase notes or other obligations guaranteed under
Section 108 of the Housing and Community Development Act of 1974, as amended
("Section 108"). Under Section 108, HUD is authorized to guaranty notes or
other obligations issued by eligible public entities; the proceeds from the
sale of the notes are used by such public entities for eligible community
development and economic development activities, including rehabilitation of
privately owned or publicly owned housing. The Trust may purchase such notes
in cases where the proceeds will be used to finance the construction or
rehabilitation of housing, and may invest in mortgage loans for the
construction or rehabilitation of housing if such mortgage loans are
guaranteed under Section 108. Section 108-guaranteed notes have terms not
exceeding 20 years and bear interest rates that are generally slightly higher
than rates on Treasury obligations of comparable maturity. Under Section 108,
the timely payment of all principal of and interest on the guaranteed note is
guaranteed by the full faith and credit of the United States.
The Trust may also purchase federally guaranteed mortgage-backed
certificates. Such certificates are issued by a mortgage banker or other
lender and carry the right to receive principal and interest payments related
to payments of principal and interest under one or more identified mortgages.
Full and timely payment under these mortgage-backed securities is guaranteed
by the Government National Mortgage Association ("Ginnie Mae") and backed by
the full faith and credit of the United States. These Ginnie Mae securities
are readily marketable, generally at publicly quoted prices. Such Ginnie Mae
securities bear interest at rates ranging from 0.25% to 0.5% less than the
whole loans backing such securities, reflecting the cost of the Ginnie Mae
guaranty and servicing of the mortgages in the pool.
FANNIE MAE AND FREDDIE MAC INVESTMENTS
The Trust may invest up to 100% of its total assets in Fannie Mae and
Freddie Mac investments, which consist of (i) obligations issued or guaranteed
by Fannie Mae or Freddie Mac, including Fannie Mae and Freddie Mac
mortgage-backed securities and Freddie Mac participation certificates backed
by pooled conventional mortgages and (ii) securities that are backed by Fannie
Mae or Freddie Mac and are, at the time of their acquisition by the Trust,
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in one of the two highest categories by at least one nationally recognized
statistical rating agency (collectively, "Fannie Mae and Freddie Mac
Investments"). The backing referred to in clause (ii) may take the form of
Fannie Mae mortgage-backed securities and Freddie Mac participation
certificates. SEE "INVESTMENT OBJECTIVES, POLICIES AND RISKS -- PASS-THROUGH
AND PAY-THROUGH SECURITIES."
Fannie Mae and Freddie Mac are federally chartered corporations engaged
principally in providing a secondary market for mortgage obligations. Neither
Fannie Mae mortgage-backed securities nor Freddie Mac participation
certificates, nor any other Fannie Mae or Freddie Mac Investments, are
federally insured or guaranteed. The mortgages backing any Fannie Mae and
Freddie Mac mortgage-related investments in which the Trust invests will meet
Fannie Mae or Freddie Mac standards, as applicable, will, when the Trust
commits to acquire them, carry competitive market yields and will be secured
by real estate, on which any buildings, structures and improvements to be
built or rehabilitated will be built or rehabilitated with union labor.
As a result of a significant decrease in the availability of FHA-insured
multifamily mortgage loans, Ginnie Mae-guaranteed securities backed by
multifamily mortgage loans, and other multifamily projects, the Trust has,
since 1991, increased investments in multifamily and single-family Fannie Mae
and Freddie Mac mortgage-backed securities. In the case of single-family
investments, the Trust enters into commitments with mortgage banking firms,
banks and other financial institutions ("Issuers") to purchase mortgage-backed
securities secured by mortgage loans financing the purchase of
newly-constructed single-family homes that are union-built and meet certain
eligibility criteria. The securities which are purchased by the Trust under
this program are single-family mortgage-backed securities guaranteed by Fannie
Mae or Freddie Mac. The securities are generally required to be delivered to
the Trust within 60 days after all of the qualified mortgage loans backing a
given issue of securities have been closed.
The interest rate and discount points for each mortgage loan backing an
issue of securities is generally established under one of two alternate
methods. Under the first and most frequently used mechanism, the Trust and
each Issuer agree weekly, based on a survey of current market conditions, on
an interest rate and discount point schedule which is used to determine the
maximum interest rate and maximum discount points on each mortgage loan for
which the Issuer issues a loan commitment during the applicable week. Under
the second mechanism, the Trust and each Issuer agree to use the interest
rates and discount points publicly quoted for securities of the type to be
purchased by the Trust at the time the loan applications for the underlying
mortgage loans are accepted plus the applicable servicing and guaranty fees
with respect to the related securities. Depending upon the terms and
conditions of the loan, the Trust will lock the interest rate for a period of
time in advance of the loan closing. Typically, the interest rate lock will
be for a period of no more than 18 months. The number of points that the
Trust charges for the interest rate lock varies depending upon the length of
the lock-in period.
The interest rates and discount points may be reduced by the mortgagor
prior to the closing of the underlying mortgage loan if market interest rates
have declined from the commitment date. The Trust has concluded that the
slight reduction in yield on the securities backed by mortgage loans whose
interest rates and discount points are reduced in this way is largely offset
by savings on transactions fees that would have been incurred in purchasing
comparable securities from broker-dealers in the secondary market (which
securities also would not necessarily have financed union-built single-family
homes).
Most of the single-family Fannie Mae and Freddie Mac mortgage-backed
securities purchased by the Trust to date have been backed by fixed rate
mortgage loans, although the Trust has the authority to acquire single-family
Fannie Mae and Freddie Mac securities which are backed by adjustable rate
mortgage loans and the Trust anticipates that in the future a larger portion
of the single-family Fannie Mae and Freddie Mac securities it purchases may be
backed by adjustable rate mortgage loans. There are a wide variety of
adjustable rate mortgage loans which may be used to back the single-family
Fannie Mae and Freddie Mac securities. These range from loans on which the
interest rate is adjusted periodically (with adjustments occurring from every
6 months to annually to each 3 or 5 years) based upon a specified market index
at the time of each adjustment, to loans which carry a fixed interest rate for
a specified period of time (e.g.,
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3, 5, 7 or 10 years) after which the interest rate on the loan is adjusted
annually based on a specified market index. There are specified limits on the
maximum amount of each upward or downward adjustment in the interest rate on
these mortgage loans and caps on the maximum aggregate adjustment in the
interest rate, either up or down, over the life of each loan. These limits
and caps vary based on the frequency with which the adjustments are made and
by loan type. Some types of the adjustable rate mortgage loans which may back
single-family Fannie Mae and Freddie Mac securities also have provisions under
which they may be converted into fixed rate mortgage loans at the option of
the mortgagor at specified times.
Under the single-family Fannie Mae and Freddie Mac securities backed by
adjustable rate mortgage loans, Fannie Mae or Freddie Mac, as applicable,
guaranties the timely payment of interest, based upon the interest rates borne
by the underlying mortgage loans, as the same are adjusted from time to time,
less applicable servicing and guaranty fees.
CONTINGENT INTEREST MORTGAGE LOANS
The Trust is authorized to make or invest in federal government-related,
Fannie Mae or Freddie Mac contingent interest mortgage loans. A contingent
interest mortgage loan of this type is a mortgage loan on a rental project
which provides for repayment of principal and base interest at a fixed rate
which is insured or guaranteed by the federal government or an agency thereof,
or is guaranteed by Fannie Mae or Freddie Mac, and also includes separate
contractual provisions obligating the borrower to pay additional interest
based entirely on net or gross cash flow and/or net or gross proceeds upon
sale, refinancing or disposition of the project. This additional interest is
not insured or guaranteed, and is sometimes referred to as "contingent
interest."
Agreements for such contingent interest mortgage loans would be
negotiated on a project-by-project basis. Accordingly, the precise formula
for calculating the amount of contingent interest payments would vary
depending on several factors, including the projected cash flow from the
project, the base interest rate and financial resources of the borrower, and
other factors which the Trust deems relevant. Receipt of contingent interest
is affected by the amount of appreciation and rental income and expenses of a
project. Generally, if there is insufficient cash flow or appreciation, no
contingent interest is due or payable.
Contingent interest mortgage loans generally require the lender to accept
a lower base interest rate than it otherwise would have been able to
negotiate, in return for the right to receive as additional interest a portion
of cash flow and/or proceeds from the sale or refinancing of the project. The
Trust is permitted to make a contingent interest mortgage loan in return for a
base interest rate which is up to 2% per annum lower than the rate which it
would otherwise be willing to accept (i.e., in the absence of the contingent
interest feature). Although all principal and base interest would remain
insured by FHA, or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac, as the
case may be, this structure may result in a reduction of current income
(particularly during construction and rent-up) in the hope of greater returns
in future years based on the project's economic performance. As noted above,
such amounts of contingent interest are neither federally guaranteed or
insured nor guaranteed by Fannie Mae or Freddie Mac. See "INVESTMENT
OBJECTIVES, POLICIES AND RISKS -- RISK FACTORS."
EARLY REPAYMENT LOANS
The Trust also may invest in federally insured or guaranteed mortgages or
securities backed thereby and in Fannie Mae and Freddie Mac Investments that
include a right to require the borrower to repay a mortgage loan prior to the
regular maturity date of the mortgage loan after an initial period during
which the loan cannot be called. This authorization affords the Trust
additional flexibility to make loans of shorter duration. Such loans may be
more attractive to borrowers since the rate of interest on shorter term loans
may be lower and may be more attractive to the Trust because it involves a
commitment of funds for a shorter term.
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In the case of such "early repayment" loans that are federally insured or
guaranteed, while all principal and base interest would be insured or
guaranteed by FHA or Ginnie Mae, the balloon repayment obligation would not be
secured by the mortgaged real property or by any government insurance or
guaranty. It is anticipated that such obligation instead would be secured by
a security interest in the ownership interests of the principals of the
borrower or other security as negotiated by the Trust and the borrower or
principals. Since the obligation to repay the loan prior to its stated
maturity would not be included in the note and mortgage, the Trust would not
be entitled to foreclose on the mortgaged property or obtain insurance
proceeds in the event of non-compliance with a demand for repayment at such
earlier date. The Trust expects that if it is unable to enforce its right to
early repayment, it would continue to hold the mortgage loan or the securities
backed by such mortgage loan, the principal and interest of which would remain
federally insured or guaranteed. In such event, a loss could be incurred
because the Trust would have required a higher rate for a mortgage or
mortgage-backed security that was not accompanied by the right to demand
repayment at an earlier date. The risk described in this paragraph does not
apply to early repayment or "balloon" loans, or securities backed thereby,
that are guaranteed by Fannie Mae or Freddie Mac. This is because payment of
such loans and securities are guaranteed at the stated maturity date.
PASS-THROUGH AND PAY-THROUGH SECURITIES
The Trust also is authorized to invest in mortgage-backed pass-through or
pay-through securities if the securities are rated in one of the two highest
rating categories of a national rating agency, such as S&P or Moody's
Investors Service ("Moody's"), and also backed by certain Mortgage
Investments in which the Trust is otherwise authorized to invest.
Mortgage-backed pass-through or pay-through securities are securities
which may be issued by privately owned entities or public issuers and secured
by mortgages or mortgage-related instruments such as FHA-insured or
VA-guaranteed loans, Ginnie Mae securities or securities which are guaranteed
by Fannie Mae or Freddie Mac, and provide certain characteristics and features
that federally insured loans or guaranteed certificates do not. Although
payment of the principal of, and interest on, such mortgage-backed securities
may be secured by Ginnie Mae securities, FHA-insured loans, VA-guaranteed
loans or securities which are guaranteed by Fannie Mae or Freddie Mac, such
mortgage-backed pass-through or pay-through securities represent obligations
solely of the issuer and will not themselves be guaranteed or insured by any
governmental entity or instrumentality or any other entity.
Although the Trust will purchase only mortgage-backed pass-through and
pay-through securities that have been rated in one of the two highest rating
categories by a nationally recognized statistical rating agency, there is no
assurance that any rating on securities purchased by the Trust will continue
for any given period of time or that it will not be revised downward or
withdrawn entirely by the rating agency if, in its judgment, circumstances so
warrant. Any such downward revision or withdrawal of such rating would be
likely to signify an increase in the risk to the Trust associated with the
related securities and would be likely to result in a reduction in the value
of the related securities. The Trust is not required to dispose of securities
the rating for which has been revised below the second highest rating category
or withdrawn except to the extent required by certain investment restrictions.
See "INVESTMENT OBJECTIVES, POLICIES AND RISKS--INVESTMENT RESTRICTIONS" and
"INVESTMENT OBJECTIVES, POLICIES AND RISKS--RISK FACTORS--Investment
Restrictions."
PRIVATELY COLLATERALIZED MORTGAGE INVESTMENTS; STATE AND LOCAL
GOVERNMENT-RELATED INVESTMENTS
The Trust is authorized to invest up to 30% of its total assets in the
following three categories of investments.
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1. Privately Collateralized Mortgage Investments
The Trust may invest in construction and/or permanent mortgage loans, or
securities backed by construction and/or permanent mortgage loans or interests
in such loans or securities, if the loans are made by a state or local
government or an agency or instrumentality thereof, including a state or
municipal housing finance agency, or by any other lender acceptable to the
Trust and such loans or the securities backed by such loans are fully
collateralized or secured in a manner satisfactory to the Trust by: (i) cash
placed in trust or in escrow by a state or local government or agency or
instrumentality thereof with an independent third party satisfactory to the
Trust on terms and conditions satisfactory to the Trust; or (ii)a letter of
credit, insurance or other guaranty from a public or private entity
satisfactory to the Trust which has a rating (at the time of the Trust's
acquisition of the related loan, securities or interests in such loans or
securities) which is at least "A" or better from S&P (or a comparable rating
by another nationally recognized statistical rating agency, as determined by
the Executive Committee of the Trust).
There is no assurance that the rating of the issuer of any letter of
credit, insurance or other form of guaranty which collateralizes a
construction and/or permanent loan investment acquired by the Trust will
continue for any given period of time or that it will not be revised downward
or withdrawn entirely by the rating agency if, in the rating agency's
judgment, circumstances so warrant. Any such downward revision or withdrawal
of such rating would be likely to signify an increase in the risk to the Trust
associated with the related investment and would be likely to result in a
reduction in the value of the related obligation. The Trust is not required
to dispose of privately collateralized investments if the rating of the issuer
of the related letter of credit, insurance or guaranty is downgraded or
withdrawn, except to the extent required by certain investment restrictions.
See, "INVESTMENT OBJECTIVES, POLICIES AND RISKS--INVESTMENT RESTRICTIONS" and
"INVESTMENT OBJECTIVES, POLICIES AND RISKS--RISK FACTORS--Investment
Restrictions." Notwithstanding any of the above, such a downward revision or
withdrawal of a rating would not have any impact upon the flow of income from
the project to the Trust.
If the issuer of any letter of credit, insurance or other form of
guaranty which secures a privately collateralized investment fails or is
unable to meet its obligations under such letter of credit or other guaranty,
the Trust would be subject to the same real estate-related risks and
uncertainties that apply to real estate investments generally, which could
have a material adverse effect on the value and performance of the
investments. See, ""INVESTMENT OBJECTIVES, POLICIES AND RISKS-- RISK
FACTORS--Real Estate-Related Risks."
There is no requirement that any construction and/or permanent investment
in this category be rated or ratable. While a rating on an obligation does
not provide any assurance of repayment and is subject to revision or
withdrawal at any time by the assigning rating agency, such ratings do provide
the prospective investor with some indication that the proposed structure and
revenue analysis for the obligation satisfy the rating agency's internal
criteria for the applicable rating. However, the Trust intends to undertake
transactions under this authority selectively, and only after having made its
own independent evaluation with respect to the experience, credit history and
management expertise of the public or private entity which guarantees the
obligations to be acquired. Unrated investments may also be less liquid than
rated investments. However, the Mortgage Investments made under this
authority, together with all other Trust investments, would be subject to the
SEC requirement which requires that at least 90% of the value of the Trust's
assets be invested in investments that are readily marketable and convertible
into cash within 120 days without a discount from their market value. See,
"INVESTMENT OBJECTIVES, POLICIES AND RISKS--INVESTMENT RESTRICTIONS" and
"INVESTMENT OBJECTIVES, POLICIES AND RISKS--RISK FACTORS--Investment
Restrictions.
2. State and Local Government-Related Obligations
The Trust may invest in the types of state and local government-related
obligations described below.
(a) Full Faith and Credit. The Trust may invest in construction
and/or permanent loans, or securities backed by construction and/or permanent
loans or interests in such loans or securities, if such loans or securities
are supported by a full faith and credit guaranty of a state or local
government or agency or instrumentality thereof that has general
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taxing authority, without regard to the credit rating of such entity or the
obligations acquired. There is no requirement that obligations acquired
under this category be rated or ratable. If the state or local government or
agency or instrumentality which provided such guaranty fails or is unable to
meet its obligations thereunder, the Trust would be subject to the same real
estate-related risks and uncertainties that apply to real estate investments
generally, which could have a material adverse effect on the value and
performance of the investments. See, "INVESTMENT OBJECTIVES, POLICIES AND
RISKS--RISK FACTORS--Real Estate-Related Risks."
(b) "Top Tier" Agencies. The Trust may invest in construction and/or
permanent loans, or securities backed by construction and/or permanent loans
or interests in such loans or securities, provided that such loans or
securities are issued (with or without recourse) or guaranteed, as the case
may be, by a state or local housing finance agency designated "top tier" by
S&P (or designated comparably by another nationally recognized statistical
rating agency, as determined by the Executive Committee of the Trust) at the
time of acquisition by the Trust, and are (i) with full recourse (directly or
by way of guaranty or indemnity) to such agency's general credit and assets,
or (ii) secured by recourse to such assets of the agency or by such third
party credit enhancement as to provide, in the judgment of management,
protection comparable to a pledge of the agency's general credit, or (iii)
backed by the "moral obligation" of the state in which such agency is located
in the form of the state's commitment to replenish any insufficiencies in the
funds pledged to debt service on the obligations.
Although the agency must be rated "top tier" by S&P, there is no
requirement that the obligations to be acquired by the Trust be rated or
ratable at all, as long as the agency is a top tier agency at the time an
obligation is acquired by the Trust. S&P has informally indicated to the
Trust that the only relevance a top tier designation would have on the rating
of particular obligations issued by such an agency is that S&P would, under
certain circumstances, increase the rating of such obligations from the level
they would otherwise be entitled to receive by one-half a level within an
existing rating category. So, for example, an issue that might otherwise be
entitled to an A rating could get an A+ rating if the agency was top tier (or
an AA- rating could be raised to an AA rating). However, an A+ rating would
not be increased to AA- because it would take the rating into another rating
category (that is, from single-A to double-A).
Before designating a housing agency as top tier, S&P must favorably
evaluate a number of criteria, including the agency's general track record,
unrestricted fund balances, administrative capabilities, investment policy,
internal controls, portfolio quality and the sponsoring state's commitment to
housing. A more complete description of the guidelines used by S&P with
respect to "top tier" designations is attached to this Statement of Additional
Information as Appendix B. There can be no assurance that any such rating of
any agency would continue for any given period of time after the Trust
acquires such an obligation, or that it would not be revised downward or
withdrawn entirely by the rating entity if, in its judgment, circumstances so
warrant. A downgrade in or withdrawal of the rating of an agency would
signify an increase in the risk that the obligations issued or guaranteed by
that agency would not be paid in accordance with their terms and would be
likely to result in a reduction in the value of the related obligations,
except to the extent that the Trust has obtained other forms of credit
enhancement or has taken other steps to secure its interests in the project.
The Trust is not required to dispose of the obligations issued or guaranteed
by an agency which loses its top tier rating, except to the extent required by
certain investment restrictions. See, "INVESTMENT OBJECTIVES, POLICIES AND
RISKS--INVESTMENT RESTRICTIONS" and "INVESTMENT OBJECTIVES, POLICIES AND
RISKS--RISK FACTORS--Investment Restrictions."
With respect to any obligation issued or guaranteed by a top tier agency,
the Trust expects that it will be secured either by the recourse obligation of
the issuer (or its guaranty) or by other collateral security, in addition to
having the benefit (directly or indirectly) of a lien on the underlying real
estate. Management of the Trust intends to undertake transactions with top
tier agencies under the foregoing authority selectively, and only after having
made its own independent evaluation and investigation with respect to the
experience, credit history and underwriting expertise of the agencies issuing
the obligations to be acquired. The Trust therefore believes that the direct
obligation or other collateral security provided by the top tier issuer will
be a significant factor in helping to assure the safety and soundness of the
investment to the Trust. If such recourse or other collateral security which
the Trust receives in conjunction with an investment issued by a top tier
agency proves insufficient to ensure full and timely performance of the
obligations
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of the issuer under the terms of the investment, the Trust (or an agent or
nominee on its behalf) will have recourse to a lien on the underlying real
property securing the projects financed. If the Trust is required to enforce
its rights to the underlying real property because its recourse to the issuer
or the other collateral security is insufficient, the Trust will be subject to
the same real estate-related risks and uncertainties that apply to real estate
investments generally, which could have a material adverse effect on the value
and performance of the investments. For a description of these potential
risks, See, "INVESTMENT OBJECTIVES, POLICIES AND RISKS--RISK FACTORS--Real
Estate-Related Risks" below.
(c) Agencies Rated "A" or Higher. The Trust is permitted to invest
in construction and/or permanent mortgage loans, or securities backed by
construction and/or permanent mortgage loans, or interests in such loans or
securities, provided that such loans or securities are issued or guaranteed,
as the case may be, by a state or local housing finance agency with a general
obligation rating of "A" or better by S&P (or a comparable rating by another
nationally recognized statistical rating agency, as determined by the
Executive Committee of the Trust) at the time of the acquisition of the
investment by the Trust; and are (i) with full recourse (directly or by way of
full indemnity or guaranty) to such agency's general credit and assets or (ii)
backed by the "moral obligation" of the state in which such agency is located,
in the form of the state's commitment to replenish any insufficiencies in the
funds pledged to debt service on the obligations or similar commitment.
Although a state or local agency which issues or guaranties an obligation to
be acquired by the Trust must have a general obligation debt rating of "A" or
better, there is no requirement that the obligation itself be rated or
ratable. There is no rating requirement for states which provide their "moral
obligation" for such obligations.
As indicated above, the Trust may acquire obligations which are backed by
the "moral obligation" of the state in which the agency is located (without
regard to the credit rating of such state), in lieu of recourse against the
state or local agency. Obligations which are backed by the "moral obligation"
of the related state could include loans from the Trust to the agency,
securities issued by the agency or loans or participation interests in loans
made by the Trust or the agency to the underlying borrower (or securities
backed by a loan made by the agency to the borrower). However, these
obligations would be secured by the state's "moral obligation", rather than by
full recourse against the agency. The state's "moral obligation" could take
the form of a commitment to replenish any insufficiencies in the funds pledged
to debt service on the investment or a commitment to pay any amounts due on
the investment in the event that the revenues from the underlying real
property are insufficient to pay all amounts when due. However, the state's
"moral obligation" would not be a binding, legal obligation of the state to
pay amounts due under the obligations acquired by the Trust and could not be
enforced against the state or its general credit and assets.
Before rating a housing agency's general obligation debt as "A" or
better, S&P has indicated that it must favorably evaluate a number of
criteria, including the state's economic base, the agency's legislative
mandate and the sponsoring state's commitment to housing programs, the
operating performance and management of the agency and earnings quality and
financial strength of the agency. A description of the general obligation
rating criteria used by S&P is attached to this Statement of Additional
Information as Appendix C. As of February 1999, the following state and
municipal housing finance agencies had a general obligation rating of "A" or
better from S&P: Alaska, California, District of Columbia, Florida, Illinois,
Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Jersey, New
Mexico, New York City, Pennsylvania, Rhode Island, Utah, Virginia, West
Virginia and Wisconsin.
There can be no assurance that the general debt obligation rating of an
agency of "A" or better would continue for any given period of time after the
Trust acquires an obligation issued or guaranteed by that agency, or that the
rating would not be revised downward or withdrawn entirely by the rating
entity if, in its judgment, circumstances so warrant. A downgrade in or
withdrawal of the rating of an agency would signify an increase in the risk
that the obligations issued or guaranteed by that agency would not be paid in
accordance with their terms and would be likely to result in a reduction in
the value of the related obligations, except to the extent that the Trust has
obtained other forms of credit enhancement for the investment. The Trust
would not be required to dispose of the obligations issued or guaranteed by an
agency which loses its general obligation rating of "A" or better, except to
the extent required by certain investment restrictions. See "INVESTMENT
OBJECTIVES, POLICIES AND RISKS--INVESTMENT
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RESTRICTIONS" and "INVESTMENT OBJECTIVES, POLICIES AND RISKS--RISK FACTORS--
Investment Restrictions."
Although the agency which issues or guaranties an obligation in which the
Trust invests must have a rating of "A" or better on its general debt
obligations, there is no requirement that the obligation itself be rated or
ratable. While a rating on an obligation does not provide any assurance of
repayment and is subject to revision or withdrawal at any time by the
assigning rating agency, such ratings do provide the prospective investor with
some indication that the proposed structure and revenue analysis for the
obligation satisfy the rating agency's internal criteria for the applicable
rating. However, the Trust intends to undertake transactions under this
authority selectively, and only after having made its own independent
evaluation with respect to the experience, credit history and management
expertise of the agencies issuing or guaranteeing the obligations to be
acquired. Unrated investments may also be less liquid than rated investments.
However, the Mortgage Investments made under this authority, together with all
other Trust investments, would be subject to the SEC requirement which
requires that at least 90% of the value of the Trust's assets be invested in
investments that are readily marketable and convertible into cash within 120
days without a discount from their market value.
The Trust believes that the direct recourse provided by the agency
involved in these investments or the "moral obligation" of the related state
will be a significant factor in helping to assure the safety and soundness of
the investments to the Trust. However, if such recourse proves insufficient
to ensure full and timely performance of the obligations of the issuer under
the terms of the investment, the Trust (or an agent or nominee on its behalf)
will have recourse to a lien on the underlying real property securing the
project financed. If the Trust is required to enforce its rights to the
underlying real property because its recourse against the issuer is
insufficient, the Trust will be subject to the same real estate-related risks
and uncertainties that apply to real estate investments generally, which could
have a material adverse effect on the value and performance of the
investments. See "INVESTMENT OBJECTIVES, POLICIES AND RISKS--RISK FACTORS--
Real Estate-Related Risks."
(d) State Insurance Funds/Programs. The Trust may invest in
construction and/or permanent loans, or securities backed by construction
and/or permanent loans, or interests in such loans or securities, if no less
than the first 75% of such loan or securities is supported by a guaranty of a
state-related agency under a state insurance or guaranty program with a record
of creditworthiness, as evidenced by a rating of the agency or the obligations
issued or guaranteed by such agency, of at least "A-" by S&P, Fitch Investors
Services Inc. ("Fitch"), or Duff & Phelps Inc. ("Duff & Phelps") or at least
"A3" by Moody's at the time of the acquisition of such investment by the
Trust. There can be no assurance that any such rating would continue for any
given period of time after the insurance or guaranty is issued, or that it
would not be revised downward or withdrawn entirely by the rating entity if,
in its judgment, circumstances so warrant. A downgrade in or withdrawal of
the rating would signify an increase in the risk to the Trust associated with
the related investments and would be likely to result in a reduction in the
value of the related obligations. The Trust is not required to dispose of
these investments if the rating of an agency or the obligations issued or
guaranteed by such agency is downgraded or withdrawn, except to the extent
required by certain investment restrictions. See, "INVESTMENT OBJECTIVES,
POLICIES AND RISKS--INVESTMENT RESTRICTIONS" and "INVESTMENT OBJECTIVES,
POLICIES AND RISKS--RISK FACTORS Investment Restrictions."
There is no requirement that obligations acquired under this category be
rated or ratable.
If the state-related agency providing the guaranty for obligations
acquired under this investment authority failed or is unable to meet its
obligations thereunder, or if the guaranty was insufficient to cover all
losses in the event of a default on a construction or permanent loan in which
the Trust invests or which backs securities in which the Trust invests, the
Trust would be subject to the same real estate-related risks and uncertainties
that apply to real estate investments generally, which could have a material
adverse effect on the value and performance of the investments. See,
"INVESTMENT OBJECTIVES, POLICIES AND RISKS--RISK FACTORS--Real Estate-Related
Risks."
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(e) State and Local Government Encouraged Projects Meeting Specified
Underwriting Criteria. The Trust is permitted to invest in construction
and/or permanent loans, or securities backed by construction and/or permanent
loans or interests in such loans or securities, that have evidence of support
by a state or local government or an agency or instrumentality thereof,
provided that the total principal amount of the investments in this category
outstanding from time to time may not exceed 4 percent of the value of all of
the Trust's assets and that all of the following criteria are satisfied: (i)
the loan-to-value ratio of the project may not exceed 60%, the "value" for
such purposes to be determined on the basis of an independent appraisal by a
licensed appraiser acceptable to the Trust, except that a loan-to-value ratio
of up to 75% is permitted if (A) mortgage insurance in an amount that will
cover all losses down to a 60% loan-to-value level has been provided by a
mortgage insurance provider rated at least "A" or better by S&P (or a
comparable rating by another nationally recognized statistical rating agency,
as determined by the Executive Committee of the Trust) or (B) another form of
guaranty or credit support of the Trust's investment which will cover all
losses down to a 60% loan-to-value level and which is provided by a guarantor
rated A or better by S&P (or a comparable rating by another nationally
recognized statistical rating agency, as determined by the Executive Committee
of the Trust) at the time of acquisition by the Trust; or (C) the project
receives the benefit of low income housing tax credits pursuant to section 42
of the IRC in accordance with the standards adopted by the Executive
Committee; (ii) the state or local government or agency or instrumentality
thereof or a foundation exempt from federal income tax under Section 501(c) of
the Internal Revenue Code of 1986, as amended (the "IRC") must make or
facilitate a financial contribution in the project within guidelines adopted
by the Executive Committee of the Trust, such financial contribution to be in
the form of subordinate financing, an interest rate write-down, a donation of
land, an award of tax credits, grants or other financial subsidy, a form of
insurance or guaranty or some other similar contribution within guidelines
adopted by the Executive Committee of the Trust; (iii) the development and
ownership team of the project must have a demonstrably successful record of
developing or managing low-income housing projects, in accordance with
guidelines developed by the Trust; (iv) the underwriter and servicer of the
mortgage loan for the project must have been approved by the Trust; and (v)
the minimum debt service coverage for the project must be at least 1.15, based
upon projections of future income and expenses satisfactory to the Trust.
There is no requirement that the obligations acquired by the Trust under
this category be rated or ratable.
The investments in this category are subject to real-estate related risks
which could have a material adverse effect on the value and performance of the
obligations. See "INVESTMENT OBJECTIVES, POLICIES AND RISKS--RISK
FACTORS--Real Estate-Related Risks."
3. Secured Bridge Loans
The Trust is permitted to invest up to 5% of all the Trust's assets in
Secured Bridge Loans, as part of the privately collateralized mortgage
investments and state and local government-related obligations in which it may
invest up to 30% of its total assets.
Secured Bridge Loans are loans related to single-family or multifamily
housing developments which are eligible to receive and have allocations or
other rights to receive Low Income Housing Tax Credits ("LIHTCs") under IRC
Section 42. Borrowers on LIHTC projects are eligible to receive tax credits
which may be used dollar-for-dollar to offset federal taxes otherwise due,
subject to certain limitations. Sponsors of LIHTC projects frequently sell
ownership interests in their projects to investors who want to receive the
benefits of the LIHTCs. The LIHTCs are available to owners in proportion to
their ownership interests in the development and are provided in substantially
equal annual amounts to owners of the development over a ten year period,
generally commencing in the year in which the units of each building are
available for occupancy. Investors generally agree to pay for their ownership
interests in the development (and, consequently, the LIHTCs) in installments
over the construction, rent-up and later periods, as negotiated on a case by
case basis.
The investor generally makes an initial payment upon admission to the
ownership entity and pays subsequent installments as various events are
achieved, such as lien free completion of construction and achievement of
stabilized
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occupancy for an agreed period of time (usually three to six consecutive
months of occupancy at a specified debt service coverage level). Payment
obligations are generally evidenced by notes or contractual agreements.
Development sponsors generally need the proceeds of the sale of LIHTCs at
or before the time construction commences to make up the difference between
the construction financing and other sources of funds available and the total
development cost of the development. Accordingly, it is customary for
sponsors to obtain bridge loan financing at or prior to the closing on the
construction loan financing to close this gap; the bridge loan financing is to
be repaid from the payments due from the LIHTC investors as the development is
constructed and reaches the achievement levels required by the LIHTC
investors. Unlike other construction financing, Secured Bridge Loans of the
type in which the Trust is permitted to invest are not usually secured by the
underlying development. Instead, such Secured Bridge Loans are secured, as
described below, primarily by the general credit of the issuer or guarantor
and, to a lesser extent, by the LIHTC investors' ownership interests in the
development owner.
The Trust intends to make Secured Bridge Loans in a way which it believes
will minimize the Trust's risks on such loans. The Trust proposes to limit
such loans to loans which on the date of the Trust's acquisition or making of
the loan are:
(a) (i) issued or guaranteed by a state or local agency
designated as "Top Tier" by S&P (or a comparable rating by another nationally
recognized statistical rating agent, as determined by the Executive Committee
of the Trust) with full recourse to the assets and credit of such agency (or
in lieu of such full recourse, secured by such third party credit enhancement
which, in the judgment of management of the Trust, provides security
comparable to full recourse to the assets and credit of such agency, or
(ii) issued (with recourse) or guaranteed by a state or local
agency which has its long term credit rating at the level of "A" or above by
S&P (or a comparable rating by another nationally recognized rating agency
approved by the Trust's Executive Committee) for a Secured Bridge Loan with a
term of longer than 12 months and at the rating level of A-1 or better by S&P
(or a comparable rating by another nationally recognized rating agency
approved by the Trust's Executive Committee) for a Secured Bridge Loan with a
term of less than 12 months;
(b) issued (with recourse) or guaranteed by FHA, Ginnie Mae, Fannie
Mae, Freddie Mac or another entity rated AA or above by S&P (or a comparable
rating by another nationally recognized rating agency approved by the Trust's
Executive Committee) or fully collateralized by obligations issued (with
recourse) or guaranteed by FHA, Ginnie Mae, Fannie Mae, Freddie Mac or another
entity rated AA or above by S&P (or a comparable rating by another nationally
recognized rating agency approved by the Trust's Executive Committee); or
(c) fully collateralized by a letter of credit or other guaranty by a
bank or other financial entity whose credit rating is rated as AA or above by
S&P (or a comparable rating by another nationally recognized rating agency
approved by the Trust's Executive Committee) or a bank with a Thompson
Bankwatch rating of "B" or better.
The Trust will invest in Secured Bridge Loans only in cases where the
Trust is otherwise committed to invest in the development's construction
and/or permanent mortgage loan, except in cases where the development's
permanent loan is less than $1 million or is anticipated to be financed
primarily on a tax-exempt basis, in which event the Trust may make the Secured
Bridge Loan even if the Trust is not committed to make the construction or
permanent loan.
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The credit enhancement mechanisms set forth above may be structured to
provide either an assurance that all scheduled payments under the Secured
Bridge Loans will be made when due or an assurance only of the ultimate
repayment of all amounts due under such loan at maturity or after foreclosure
or other liquidation.
There is no requirement that the Secured Bridge Loan itself be rated or
ratable.
The Secured Bridge Loan will be paid down in a manner approved by the
Trust as capital contributions are made by the LIHTC investors, although not
all of the proceeds of investor payments will be required to reduce the
Trust's loan if the Trust so approves.
Unlike most other assets in which the Trust invests, Secured Bridge Loans
may not be secured by mortgages on real property, are not directly related to
payments on first-lien mortgage loans, and are not necessarily insured or
guaranteed by the federal government or an entity such as Fannie Mae or
Freddie Mac. However, as described above, Secured Bridge Loans will be
guaranteed or credit-enhanced by state housing finance agencies, letter-of-
credit providers or other mechanisms which are of the same credit quality as
those which provide credit enhancement for the privately collateralized
mortgage investments and state and local government-related investments in
which the Trust may invest up to 30% of its total assets.
The borrower's obligation to make principal and interest payments on a
Secured Bridge Loan will not be contingent on the borrower's receipt of
investor payments. However, the development owner may depend on investor
payments to obtain the funds with which to make payments on a Secured Bridge
Loan. Payments to the development owner from its investors in turn may be
dependent on certain factors relating to completion, rent-up, other matters
relating to the LIHTC and otherwise. The Trust expects, however, that its
investments will be made on the basis of the credit of the guarantor or issuer
as described in (a) through (c) above, and to a lesser extent by the LIHTC
investors' ownership interests in the development owner. The
Trust's investment criteria have been designed to enhance the likelihood that
the Trust will invest only in credit-worthy Secured Bridge Loans. The Trust
also believes that any additional risk associated with bridge loans, as
compared to the Trust's other authorized investments, will be offset by the
higher interest rates payable on Secured Bridge Loans.
Presently, the Trust is limited to investing at least 90% of its assets
in investments that are readily marketable and convertible into cash within
120 days without a discount from their market value. Secured Bridge Loans may
not be liquid investments. The authority to invest in Secured Bridge Loans
will not increase the 10% limit on illiquid assets, but it may result in an
increase in the proportion of illiquid investments in the Trust's portfolio.
In evaluating investments in all categories of state and local
government-related obligations described above, the Trust staff will consider,
among other factors: (i) the experience, past performance, credit rating,
competence and managerial and marketing ability of prospective project
developers; (ii) the geographic area; (iii) the location, construction
quality, condition and design of the project; (iv) the projected
loan-to-appraised value ratio and underlying assumptions on which such
projections are based; (v) the current and projected cash flow; (vi) the
potential for capital appreciation; (vii) the occupancy, supply of and demand
for properties of similar type in the vicinity; (viii) the prospects for
liquidity through sale, financing or refinancing of the project; and (ix) such
other factors as become relevant in the course of the evaluation process. In
evaluating such underwriting criteria, the Trust may retain consultants to
assist them in evaluating state and local government investment opportunities.
See, "INVESTMENT OBJECTIVES, POLICIES AND RISKS--RETENTION OF TECHNICAL
CONSULTANTS."
In determining whether to invest in a state or local government-related
mortgage loan or security, the Trust is not limited to investments which have
a rating or which been rated in any particular category by a nationally
recognized statistical rating organization. Although a rating provides no
assurance of repayment and is subject to revision or withdrawal at any time by
the assigning rating agency, ratings do provide the prospective investor with
some indication that the proposed structure and revenue analysis satisfy the
rating agency's internal criteria for the respective rating.
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The Trust will seek to minimize the risk of loss in this connection by
investing only in instruments satisfying other criteria, as outlined above.
The Trust believes that the foregoing state and local government-related
investments provide the Trust with considerable flexibility in creating
investment opportunities for the Trust. In addition to the issues outlined
above, the investments can involve certain risks not present with other
authorized investments. Without requirements for ratings or access to taxing
power, the credit determinations with respect to the proposed state and local
government-related investments could be more difficult to make, and their
credit quality could be lower than that of other investments the Trust is
permitted to make. The state and local government-related investments may
also be less liquid than most other investments authorized for the Trust.
However, the state and local government-related investments, together with all
other Trust investments, would be subject to the SEC's requirement that at
least 90% of the value of the Trust's assets be invested in investments that
are readily marketable and convertible into cash within 120 days without a
discount from their market value. See "INVESTMENT OBJECTIVES, POLICIES AND
RISKS--INVESTMENT RESTRICTIONS" and "INVESTMENT OBJECTIVES, POLICIES AND
RISKS--RISK FACTORS--Redemption." To the extent that state and local
government-related investments are not rated or may not be readily traded in
existing markets, the valuation of these are likely to be less precise than
those of the Trust's other investments.
MORTGAGE INVESTMENTS SUPPORTED BY MORE THAN ONE FORM OF CREDIT ENHANCEMENT
The Trust may also invest in construction and/or permanent loans or
securities or obligations backed by construction and/or permanent loans or
interests in such loans, securities and obligations which are supported by any
combination of two or more of the types of credit enhancement which must
support Mortgage Investments in which the Trust is otherwise authorized to
invest, as described above, as long as all of the principal component of such
loans, or securities or obligations backed by such loans or interests therein
are fully collateralized by one or more of such types of credit enhancement.
The multiple forms of credit enhancement may be combined either concurrently
or sequentially.
PRE-CONSTRUCTION COMMITMENTS
The Trust may enter into pre-construction commitments to provide
long-term financing upon satisfactory completion of a specified project. Such
commitments, commonly known as permanent financing commitments, are often a
precondition to the ability of a developer to obtain a construction loan. The
Trust may receive good-faith deposits for such permanent financing
commitments, but such deposits are not expected to be a major source of Trust
income. In contrast to a company hoping to earn a standby commitment fee
without investment, the Trust will make permanent financing commitments with
the purpose and ability to acquire the Mortgage Investment.
Because complete funding of construction and long-term mortgage loans
requires up to three years after making a financing commitment, the Trust
estimates the amount of funds it expects to have available for investment from
principal payments and prepayments on existing Mortgage Investments, dividend
reinvestment and sales of additional Units to new or existing Participants.
Loan commitments are made after considering reasonable projections of
available funds. At times, the Trust's short-term cash balances may be less
than its outstanding financing commitments. This commitment policy reduces
the amount of assets the Trust would otherwise invest in lower yielding,
short-term investments. The Trust maintains highly liquid government
securities in a segregated account which, in addition to short-term liquid
assets, and amounts projected to be available, is at least equal to
outstanding financing commitments. If, however, a substantial amount of the
funds projected to be available are not in fact received, the Trust would
either borrow funds pursuant to lines of credit previously established with
commercial banks (in accordance with applicable asset coverage requirements)
or sell long-term assets to raise the cash necessary to fund the financing
commitments.
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FORWARD COMMITMENTS
The majority of the Trust's investments are made pursuant to forward
commitments, in which the Trust agrees to purchase investments in or backed by
mortgage loans that have not yet been originated. This type of transaction
requires the Trust to commit funds for future purchases of such investments at
rates which are set at the time of the commitment. With respect to
multifamily mortgage loans, the Trust sets fixed rates for future delivery.
With respect to single-family mortgage loans, the Trust generally sets either
(i) a fixed rate or (ii) a maximum rate that may be adjusted by the mortgagor
prior to the closing of the mortgage loan if market interest rates decline.
In the event market interest rates decline, it may be difficult for the
Trust to get delivery of the single-family and multifamily mortgage loans that
back the Trust's investments. The Trust generally imposes penalties
(generally 1/2 to 4 points) where delivery on a forward commitment is not
fulfilled. Where obtainable, the Trust also includes mandatory-delivery
clauses in its forward commitments on certain obligations secured by mortgages
on multifamily projects. Notwithstanding such penalties and clauses referred
to above, there is no guaranty that the obligations committed to will be
delivered to the Trust.
TEMPORARY INVESTMENTS
The Trust will invest funds temporarily in liquid assets until they can
be placed in Mortgage Investments meeting Trust investment objectives. Such
liquid assets are limited by the Declaration of Trust to: United States
Treasury issues; federal agency issues; commercial bank time certificates of
deposit and savings bank deposits in domestic banks insured by the Federal
Deposit Insurance Corporation (through the Bank Insurance Fund); domestic
savings and loan association deposits insured by the Federal Deposit Insurance
Corporation (through the Savings Association Insurance Fund); bankers
acceptances (drafts or bills of exchange accepted by a bank or trust company
that guaranties payment thereof); commercial paper rated as category A-1 or
P-1 by S&P or Moody's; collateral loans and warehousing agreements (temporary
assignments of mortgage notes or mortgage-backed securities) secured by
mortgages on FHA-insured or VA-guaranteed single-family mortgage or
FHA-insured multifamily projects; and interests (including repurchase
agreements, that is, purchase of securities accompanied by an agreement to
resell the securities at a later date) in United States Government securities
pledged by a bank or other borrower to secure short-term loans from the Trust.
The Trust also may invest funds temporarily in registered investment
companies investing predominantly in United States Treasury issues or federal
agency issues. Investments in other registered investment companies are
restricted as follows:
(1) Such securities acquired by the Trust shall not exceed 3% of the
total outstanding voting stock of any investment company;
(2) The total value of such securities acquired by the Trust in any
one investment company shall not exceed 5% of the Trust's total assets; and
(3) The total value of such securities acquired by the Trust in all
investment companies shall not exceed 10% of the Trust's total assets.
RETENTION OF TECHNICAL CONSULTANTS
The majority of the construction and long-term mortgage loans and
mortgage-backed securities in which the Trust invests have been underwritten
to meet the requirements of HUD, Fannie Mae or Freddie Mac, or have been
underwritten by state or local housing finance authorities based on specified
qualifying loan to value standards. In evaluating certain investments,
however, the Trust may retain consultants to provide site inspections,
appraisal reviews,
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environmental analyses, property management reviews and such other statistical
and factual information as the Trust may deem useful to its evaluation and
investment decision-making. Such consultants would provide such analysis on a
case-by-case basis and only with respect to occasional transactions in
specific proposals. It is anticipated that any such consultants would be
compensated either on an hourly basis or for a set fee for evaluating each
specific proposal.
OTHER POLICIES
If it is feasible and profitable, the Trust may directly service some of
the long-term loans in which it invests. Generally, however, the Mortgage
Investments in which the Trust proposes to invest, whether or not they are
originated by the Trust, will ordinarily be serviced by mortgage banks or
other mortgage servicing institutions, such as savings and loan institutions
or commercial banks, located throughout the United States. Such institutions
are generally compensated for their services at rates that vary from
one-twentieth to three-quarters of one percent (.05%-.75%) per annum,
calculated monthly, on the then current outstanding principal balance in the
case of long-term first mortgage loans, and at rates of 0.125% per annum or
more of the total loan commitment in the case of construction loans.
The Trust is empowered to invest Mortgage Investments backed by projects
anywhere in the United States. The Trust will invest only in Mortgage
Investments which provide yields competitive with those then generally
prevailing in the market taking into consideration all factors relevant to an
appropriate evaluation of risk and return and the overall objectives of the
Trust. Among Mortgage Investments of comparable yield, the Trust will, if
possible, invest in projects in geographic areas in which Participants or
their members are located.
As a risk mitigation strategy, the Trust will from time to time buy or
sell Mortgage Investments in order to prevent fluctuations in the weighted
average maturity of its portfolio, to manage the duration of the portfolio or
to maintain a desirable level of portfolio diversification. Moreover, the
Trust remains free to dispose of Mortgage Investments at any time to meet
objectives of the Trust, generally on the basis of changed circumstances or
market conditions. The short-term liquid assets in which the Trust may
temporarily invest are subject to a very high turnover rate. Fees associated
with the purchase, sale or redemption of such liquid assets are nominal. See
"INVESTMENT ADVISER."
INVESTMENT RESTRICTIONS
The Trust operates under the following restrictions and policies relating
to investment of its assets and activities.
The Trust will not:
(1) concentrate its investments in any industry except the real
estate industry as set forth above;
(2) permit less than 70% of the mortgages and mortgage-backed
securities acquired by the Trust or backing Mortgage Investments acquired by
the Trust to be federally insured or guaranteed or issued or guaranteed by
Fannie Mae or Freddie Mac with respect to the payment of principal and
interest; or
(3) originate or purchase any Mortgage Investment secured by a
project involving new construction or rehabilitation unless the buildings,
structures or other improvements to be built on the real estate subject to
such mortgage will be built or rehabilitated by union labor.
The foregoing policies are fundamental to the Trust and may not be
changed without the approval of the holders of a majority of the Trust's
outstanding Units.
In addition, the Trust will not:
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(1) issue senior securities, except in accordance with clause (9) below;
(2) purchase securities on margin (but the Trust may obtain such
short-term credits as may be necessary for the clearance of
transactions);
(3) sell any securities short;
(4) write put and call options;
(5) underwrite the securities of other issuers except that the Trust may
resell to other financing institutions all or a portion of the
Mortgage Investments acquired by the Trust in transactions exempt
from registration under the Securities Act of 1933, as amended;
(6) purchase or sell real estate (other than real estate mortgage loans
and construction loans) except for real estate acquired through the
foreclosure of mortgage loans and construction loans held by the
Trust;
(7) purchase or sell commodities or commodities futures contracts;
(8) lend any assets of the Trust except as set forth above;
(9) borrow money from banks unless immediately after such borrowing
there is an asset coverage of at least 300% of all borrowings of the
Trust. Not more than fifty percent of the value of the Trust's
assets will be used as security for such borrowings. This borrowing
provision is not for investment leverage, but primarily to
facilitate management the portfolio by enabling the Trust to meet
redemption requests and to make advances on construction loans
securing Mortgage Investments and to meet outstanding Trust
commitment obligations (and, on occasion, to make income
distributions) when available Trust cash is insufficient for such
purposes and the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. Interest paid by the Trust on
borrowed funds will decrease the amount of Trust assets available
for investment;
(10) invest in commodities, commodity contracts, oil, gas or other
mineral leases, or arbitrage transactions; or
(11) invest more than 10% of the value of the Trust's assets in Mortgage
Investments that are not readily marketable and convertible into
cash within 120 days without a discount from their market value.
One effect of the restriction described in clause (11) above is to
prohibit the Trust from investing more than ten percent of the value of its
assets in investments that do not satisfy the liquidity requirement even
though they may otherwise be permitted under the Trust's Declaration of Trust.
RISK FACTORS
The primary risks in investing in Units of the Trust are summarized in
the Prospectus under the caption "INVESTMENT OBJECTIVES, PRINCIPAL STRATEGIES
AND RELATED RISKS--PRINCIPAL INVESTMENT RISKS." The following section contains
a fuller discussion of the risks associated with investing in Units of the
Trust.
Reliance on Management -- Unspecified Investments
The Trustees and officers of the Trust will invest the Trust's assets as
deemed prudent by the Trustees. Investors in the Trust will not have any
specific information with which to evaluate future Mortgage Investments of the
Trust in advance of the Trust's investment or commitment to invest. There can
be no assurance that the Trust will be successful in acquiring Mortgage
Investments that meet the investment objectives and policies of the Trust.
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Fluctuating Interest Rates
While the Trust retains the freedom to sell all or any portion of its
assets if circumstances (e.g., changed market conditions) suggest the prudence
of that course, it will manage its assets with the expectation that despite
major temporary fluctuations in interest rates from time to time, return on
assets over a long term will be satisfactory. Nevertheless, the market value
of the Trust Mortgage Investments and the resulting net asset value of the
Trust portfolio will fluctuate with short-term changes in interest rates.
Generally, when market interest rates rise, the net asset value of the Trust
will decline; Participants who redeem Units in such circumstances will suffer
the resulting loss in value of Trust assets. Conversely, in certain periods
of declining interest rates, Mortgage Investments held by the Trust will
increase in market value but may be prepaid by the various borrowers or other
obligors so that anticipated yields on such investments may not be realized.
Scheduled payments of principal and any prepayments will be reinvested at
prevailing interest rates, which may be less than the rate of interest for the
Mortgage Investments on which such payments are made. In addition, to the
extent the Trust purchases Mortgage Investments at a premium (i.e., an amount
in excess of the principal amount of the asset purchased), partial prepayments
of principal would reduce the yield to the Trust and, in the event of complete
prepayment, the Trust would be unable to recover or recoup the premium.
Redemption
The Trust will from time to time buy or sell Mortgage Investments in
order to prevent fluctuations in the weighted average maturity of its
portfolio, to manage the duration of the portfolio or to maintain a desirable
level of portfolio diversification. Although registered investment companies
generally must value their assets and accept redemption requests daily, the
Trust is permitted to value its assets and accept redemption requests no more
often than quarterly, by virtue of an exemptive order received from the SEC.
The Trust's Board of Trustees has implemented monthly valuations of the
Trust's assets, which enables the Trust to redeem Units on a monthly, rather
than quarterly, basis. Consistent with the Trust's exemptive order and its
redemption procedures (see "REDEMPTION OF UNITS"), the Trust will invest at
least 90% of the value of its assets in investments that are readily
marketable and convertible into cash within 120 days without a discount from
their market value (see "INVESTMENT OBJECTIVES, POLICIES AND RISKS --
INVESTMENT RESTRICTIONS"). It is possible, however--due to changes in
interest rates, the performance of specific properties, or general economic
conditions since monthly as of the close of business at the end of each
calendar month (hereinafter "Valuation Date")] preceding a request for
redemption--for the market value of an investment at the time of its
liquidation to be less than its market value as of the monthly Valuation Date
preceding a request for redemption.
Most of the Trust's assets could be disposed of in a time frame
sufficient to meet monthly redemptions. In the event the Trust were to
receive redemption requests with respect to a particular monthly Valuation
Date in an amount that exceeds the amount of assets that the Trust could
liquidate at market value prior to the applicable redemption date, the Trust
would not be able to satisfy such redemption requests without liquidating
certain of its assets at a discount from their market value. If such
circumstances were to occur, the Trust would be unable to satisfy at least
some of the redemption requests on a timely basis because the Trust would not
liquidate assets at a discount from their market value. Therefore, in
anticipating the availability of funds based on a redemption of Units,
investors should be prepared for the possibility of a delay in the
satisfaction of a monthly redemption request. Such a delay would not,
however, extend more than 120 days beyond the monthly Valuation Date following
the Trust's receipt of the redemption request (except to the extent it were
necessary to liquidate that portion (up to 10%) of the Trust's portfolio not
required to be invested in assets that are readily marketable and convertible
into cash within one hundred twenty days without a discount from their market
value). Redemption is the only means available to the holder of a Unit
wishing to liquidate its interest in the Trust, as the Units may not be
transferred, assigned, pledged or otherwise encumbered. The Trust has never
failed to satisfy any redemption request on a timely basis.
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Limited Resale Market for Certain Types of Mortgage Investments
If for any reason the Trust were required to sell Mortgage Investments
quickly, it may, on occasion, be able to dispose of them only at a discount
from their market value. These constraints relate principally to Mortgage
Investments that are not federally insured or guaranteed or not issued or
guaranteed by Fannie Mae or Freddie Mac or are backed by loans or securities
that are not federally insured or guaranteed or not issued or guaranteed by
Fannie Mae or Freddie Mac. Under the Trust's Declaration of Trust, such
Mortgage Investments may not exceed more than 30% of the Trust's portfolio.
Moreover, to the extent such Mortgage Investments are considered illiquid for
purposes of the Investment Company Act (see "INVESTMENT OBJECTIVES, POLICIES
AND RISKS -- INVESTMENT RESTRICTIONS"), they will be treated as such by the
Trust.
Mortgage Investments which are federally insured or guaranteed or are
issued or guaranteed by Fannie Mae or Freddie Mac are very liquid and an
active secondary market for such investments exists. Prices for these
investments are often publicly quoted. There is no similar secondary market
for Mortgage Investments which are not federally insured or guaranteed or
which are not issued or guaranteed by Fannie Mae or Freddie Mac. A number of
factors constrain the marketability of long-term Mortgage Investments that are
not federally insured or guaranteed or not issued or guaranteed by Fannie Mae
or Freddie Mac or are backed by loans or securities that are not federally
insured or guaranteed or not issued or guaranteed by Fannie Mae or Freddie
Mac. These include the fact that many of these investments are structured in
a "one-off", rather than standardized, manner because they are tailored to the
specific needs of the project to be financed. Since these investments are
tailored in such a fashion, published quotes do not exist and potential
purchasers must be contacted individually. Administrative loan servicing
requirements and costs and other factors restrict the resale market for
single-family mortgage loans to some extent. The large denominations of
Mortgage Investments for multifamily projects and health care facilities
restrict the number of buyers interested in them. In the case of any
long-term Mortgage Investment, the market is apt to be more limited than for
Mortgage Investments of shorter maturity. Required liquidation of long-term
Mortgage Investments in an unfavorable market could result in significant
losses from face value.
The market for construction period Mortgage Investments is affected by
the uncertainties inherent in building construction. If a Mortgage Investment
is sold during the construction period, the purchaser customarily will seek
assurances as to the status of construction, the nature of the permanent
financing commitment and other matters relating to the underlying project.
These and other factors may cause delays in the event a decision is made to
sell construction period Mortgage Investments.
Inflation
Loans and other Mortgage Investments in which the Trust invests generally
do not include any provision giving the lender or issuer the right to require
repayment of principal in advance of maturity except in the case of default.
The rate of inflation in the national economy may from time to time be such
that prevailing interest rates exceed the rates earned on the Mortgage
Investments in the Trust's portfolio. Such circumstances could diminish the
value of the Trust's assets, although continued sales of Units will tend to
mitigate such diminution.
Defaults on Loans
Defaults on loans can occur for a variety of reasons, including those
described below under the caption "INVESTMENT OBJECTIVES, POLICIES AND RISKS -
- - RISK FACTORS -- Real Estate-Related Risks." The Trust may experience
certain losses in the event of default on the loans which directly or
indirectly back the Trust's Mortgage Investments. This is true even for
federally insured or guaranteed loans. Losses on federally insured or
guaranteed loans can occur as a result of: (i) the requirement in some cases
that the holder of a mortgage loan in default generally pay an assignment fee
of 1% when receiving an insurance settlement; (ii) the requirement in some
cases that the holder of the mortgage loan obtain title to the property,
through foreclosure or otherwise, in order to obtain an insurance settlement;
(iii) the fact that federal agencies can, in some cases, settle insurance
obligations by payment in debentures
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rather than in cash; (iv) possible offsets of insurance proceeds against
amounts held by the Trust or mortgage banker; (v) loss of certain interest
payments upon default that are not covered by certain FHA insurance programs;
(vi) costs of foreclosure and related costs; and (vii) other reasons.
For VA-guaranteed loans not included in Ginnie Mae pools, it is possible
that the amount of the loss will exceed VA's maximum loss exposure under its
guaranty. If this were to occur, the Trust would bear the portion of the loss
not covered by VA's guaranty.
The Trust may invest in certain loans or securities which, in addition to
principal and base interest insured or guaranteed by FHA, VA or Ginnie Mae, or
guaranteed by Fannie Mae or Freddie Mac, include separate uninsured
obligations. These investments may consist of (i) federal
government-related, Fannie Mae and Freddie Mac contingent interest mortgage
loans which include separate contractual provisions obligating the borrower to
pay additional interest based entirely on net or gross cash flow and/or net or
gross proceeds upon sale, refinancing or disposition of the project (the
contingent interest) and (ii) mortgage loans that include a right to require
the borrower to repay a mortgage loan prior to the regular maturity date of
the insured mortgage loan. See "INVESTMENT OBJECTIVES, POLICIES AND RISKS --
CONTINGENT INTEREST LOANS" and "INVESTMENT OBJECTIVES, POLICIES AND RISKS --
EARLY REPAYMENT LOANS."
Contingent interest obligations in excess of principal and base interest
are not secured by the mortgaged real property, by any government insurance or
guaranty or by any obligation or guaranty of Fannie Mae or Freddie Mac.
Moreover, in the event of a default under the mortgage loan which results in a
claim under the federal government's insurance or guaranty, or against Fannie
Mae or Freddie Mac's obligation or guaranty, the right to receive the
contingent interest would either be assigned to the federal government agency,
Fannie Mae or Freddie Mac, as the case may be, or would terminate. In
addition, the obligation of the principals of a project owner to pay
contingent interest is generally not a personal obligation of such parties.
There can be no assurance that any project owner or principals thereof will
have sufficient financial resources to pay any contingent interest that may be
due. The Trust expects that it will attempt to secure a contingent interest
obligation by obtaining, where possible, a subordinate mortgage and/or a
security interest in the ownership interest of the principals of the borrower
or other security.
State usury laws establish restrictions, in certain circumstances, on the
maximum rate of interest that may be charged and impose penalties on the
making of usurious loans, including monetary penalties, forfeiture of interest
and unenforceability of the debt. Although the Trust does not intend to make
or invest in mortgage loans charging contingent interest rates in excess of
those permitted by law, there is a risk that interest on contingent interest
mortgage loans could be found to exceed legal limits as a result of
uncertainties in determining the maximum legal rate of interest in certain
jurisdictions, especially with respect to contingent interest. To address
this risk, in circumstances where the Trust invests in contingent interest
mortgage loans, the Trust intends to obtain (i) an opinion of counsel from the
jurisdiction in which the mortgaged property is located stating that, in the
opinion of counsel, the rate of contingent interest does not and will not
exceed the maximum rate of interest allowed by law and/or (ii) a special
endorsement to the title insurance policy, in jurisdictions where obtainable,
insuring the Trust against penalties that may arise from the charging of
interest in excess of the maximum rate of interest allowed by law.
If the Trust obtains a subordinate mortgage or other security to secure
the payment of contingent interest, there can be no assurance that such
subordinate mortgage or other security will provide meaningful protection to
the Trust with respect to any payments due, because rights under such
subordinate mortgage or other security and to the revenues of the project
therefrom will be subordinate to the rights of the first priority lien holder.
The Trust's ability to collect contingent interest in excess of insured
base interest will be dependent also on the economic performance of the
project and will be subject to the risks inherent in investing in real estate.
The economic performance of a project may be affected by a number of factors,
including occupancy levels, defaults by tenants in the payment of rent,
increases in project operating expenses and acts of God, such as earthquakes
and floods.
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With respect to federally insured or guaranteed mortgage loans that
include a right to require the borrower to repay the indebtedness prior to the
regular maturity date of a mortgage loan, the balloon repayment obligation
would not be secured by the federally insured note or mortgage or by any
government insurance or guaranty. It is anticipated instead that such
obligation would be secured by a security interest in the ownership interests
of the principals of the borrower or other security, including, where
obtainable, a subordinate mortgage. Because the obligation to repay the loan
prior to its stated maturity would not be included in the federally insured or
guaranteed note and mortgage, the Trust would not be entitled to obtain
insurance proceeds in the event of non-compliance with a demand for repayment
at such earlier date. If the Trust has obtained a subordinate mortgage to
secure the early repayment of the mortgage loan, the Trust would be able,
subject to compliance with certain conditions, to foreclose on the mortgaged
property, and obtain title (either directly or through an agent or nominee) to
the underlying real property subject to the federally insured first mortgage.
However, even if the Trust obtains a subordinate mortgage or other security,
there can be no assurance that such subordinate mortgage or other security
will provide meaningful protection to the Trust with respect to the early
repayment of the loan, because the rights under such subordinate mortgage or
other security and to the revenues of the project will be subordinate to the
rights of the holder of the first mortgage. The Trust expects that if it is
unable to enforce its right to early repayment, it would continue to hold its
interests in the mortgage loan or the securities backed by such mortgage loan,
the principal and interest of which mortgage loan or securities would remain
federally insured or guaranteed. In such event, a loss could be incurred
because the Trust would have required a higher rate for an investment in a
mortgage loan or mortgage-backed security that was not accompanied by the
right to demand repayment at an earlier date. The risk described in this
paragraph does not apply to "balloon" loans, or securities backed thereby,
that are guaranteed by Fannie Mae or Freddie Mac, because payments on such
loans and securities are guaranteed at the stated early maturity date.
In addition, not all loans or mortgage-related assets in which the Trust
may invest are federally insured or guaranteed or guaranteed by Fannie Mae or
Freddie Mac; Mortgage Investments which are not so insured or guaranteed will
be subject to all the risks inherent in investing in real estate. See
"INVESTMENT OBJECTIVES, POLICIES AND RISKS -- RISK FACTORS--Real
Estate-Related Risks."
Defaults on Secured Bridge Loans
If the issuer of any letter of credit or other form of guaranty which
secures a Secured Bridge Loan fails or is unable to meet its obligations under
such letter of credit or other guaranty, the Trust would be subject to the
risk that LIHTC investors may not make required payments on their obligations
to the development owner as scheduled and also to certain real estate risks
relating to the underlying development. LIHTC investors may not make the
payments for reasons relating to the performance of the development, i.e.,
because the agreed upon circumstances under which the payments would become
due do not occur. In addition, however, the LIHTC investors may not make the
payments as a result of changes in the financial capacity of the LIHTC
investors themselves. In the event that the LIHTC investors do not make
required payments, the Trust may be required to enforce the obligations of the
LIHTC investors under their notes or other payment agreements with the
development owner. Enforcement actions may include foreclosing upon or
otherwise acquiring the defaulting LIHTC investors' ownership interests. As
the owner of such interests in the development owner, the Trust would be
subject to the real estate risks that any development owner would face.
Certain of these risks are described below under the caption "INVESTMENT
OBJECTIVES, POLICIES AND RISKS -- RISK FACTORS--Real Estate-Related Risks."
Ratings
There can be no assurance that a rating that exists when a Trust
investment is made will continue for any given period of time, or that it
would not be revised downward or withdrawn entirely by the rating entity if,
in its judgment, circumstances so warrant. A downgrade in the rating or
withdrawal of the rating would signify an increase in the risk of default on
the related Mortgage Investment and would be likely to result in a reduction
in the value of the investment.
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Lack of Diversification
The Investment Company Act defines a "diversified company" as an
investment company that maintains at least seventy-five percent of the value
of its total assets in, among other investments, securities of any one issuer
limited to an amount not greater in value than 5% of the value of the
company's total assets. In this connection, the Declaration of Trust does not
specify the proportion of the Trust's assets that may be committed to each of
the several types of investments the Trust may make. The Trust plans to
follow a policy of investing no more than 15% of the value of its total assets
in any single Mortgage Investment as of the time of investment. Given the
foregoing definition of a diversified company, the Trust's ability to invest
up to 15% of its total assets in a single Mortgage Investment under this
policy may from time to time result in the Trust's investment portfolio
shifting from nondiversified to diversified and back again, without prior
investor approval. This shift is contrary to Section 13(a)(1) of the
Investment Company Act, absent prior security holder approval. However, the
Trust has obtained from the SEC an exemption from this requirement insofar as
the exemption might be necessary for the Trust to conduct its investment
practices as described above. To the extent the Trust operates as a
nondiversified company, the risk of loss on its investment portfolio will be
increased. See, "EXEMPTIONS FROM SPECIFIC REQUIREMENTS OF THE INVESTMENT
COMPANY ACT" in this Statement of Additional Information.
The terms "diversified" and "nondiversified" as used herein are not
intended to describe the geographical locations or concentrations of
properties backing the Mortgage Investments in the Trust's portfolio. Such
properties are spread throughout the United States and it is the Trust's
intention to maintain such geographical diversity.
Investment Restrictions
Because of certain legal restrictions, the Trust may not invest more than
10% of the value of the Trust's assets in securities or investments that are
not readily marketable and convertible into cash within 120 days without a
discount from their market value. As of December 31, 1998, 2% of the Trust's
net assets were in this category. See, "INVESTMENT OBJECTIVES, POLICIES AND
RISKS--INVESTMENT RESTRICTIONS." Circumstances may arise where the aggregate
of such restricted investments held by the Trust temporarily exceeds the 10%
limitation. For example, the rating of the issuer of a letter of credit,
insurance policy or guaranty related to a privately collateralized investment
held by the Trust, or the rating of a state agency guaranteeing obligations
held by the Trust, may be downgraded or withdrawn, which could in turn result
in the investments being not readily marketable or not convertible into cash
within 120 days without a discount from their market value. To the extent
that the total amount of such securities or investments exceeds 10% of the
value of the Trust's assets, such securities or investments must be liquidated
by the Trust even if the market requires that they be liquidated at a price
that reflects a substantial discount from their market value.
Real Estate-Related Risks
Most of the Trust's Mortgage Investments are (i) federally insured or
guaranteed or are issued or guaranteed by Fannie Mae or Freddie Mac or (ii)
backed by securities, obligations or loans which are federally insured or
guaranteed or are issued or guaranteed by Fannie Mae or Freddie Mac. In
addition, almost all of the Trust's other Mortgage Investments will have some
form of credit enhancement to protect against losses in the event of a
default. However, to the extent that a Mortgage Investment does not have
credit enhancement or if a private entity or a state or local government
entity which provides credit enhancement for a Mortgage Investment fails to
meet its obligations under the credit enhancement in the event of a default
under the underlying mortgage loan, the Trust would be subject to the risks
that apply to real estate investments generally with respect to that Mortgage
Investment. Some of these risks are described below.
Construction Risks. The construction period is an extremely risky phase
of any project development for a variety of reasons. For example, it is
sometimes difficult accurately to estimate prior to the commencement of
construction the total costs of construction and related carrying costs that
will be required in order to complete a project
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and to pay operating expenses, leasing costs and debt service until the
project reaches sustaining occupancy. In addition, the construction period
may be subject to unforeseeable delays and difficulties which may adversely
affect the project and the related construction loan.
The total development costs of a project and its scheduled completion
date are subject to change as construction and operation of a project
progresses. During all stages of development and construction, a developer is
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subject to extensive environmental, building, land use, zoning and other
statutes and regulations administered by various federal, state, county and
local authorities. Such statutory and regulatory requirements (and any
changes in such requirements during construction) may result in increased
costs, delays in construction and/or an inability to complete a project on
schedule and in accordance with development plans. For example, changes in
environmental or other laws may impose or increase restrictions on the use or
operation of a project, may increase certain expenses of a project or may
necessitate potentially expensive changes in the physical configuration of the
property. Changes in federal tax laws may make investment in real estate less
attractive economically and thereby adversely affect real estate values.
Other factors that may result in increased costs, delays in construction
and/or an inability to complete a project on schedule and in accordance with
development plans include, without limitation, cost increases or shortages in,
or the unavailability when needed of, materials, labor and/or services,
construction or labor disputes, delays in construction caused by adverse
weather, casualty and other factors, poor management, delays, unanticipated
costs and difficulties in obtaining lease-up of a project and other unforeseen
occurrences. Such cost overruns and delays may adversely affect the
developer's ability to complete the construction of a project, as well as the
economic viability of a project.
Although the project and the sponsor will be carefully reviewed and
underwritten, there is no assurance that a borrower will have the resources
available to fund the total construction and marketing costs of a project or
will be able to secure secondary or alternative financing of cost overruns or
unanticipated costs. In the event that construction loan proceeds and other
funds available to a borrower are insufficient to pay all such costs, the
project may not reach completion, satisfy any requirements for permanent
financing and/or reach sustaining occupancy, in which event the borrower is
unlikely to be able to repay the loan.
There is no assurance that a borrower will be able to complete the
construction or lease-up of a project as required. Delays may result from a
variety of causes, including, without limitation, the factors discussed above,
despite the developer's contractual obligations as to completion and lease-up.
Any failure to complete the construction or lease-up of a project on schedule
and in accordance with development plans may result in loss of rental income,
loss of permanent financing (if the Trust is providing only construction
financing) or other financial assistance for the project.
Market conditions also may change between the time at which a commitment
is issued or the construction loan is made and the completion of a project,
rendering the project economically unfeasible or anticipated rents
unattainable. In the event that any of the foregoing or other difficulties
occur during the construction period, a borrower may not repay all amounts
advanced under or with respect to a construction loan on a timely basis.
Risks Affecting the Operation of Projects and Repayment of Permanent
Loans. A borrower's ability to make required payments on any mortgage loan
after the completion of construction of a project will be affected by a
variety of factors. These include, but are not limited to, the achievement
and maintenance of a sufficient level of occupancy, sound management of the
project, timely receipt of rental income, increases in rents to cover
increases in operating expenses (including taxes, utility rates and
maintenance costs), and the costs of required repairs resulting from
reasonable wear and tear and casualties and changes in applicable laws and
governmental regulations. In addition, the continued feasibility of a project
may depend in part upon general and local economic factors, the supply and
demand for rental housing in the area in which the project is located,
competition from other rental housing projects, rent controls and profit
controls. There are no assurances that a project owner will be able to
achieve and maintain sufficient rental income in order to pay all operating
expenses and maintenance and repair costs of a project and the debt service on
the
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related mortgage loan on a timely basis. In the event that a project owner is
unable to pay all such costs, expenses and debt service, a default on the
related mortgage loan is likely to occur.
Environmental and Litigation Risks. Certain states impose a statutory
lien for associated costs on property that is the subject of a cleanup action
by the state on account of hazardous wastes or hazardous substances released
or disposed of on the property. Such a lien generally will have priority over
all subsequent liens on the property and, in certain states, will have
priority over prior recorded liens, including the lien of a mortgage. In
addition, under federal environmental law and possibly under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale may be liable for the
costs of cleaning up a contaminated site. Such costs could be substantial.
The imposition of such costs on a project owner may adversely affect such
owner's ability to pay the debt service on a mortgage loan. It is unclear
whether such costs would be imposed on a secured lender such as the Trust or
any secured lender acting on behalf of the Trust in the event that the secured
lender did not actually acquire title to the project. In the event that title
to a project securing a mortgage loan was acquired by the Trust or any lender
acting on behalf of the Trust and cleanup costs were incurred in respect of
the project (or such cleanup costs were imposed upon the Trust as a secured
lender or any secured lender acting on behalf of the Trust even if the Trust
or such other lender did not acquire title to the project), the Trust could
realize a loss.
Any project owner may be vulnerable to potential litigation arising from
public or private disputes about the conduct of its business or the operation
of its project. A project owner may become involved in disputes or
litigation, during construction or in the course of continuing operations, as
to violations of federal, state or local laws, property tax valuations and
assessments, rent or profit controls, the terms of lease agreements with
tenants or any other contract or agreement as to which it is a party or will
become a party in the course of its business operations. Litigation arising
from such disputes could be resolved adversely to the project owner and the
existence of such a dispute or an unfavorable resolution of such a dispute
could adversely affect the ability of a project owner to pay the debt service
on its mortgage loan.
Foreclosure Risks. In cases in which the Trust invests directly in
mortgage loans, it is anticipated that the mortgage loan will be secured by a
deed of trust or mortgage, depending upon the prevailing practice in the state
in which the subject property is located. Foreclosure of a deed of trust may
be accomplished in certain jurisdictions by a non-judicial trustee's sale
under a specific provision in the deed of trust which authorizes the trustee
to sell the property upon any default by the borrower under the terms of the
note or deed of trust. Foreclosure of a mortgage generally is accomplished by
judicial action. The action is initiated by the service of legal pleadings
upon all parties having an interest in the real property. Delays in
completion of the foreclosure occasionally may result from difficulties in
locating necessary party defendants. The borrower may seek bankruptcy
protection in an attempt to delay or avert a foreclosure and/or assert other
defenses to the proceedings. Any bankruptcy filing will, and the assertion of
other defenses may, significantly delay the proceedings and increase the
expenses incurred by the lender in prosecuting the proceedings, and could
result in a reduction of the secured debt in the event of a "cramdown" by a
bankruptcy court. Depending upon market conditions, the net proceeds of the
sale of the property after foreclosure, fix-up and selling expenses may be
less than the Trust's investment.
In some states, after foreclosure and sale, the borrower and foreclosed
junior lienholders are given a statutory period in which to redeem the
property from the foreclosure sale. In some states, redemption may occur only
upon payment of the entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a
statutory right of redemption is to diminish the ability of the lender to sell
the foreclosed property. Consequently, the practical effect of the redemption
right is often to force the lender to retain the property and pay the expenses
of ownership until the redemption period has run.
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MANAGEMENT OF THE TRUST
Under the terms of the Trust's Declaration of Trust, the Board of
Trustees of the Trust has overall responsibility for the management and
policies of the Trust. Between meetings of the full Board, the Executive
Committee of the Trust acts for the Board in managing the Trust's affairs.
The Executive Committee is composed of the Trust's Chairman, Richard Ravitch
(Chairman of the Executive Committee), Union Trustee John J. Sweeney and
Management Trustee Tony Stanley (Vice Chairman of the Executive Committee).
The Executive Committee has all the authority of the Board of Trustees when
the Board is not in session, except to the extent that such authority is
limited by law. The Executive Committee also serves as Nominating Committee
with authority to identify potential new members of the Board of Trustees.
The current Trustees and officers of the Trust and their principal
occupations are as follows:
Position with Principal Occupation(s)
Name, Address, and Age Housing Trust During Past 5 Years
- --------------------- --------------- ------------------------
Richard Ravitch Chairman Formerly President and
350 Park Avenue Chief Executive Officer,
18th Floor Player Relations Committee
New York, New York of Major League Baseball;
age 65 formerly Chairman, Aquarius
Management Corporation
(limited profit housing
project management); formerly
Chairman and Chief Executive
Officer, Bowery Savings Bank
Linda Chavez-Thompson* Union Trustee Executive Vice President,
815 16th Street, N.W. AFL-CIO; formerly Inter-
Washington, D.C. 20006 national Vice President,
age 54 American Federation of State,
County and Municipal
Employees
Arthur A. Coia* Union Trustee General President, Laborers'
905 16th Street, N.W. International Union of
Washington, D.C. 20006 North America
age 55
John E. Cullerton Management Trustee Chairman, Central Pension
55 West Van Buren Street Fund of the International
Chicago, Illinois 60605 Union of Operating Engineers
age 83 and Consultant to the Hotel
Employees and Restaurant
Employees International
Union; formerly Fund Advisor
to Trustees for the Hotel
Employees and Restaurant
Employees International Union
Health, Welfare and Pension
Funds
25
<PAGE>
<PAGE>
Robert A. Georgine* Union Trustee President, Building and
815 16th Street, N.W. Construction Trades
Washington, D.C. 20006 Department, AFL-CIO
age 66
Francis X. Hanley* Union Trustee General President (formerly
1125 17th Street, N.W. General Secretary-Treasurer)
Washington, D.C. 20036 International Union of
age 68 Operating Engineers
Edwin D. Hill* Union Trustee Secretary, International
1125 15th Street, N.W. Brotherhood of Electrical
Washington, D.C. 20005 Workers; formerly
age 61 International Vice President,
International Brotherhood of
Electrical Workers Third
District Office
Frank Hurt* Union Trustee President, Bakery,
10401 Connecticut Avenue Confectionery & Tobacco
Kensington, MD 20895 Workers and Grain Millers
age 60 International Union
John T. Joyce* Union Trustee President, International
815 15th Street, N.W. Union of Bricklayers &
Washington, D.C. 20005 Allied Craftsworkers; Union
age 63 Labor Life Insurance Company
Martin J. Maddaloni* Union Trustee President, United Association
901 Massachusetts Avenue, N.W. of Journeyman and Apprentices
Washington, D.C. 20001 of the Plumbing And Pipe
age 58 Fitting Industry of the
United States and Canada
("UA"); formerly
International Vice President,
UA District 2; formerly
International Representative,
UA; formerly Special
Representative, UA
Michael E. Monroe* Union Trustee General President,
1750 New York Ave., N.W. International Brotherhood of
Washington, D.C. 20006 Painters and Allied Trades
age 48
Andrew Stern* Union Trustee President, Service Employees
1313 L Street, N.W. International Union
Washington, D.C. 20005
age 48
26
<PAGE>
<PAGE>
John J. Sweeney* Union Trustee President, AFL-CIO;
815 16th Street, N.W. Formerly International
Washington, D.C. 20006 President, Service
age 64 Employees International
Union
Richard L. Trumka* Union Trustee Secretary-Treasurer,
815 16th Street, N.W. AFL-CIO, formerly
Washington, D.C. 20006 President, Mine Workers
age 49 of America, United
Terrence R. Duvernay Management Trustee Public Finance division,
4740 Guilford Forest Dr. Legg Mason; formerly
Atlanta, GA 30331 Deputy Secretary of U.S.
age 56 Department of Housing and
Urban Development; formerly
Executive Director of Georgia
Housing and Finance Authority
and Michigan State Housing
Development Authority
Alfred J. Fleischer Management Trustee Chairman, Fleischer-Seeger
5725 Manchester Avenue Construction Corporation;
St. Louis, MO 63110 formerly a Director of the
age 78 National Corporation for
Housing Partnerships of
Washington, D.C.
Walter Kardy Management Trustee President, Specialty
9500 Barroll Lane Contractor's Management, Inc.
Kensington, MD 20895
age 70
George Latimer Management Trustee Chief Executive Officer,
547 West Jackson National Equity Fund (a tax
Suite 601 credit investment company);
Chicago, IL 60661 Professor of Urban Studies,
age 63 Macalster College; Formerly
Director, Special Actions
Office, HUD
Marlyn J. Spear Management Trustee Chief Investment Officer,
500 Elm Grove Road Milwaukee and Vicinity
Room 300 Building Trades United
Elm Grove, WI 53122-0530 Pension Trust Fund; formerly
age 45 Investment Coordinator
Tony Stanley Management Trustee Executive Vice President and
25250 Rockside Road Director, TransCon Builders,
Bedford Heights, OH 44146 Inc. (building construction)
age 65
27
<PAGE>
<PAGE>
Patricia F. Wiegert Management Trustee Retirement Administrator,
1355 Willow Way Contra Costa County
Suite 221 Employee's Retirement
Concord, CA 94520 Association
age 52
Stephen F. Coyle* Chief Executive Formerly Director of the
1717 K Street, N.W. Officer Boston Redevelopment
Suite 707 Authority
Washington, D.C. 20006
age 53
Michael M. Arnold* Executive Vice Formerly Director of Investor
1717 K Street, N.W. President - Relations, AFL-CIO Housing
Suite 707 Marketing Investment Trust
Washington, D.C. 20006
age 59
ElChino Martin* General Counsel Formerly Chief of Staff
1717 K Street, N.W. and Development Counsel,
Suite 707 AFL-CIO Housing Investment
Washington, D.C. 20006 Trust
age 38
James D. Campbell* Chief Investment Formerly Director, National
1717 K Street, NW Officer Partnership for Community
Suite 707 Investment, AFL-CIO
Washington, D.C. 20006 Housing Investment Trust
age 45
Harry W. Thompson* Controller Formerly Deputy Financial
1717 K Street, NW Manager, AFL-CIO Housing
Suite 707 Investment Trust
Washington, D.C. 20006
age 39
Patton H. Roark, Jr.* Portfolio Manager Formerly Assistant Portfolio
1717 K Street, NW Manager, AFL-CIO Housing
Suite 707 Investment Trust
Washington, D.C. 20006
age 32
Union Trustees Georgine, Joyce, Maddaloni and Hill and Management
Trustees Fleischer, Spear and Cullerton are "Class II" Trustees whose terms
expire at the 2000 Annual Meeting of Participants. Union Trustees Coia, Hurt,
Monroe and Sweeney and Management Trustees Duvernay, Stanley and Wiegert are
"Class III" Trustees whose terms expire at the 2001 Annual Meeting of
Participants. Union Trustees Chavez-Thompson, Hanley, Trumka and Stern and
Management Trustees Kardy and Latimer are "Class I" Trustees, whose terms
expire at the 2002 Annual Meeting of Participants. Trustee Ravitch is the
Chairman (a non-classified trustee) with a one-year term expiring at the 2000
Annual Meeting of Participants.
28
<PAGE>
<PAGE>
Those Trustees and officers whose names are marked with an asterisk (*)
may be considered to be "interested persons" within the meaning of Section
2(19) of the Investment Company Act although the Trust does not concede that
such is the case. Each of these Trustees and officers is an officer or
employee of the AFL-CIO, a Labor Organization (as that term is defined in the
Trust's Declaration of Trust) that is a member of the AFL-CIO, or the Trust.
Since February 1, 1992, Stephen Coyle has served as Chief Executive
Officer of the Trust. Mr. Coyle, age 53, served as Director of the Boston
Redevelopment Authority from July 1984 to January 1992. Prior to that, he
served as Chief Executive Officer of John Carl Warnecke & Associates in San
Francisco, a national firm for architecture and urban design. From 1977
through 1980, Mr. Coyle served the Federal Government in Washington, D.C. as
Deputy Under Secretary of the United States Department of Health and Human
Services and Executive Assistant to the Secretary of the United States
Department of Housing and Urban Development. Mr. Coyle earned his Bachelor's
degree from Brandeis University, his Master's degree from the Harvard Kennedy
School of Government, and a law degree from Stanford Law School.
The Trustees have selected Mr. Arnold to be Executive Vice President -
Marketing. Mr. Arnold is 59 years old. He joined the Trust in April 1985 as
Director of Investor Relations after being employed by the AFL-CIO Human
Resources Development Institute (HRDI) since 1969. During his tenure with
HRDI, he held the positions of area representative, regional director,
assistant director and executive director. As executive director during the
six years prior to being employed by the Trust, he was responsible for overall
administration and fiscal affairs and the general supervision of staff located
at the national office in Washington, D.C. and in field offices in 59 major
metropolitan areas of the country. During this period, Mr. Arnold had
extensive experience in working with officers and staff of international,
state and local labor organizations. In 1967-68, Mr. Arnold was manpower
coordinator and labor liaison officer with the Dallas Community Action Agency.
He is a 37-year member and former local union officer of the International
Union of Bricklayers and Allied Craftsworkers, and is also a licensed real
estate broker.
The Trustees have selected Mr. Martin to be General Counsel. Mr. Martin
is 38 years old. He joined the Trust in 1992. From 1992 until 1993, he served
as Special Counsel, when he became Chief of Staff. From 1995 until his
appointment as General Counsel, he served as Chief of Staff and Development
Counsel. Prior to joining the Trust, from 1988 to 1992, Mr. Martin was an
associate in the Real Estate Department of Morrison & Foerster. From 1986
until 1988, he served as law clerk to the Honorable Gabrielle K. McDonald,
U.S. District Court for the Southern District of Texas. Mr. Martin earned his
Bachelor of Arts degree from the University of North Carolina at Chapel Hill
and his Juris Doctor degree from Yale Law School.
The Trustees have selected Mr. Campbell to be Chief Investment Officer of
the Trust. Mr. Campbell is 45 years old. He joined the Trust in 1993 after
serving as Financial Consultant to the Boston Redevelopment Authority from
1990 to 1992. Prior to that, from 1986 to 1989, Mr. Campbell served as Vice
President for Development for Related Companies Northeast. From 1983 to 1986,
he served as Director of the East Cambridge Riverfront Redevelopment Project.
Mr. Campbell earned his Bachelor's degree from Syracuse University and his
Master's degree in City Planning from Harvard University.
Harry W. Thompson, age 39, was appointed Controller in December 1997. Mr.
Thompson joined the Trust in 1991. From 1991 until 1993, he served as Deputy
Financial Manager, when he became Controller. Prior to joining the Trust,
from 1988 through 1991, Mr. Thompson was the Controller for Rosewood
Residential, an apartment developer and their predecessor Property Company of
America. From 1985 to 1988, Mr. Thompson held Asset Manager positions with
CRI Inc. and Shelter Can-American. From 1982 to 1985, Mr. Thompson was on the
audit staff of KMG/Main Hurdman, an international accounting firm. Mr.
Thompson is a certified public accountant and earned his Bachelor of Science
in Business Administration degree, with a double major in professional
accounting and finance, from The American University.
Patton H. Roark, Jr., age 32, was appointed Portfolio Manager in December
1997. Mr. Roark joined the Trust in 1993 as Assistant Portfolio Manager.
Prior to joining the Trust, Mr. Roark, from 1990 to 1993, was a Senior
29
<PAGE>
<PAGE>
Consultant for Price Waterhouse, an international accounting firm. From 1989
to 1990, Mr. Roark was an internal auditor with the Inspector General's office
of the Office of Personnel Management. Mr. Roark is a Chartered Financial
Analyst, Certified Public Accountant and Certified Internal Auditor, and
earned his Bachelors of Science degree in accounting from Shepherd College.
Mr. Arnold, Mr. Martin, Mr. Campbell, Mr. Thompson and Mr. Roark and
their staff are responsible, under the supervision of the Chief Executive
Officer, for the day-to-day administration and operation of the Trust,
including the selection of mortgage and other investments (with the exception
of certain short-term assets--see "Investment Adviser") and communication with
existing and potential investors.
The following table sets forth the aggregate remuneration, including any
deferred, which was paid during 1998 to each executive officer of the Trust
and to all executive officers and trustees of the Trust as a group:
30
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
1998 Compensation Table
NAME OF PERSON, AGGREGATE PENSION ESTIMATED TOTAL
POSITION COMPENSATION OR RETIREMENT ANNUAL COMPENSATION
FROM TRUST<F2> BENEFITS BENEFITS FROM TRUST
($) ACCRUED AS UPON PAID TO
PART OF TRUST RETIREMENT DIRECTORS<F4>
EXPENSES ($) <F3>($) ($)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stephen Coyle<F5>
Chief Executive cannot be not
Officer 152,695 82,068 determined applicable
Michael M. Arnold<F6>
Executive Vice not
President - Marketing 112,691 29,299 59,133 applicable
*In addition, the Trust has an additional 22 employees who received
compensation in excess of $60,000 from the Trust during 1998; these employees
are not involved in the management of the Trust's portfolio.
<F2> Compensation figures represent 100% of each executive officer's
compensation for time devoted to Trust matters. Approximately 30% of Mr.
Coyle's time, 38% of Mr. Arnold's time, 17% of Mr. Campbell's time, 0% of Mr.
Martin's time, 7% of Mr. Thompson's time and 0% of Mr. Roark's time was
devoted to matters relating to the AFL-CIO Building Investment Trust ("BIT").
Mr. Coyle received compensation from BIT Limited Partnership in addition to
the amount set forth above.
<F3> The Internal Revenue Code limits the permissible benefit payments that
may be paid under the Retirement Plan. Consequently, the amounts of
retirement benefits that actually may be paid to individual employees may be
significantly lower than as shown, depending on several factors, including but
not limited to the employee's years of service, level of compensation, and
actual year of retirement.
<F4> Includes compensation from the Trust and all other registered 1940 Act
companies that have a common investment advisor with the Trust, or an
investment advisor that is an affiliated person of the Trust's investment
advisor.
<F5> Aggregate Compensation includes $8,058 of deferred compensation in 1998
under the 401(k) Plan, and excludes compensation deferred in lieu of
participation in the Retirement Plan and interest thereon. Pension or
Retirement Benefits Accrued as Part of Trust Fund Expenses includes $1,350 of
matching funds accrued under the 401(k) Plan and $80,718 of deferred
compensation in lieu of participation in the Retirement Plan. The total amount
of compensation deferred by Mr. Coyle through December 31, 1998 in lieu of
participation in the Retirement Plan, including interest, is $327,146 and the
total amount deferred under the 401(k) Plan through December 31, 1998,
including interest and Trust matching, is $20,630.
<F6> Aggregate Compensation includes $10,000 of deferred compensation in 1998
under the 401(k) Plan, and excludes amounts contributed to the Retirement Plan
on Mr. Arnold's behalf. Pension or Retirement Benefits Accrued as Part of
Trust Fund Expenses includes $1,350 of matching funds accrued under the 401(k)
Plan and $27,949 contributed to the Retirement Plan in 1998. The total amount
of compensation deferred by Mr. Arnold as of December 31, 1998 under the
401(k) Plan, including interest and Trust matching, is $298,977.
31
<PAGE>
<PAGE>
1998 Compensation Table
NAME OF PERSON, AGGREGATE PENSION ESTIMATED TOTAL
POSITION COMPENSATION OR RETIREMENT ANNUAL COMPENSATION
FROM TRUST<F2> BENEFITS BENEFITS FROM TRUST
($) ACCRUED AS UPON PAID TO
PART OF TRUST RETIREMENT DIRECTORS<F4>
EXPENSES ($) <F3>($) ($)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James D. Campbell<F7>
Chief Investment not
Officer 134,207 27,744 23,073 applicable
ElChino Martin<F8> not
General Counsel 139,433 24,373 20,610 applicable
Harry Thompson<F9> not
Controller 112,936 21,815 25,634 applicable
<F7> Aggregate Compensation includes $9,832 of deferred compensation in 1998
under the 401(k) Plan, and excludes amounts contributed to the Retirement Plan
on Mr. Campbell's behalf. Pension or Retirement Benefits Accrued as Part of
Trust Fund Expenses includes $1,350 of matching funds accrued under the 401(k)
Plan and $26,394 contributed to the Retirement Plan in 1998. The total amount
of compensation deferred by Mr. Campbell as of December 31, 1998 under the
401(k) Plan, including interest and Trust matching, is $20,804.
<F8> Aggregate Compensation includes $10,000 of deferred compensation in 1998
under the 401(k) Plan, and excludes amounts contributed to the Retirement Plan
on Mr. Martin's behalf. Pension or Retirement Benefits Accrued as Part of
Trust Fund Expenses includes $1,350 of matching funds accrued under the 401(k)
Plan and $23,023 contributed to the Retirement Plan in 1998. The total amount
of compensation deferred by Mr. Martin as of December 31, 1998 under the
401(k) Plan, including interest and Trust matching, is $101,000.
<F9> Aggregate Compensation includes $10,000 of deferred compensation in 1998
under the 401(k) Plan, and excludes amounts contributed to the Retirement Plan
on Mr. Thompson's behalf. Pension or Retirement Benefits Accrued as Part of
Trust Fund Expenses includes $1,350 of matching funds accrued under the 401(k)
Plan and $20,465 contributed to the Retirement Plan in 1998. The total amount
of compensation deferred by Mr. Thompson as of December 31, 1998 under the
401(k) Plan, including interest and Trust matching, is $87,610.
32
<PAGE>
<PAGE>
1998 Compensation Table
NAME OF PERSON, AGGREGATE PENSION ESTIMATED TOTAL
POSITION COMPENSATION OR RETIREMENT ANNUAL COMPENSATION
FROM TRUST<F2> BENEFITS BENEFITS FROM TRUST
($) ACCRUED AS UPON PAID TO
PART OF TRUST RETIREMENT DIRECTORS<F4>
EXPENSES ($) <F3>($) ($)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Patton H. Roark, Jr.<F10> not
Portfolio Manager 98,151 17,309 13,635 applicable
Richard Ravitch,
Chairman 10,000 0 0 10,000
Arthur A. Coia*,
Union Trustee 0 0 0 0
Linda Chavez-
Thompson,*
Union Trustee 0 0 0 0
Terence R. Duvernay,
Management Trustee 0 0 0 0
Alfred J. Fleischer,
Management Trustee 0 0 0 0
Robert A. Georgine*,
Union Trustee 0 0 0 0
Francis X. Hanley*,
Union Trustee 0 0 0 0
Frank Hurt*,
Union Trustee 0 0 0 0
John T. Joyce*,
Union Trustee 0 0 0 0
Walter Kardy,
Management Trustee 0 0 0 0
<F10> Aggregate Compensation includes $2,860 of deferred compensation in 1998
under the 401(k) Plan, and excludes amounts contributed to the Retirement Plan
on Mr. Roark's behalf. Pension or Retirement Benefits Accrued as Part of
Trust Fund Expenses includes $1,350 of matching funds accrued under the 401(k)
Plan and $15,959 contributed to the Retirement Plan in 1998. The total amount
of compensation deferred by Mr. Roark as of December 31, 1998 under the 401(k)
Plan, including interest and Trust matching, is $21,121.
33
<PAGE>
<PAGE>
1998 Compensation Table
NAME OF PERSON, AGGREGATE PENSION ESTIMATED TOTAL
POSITION COMPENSATION OR RETIREMENT ANNUAL COMPENSATION
FROM TRUST<F2> BENEFITS BENEFITS FROM TRUST
($) ACCRUED AS UPON PAID TO
PART OF TRUST RETIREMENT DIRECTORS<F4>
EXPENSES ($) <F3>($) ($)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
George Latimer,
Management Trustee 1,000 0 0 1,000
Michael E. Monroe*,
Union Trustee 0 0 0 0
Marlyn J. Spear,
Management Trustee 0 0 0 0
Tony Stanley,
Management Trustee 5,500 0 0 5,500
John Sweeney*,
Union Trustee 0 0 0 0
Richard Trumka*,
Union Trustee 0 0 0 0
Patricia F. Wiegert,
Management Trustee 0 0 0 0
All Directors and
Officers as a Group
(23 persons)* $766,613 $202,608 $142,085 $16,500
</TABLE>
Prior to October 1, 1990, the Trust had not established or adopted any
bonus, profit sharing, pension, retirement, stock purchase or other
compensation or incentive plans for its officers and employees. Personnel
(other than the Chief Executive Officer) were provided pursuant to a Personnel
Contract between the Trust and the AFL-CIO, whereby the Trust reimbursed the
AFL-CIO for the AFL-CIO's costs of employing the personnel. While the
Personnel Contract was in effect, the personnel participated in the AFL-CIO
Deferred Compensation Plan, a defined contribution plan, and were subject to
the AFL-CIO Staff Retirement Plan ("Retirement Plan"), a defined benefit plan.
Any amounts contributed by the AFL-CIO on behalf of such personnel pursuant to
the Retirement Plan were reimbursed by the Trust pursuant to the Personnel
Contract. The Trust adopted the Retirement Plan for all of its employees
except for its Chief Executive Officer, effective as of October 1, 1990.
Also, effective October 1, 1990, the Trust adopted the 401(k) Plan described
below for all of its employees including its Chief Executive Officer (and
subsequent Chief Executive Officers).
34
<PAGE>
<PAGE>
THE RETIREMENT PLAN
Under the Retirement Plan, contributions are based on an eligible
employee's base salary. In general, rates are determined actuarially every
other year. The Retirement Plan was funded by employer contributions at rates
of 17.4% of eligible employees' base salaries during the twelve months ended
December 31, 1998. During 1998, the base salaries of Mr. Arnold, Mr.
Campbell, Mr. Martin, Mr. Thompson and Mr. Roark were $160,925, $152,000,
$132,573, $117,767 and $91,889, respectively.
The Retirement Plan is open to employees of the AFL-CIO and other
participating employers which are approved by the Retirement Plan's board of
trustees and that make contributions to the Retirement Plan on their behalf.
Such employees become members of the Retirement Plan on their first day of
employment that they are scheduled to work at least 1,000 hours during the
next 12 consecutive months.
The Retirement Plan provides a normal retirement pension to eligible
employees for life, beginning at age 65. The amount of this pension depends
on salary and years of credited service at retirement. Eligible employees
will receive 3.00 percent of the average of their highest three years'
earnings ("Final Average Salary") for each year of credited service up to 25
years, and 0.5 percent of their Final Average Salary of each year of credited
service over 25 years. Eligible employees must have at least five years of
service to retire and receive a monthly pension. Eligible employees generally
earn credited service toward their pension for each year that they work for a
participating employer.
An eligible employee can also receive full benefits after reaching age
55, if his or her age plus his or her years of service equals 80 or more. It
is also possible for an employee who meets the combination of 80 requirement
to retire after age 50, but in such event benefits would be reduced 4 percent
for each year or portion thereof that the employee is less than 55 years old.
Set forth below is a table showing estimated annual benefits payable upon
retirement<F11> in specified compensation and years of service
classifications. As of the date hereof, Mr. Arnold, Mr. Campbell, Mr. Martin,
Mr. Thompson and Mr. Roark have approximately 14, 6, 6, 8 and 6 credited years
of service, respectively, under the Retirement Plan.
<TABLE>
<CAPTION>
Years of Service
----------------
Final
Average Salary 15<F12> 20<F12> 25<F12> 30<F13> 35<F13>
- -------------- ------ ------ ----- ------- -------
<S> <C> <C> <C> <C> <C>
$ 50,000 $ 22,500 $ 30,000 $ 37,500 $ 38,750 $ 40,000
70,000 31,500 42,000 52,500 54,250 56,000
100,000 45,000 60,000 75,000 77,500 80,000
- --------------------------
<F11> The Internal Revenue Code limits the permissible benefit payments that
may be paid under the Retirement Plan. Consequently, the amounts of
retirement benefits that actually may be paid to individual employees may be
significantly lower than as shown, depending on several factors, including but
not limited to the employee's years of service, level of compensation, and
actual year of retirement.
<F12> 3.00 percent per year up to 25 years.
<F13> 0.5 percent per year for years over 25 years.
</TABLE>
Benefits listed in the table are not subject to any deduction for Social
Security benefits or other offset amounts.
35
<PAGE>
<PAGE>
THE 401(K) PLAN
Under the 401(k) Plan, an eligible employee may agree with the Trust to
set aside up to 15 percent of his or her total compensation, up to a maximum
of $10,000 in 1999. In 1999, the Trust will match dollar-for-dollar the first
$1,450 contributed. The amount set aside by an eligible employee and the
amount of the Trust's matching contribution, if any, will be deposited in a
trust account in the employee's name. Every employee of the Trust is eligible
to participate in the 401(k) Plan provided such employee has reached the age
of 21 and is not a nonresident alien.
When a participating employee terminates his or her employment, retires
or becomes disabled, the employee will be able to receive as a lump sum
payment the salary reduction amounts that were contributed to the trust
account on the employee's behalf, the additional amounts that the Trust
contributed to the trust account on the employee's behalf, plus income (less
the employee's allocated share of expenses) earned on these contributions.
40
<PAGE>
<PAGE>
If the employee continues to work for the Trust, the employee cannot
withdraw these amounts unless the employee has a financial hardship. A
financial hardship is an immediate and heavy financial need for which the
employee has no other available resources, and includes medical expenses, the
purchase of a primary residence, the payment of tuition and related
educational fees and the need to prevent eviction from, or foreclosure on the
mortgage of, the employee's primary residence. The employee will be required
to present evidence of the financial hardship and upon submission of such
evidence may be entitled to withdraw an amount, up to the balance in the
employee's account, to meet the immediate financial need.
The amount in an employee's account must be distributed to the employee
in one lump sum or in periodic installments beginning the April 1 of the year
following the year in which the employee reaches age 70 1/2. Additionally,
these amounts must be distributed within a reasonable time following the
termination of the 401(k) Plan or the termination of the employee's employment.
An employee will be entitled to receive a distribution of the amounts in their
account upon the employee's attainment of age 65.
A participating employee may borrow from his or her account subject to
certain prescribed limitations.
The following table sets forth the amounts paid or distributed pursuant
to the 401(k) Plan in 1998 to the executive officers listed in the
Compensation Table above, and the amounts deferred and accrued pursuant to the
401(k) Plan for the accounts of such individuals during 1998, the distribution
or unconditional vesting of which are not subject to future events.
Name of Individual Amount Paid or Amount Employer
Number of Group Distributed($) Deferred Matching ($)
- ------------------ --------------- -------- ------------
Stephen Coyle -0- 8,058 1,350
Michael M. Arnold -0- 10,000 1,350
James D. Campbell -0- 9,832 1,350
ElChino M. Martin -0- 10,000 1,350
Harry W. Thompson -0- 10,000 1,350
Patton H. Roark, Jr. -0- 2,860 1,350
All executive officers
as a group
(6 persons) -0- 50,750 8,100
36
<PAGE>
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
The following table sets forth the beneficial ownership information as of
February 1, 1999 with respect to each Labor Organization and Eligible Pension
Plan (as those terms are defined in the Trust's Declaration of Trust) known to
the Trust to be the beneficial owner of more than 5 percent (that is more than
92,440.3108 Units) of the Trust's 1,848,806.2153 outstanding Units of
Participation. Because only Labor Organizations and Eligible Pension Plans
are eligible to own Units of Participation in the Trust, no Units of
Participation are owned by any Trustee or officer of the Trust individually.
The beneficial owner set forth below is also the record owner of the Units
specified.
Name and Address Number of Units Percent of Class
- ----------------- --------------- ----------------
California Pension Fund of the
International Union of Operating
Engineers
415 Chesapeake Street, N.W.
Washington, D.C. 20016 102,822.6866 units 5.6%
INVESTMENT ADVISER
The Trust's only independent investment advisor is Wellington Management
Company, LLP ("Wellington Management"). The Trust engaged Wellington
Management in May, 1992 to furnish investment advisory services with respect
to certain of the short-term, liquid assets in the Trust's portfolio
designated by the Trust from time to time. The Trust's Investment Advisory
Agreement with Wellington Management was extended for a period of two years by
a vote of the Participants at the Trust's Annual Meeting in May, 1997 and
amended to include investment advisory services concerning certain of the
intermediate-term, liquid assets in the Trust's portfolio designated by the
Trust from time to time and certain other portfolio analysis services. As of
December 31, 1998, the value of all short-term and intermediate-term assets
managed by Wellington Management was $34,767,314, which represented 1.7% of
the Trust's total net assets at that date.
Wellington Management is a Massachusetts limited liability partnership
and a registered investment adviser. Its principal offices are located at 75
State Street, Boston, Massachusetts 02109. Its Managing Partners are Robert
W. Doran, Duncan M. McFarland and John R. Ryan.
Wellington Management is a professional investment counseling firm that
provides investment services to investment companies, employee benefit plans,
endowment funds, foundations and other institutions and individuals. As of
January 31, 1999, Wellington Management held investment management authority
over approximately $214 billion of assets, including $24.2 billion of cash and
cash-equivalent assets. Wellington Management and its predecessor
organizations have provided investment advisory services to investment
companies since 1928 and to investment counseling clients since 1960.
Under the Investment Advisory Agreement, Wellington Management provides
investment advisory services concerning certain of the short-term and
intermediate-term, liquid assets in the Trust's portfolio (the
"Short/Intermediate Term Assets"). Wellington Management manages the
investment and reinvestment of the Short/Intermediate Term Assets;
continuously reviews, supervises and administers the investment program of the
Short/Intermediate Term Assets; determines the securities to be purchased,
retained and sold (and implements those decisions); renders regular reports to
the Trust's officers and Trustees concerning its discharge of the foregoing
responsibilities, including providing to the Trust's officers within
37
<PAGE>
<PAGE>
2 business days after the last business day of each month (each, a "Valuation
Date") market prices as of the Valuation Date of Short/Intermediate Term
Assets that mature more than 60 days after the Valuation Date; monitors
portfolio investment characteristics; analyzes portfolio performance and
provides to the Trust's officers within 10 business days after each calendar
month end a report regarding such performance for such month; provides
analysis on markets and instruments; provides investment overview and economic
outlook forecasts; provides information and comment on various relevant
regulatory and legal issues; attends meetings of the Trust's Executive
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Committee and Trustees as reasonably requested; supplies the Trust's officers
and Trustees with statistical information and reports; and provides the Trust
with certain portfolio analysis functions and reports including analysis and
reports which may assist the Trust in determining the allocation of assets
within the Short/Intermediate Term Assets. Wellington Management discharges
these and its other duties subject to the oversight of the officers and
Trustees of the Trust and in compliance with the Trust's policies.
Wellington Management renders all of the services described above and
provides the office space, furnishings and equipment, and personnel required
by it to perform those services for the compensation described below.
Wellington Management is authorized to arrange for the execution of
portfolio transactions by selecting brokers or dealers that will execute the
transactions, and is directed to use its best efforts to obtain the best net
results, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution
and operational facilities of the firm involved. Wellington Management may in
its discretion purchase and sell portfolio securities through brokers who
provide it or the Trust with research, analysis, advice and similar services,
and Wellington Management may pay to these brokers, in return for research and
analysis, a higher commission than may be charged by other brokers, provided
that Wellington Management determines in good faith that such commission is
reasonable in terms either of that particular transaction or of the overall
responsibility of Wellington Management, that the total commission paid by the
Trust will be reasonable in relation to the benefits to the Trust over the
long term and that the total commission paid by the Trust is consistent with
commissions paid in comparable transactions.
In selecting a broker for each specific transaction, Wellington
Management has agreed to use its best judgment to choose the broker most
capable of providing the brokerage services necessary to obtain the best
available price and most favorable execution. The full range and quality of
brokerage services available will be considered in making these
determinations. For example, brokers may be selected on the basis of the
quality of such brokerage services related to the requirements of the specific
transaction such as the following; capable floor brokers or traders, competent
block trading coverage, good communications, ability to position, use of
automation, research contracts, arbitrage skills, administrative ability, or
provision of market information relating to the security. Wellington
Management will make periodic evaluations of the quality of these brokerage
services as provided by various firms and measure these services against its
own standards of execution. Wellington Management has agreed that brokerage
services will be obtained only from those firms which meet its standards,
maintain a reasonable capital position and can be expected to reliably and
continuously supply these services.
On occasions when Wellington Management deems the purchase or sale of a
security to be in the best interest of the Trust as well as other clients, to
the extent permitted by applicable laws and regulations, Wellington Management
may, but is under no obligation to, aggregate the securities to be so
purchased or sold in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event, allocation of
the securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by Wellington Management in the manner it considers
to be the most equitable and consistent with its fiduciary obligations.
Under the terms of the Investment Advisory Agreement, Wellington
Management is compensated monthly at the annual rate of 0.16% of the market
value of the Trust's assets under management by Wellington Management, based
upon the average monthly market value of such assets. During the year ended
December 31, 1998, the Trust incurred total investment advisory fees of
$97,625, which represented 0.005% of the Trust's average net assets for such
period. During its last three fiscal years, the Trust incurred total
investment advisory fees of $314,465.
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SALES AND DISTRIBUTION ACTIVITIES
The Director of Investor Relations of the Trust, operating out of the
Trust offices in the District of Columbia, conducts, and manages the other
Trust staff members who conduct, sales and distribution activities for the
Trust. Sales and distribution activities are directed to certain pension
plans and include solicitations in person or by mail or telephone as well as
responding to inquiries concerning the Trust's offering of Units, and the
ministerial and clerical work of effecting sales of Units. Expenses of sales
and distribution of Units in this manner are paid by the Trust pursuant to a
Plan for Distribution adopted by the Trustees and the Participants pursuant to
SEC Rule 12b-1 under the Investment Company Act. Sales and distribution
expenses, including printing of the prospectus and travel costs, for the year
ended December 31, 1998 were $535,613, which represents approximately 0.03
percent of the $2,023,371,045 in net Trust assets as of December 31, 1998. At
its 1998 fall meeting, the Board of Trustees approved a budget of $550,000 for
the Plan of Distribution in 1999 from which non-material increases may be made
by the Board. No material increase in the budget for the Plan for
Distribution will be made without Participant approval.
Under the Plan for Distribution approved by Participants and Trustees,
including all disinterested Trustees, the Trust may finance any activity that
is primarily intended to result in the sale of the Trust's Units and allocable
indirect expenses of the Trust relating to the distribution of Units, subject
to the limitations set forth above, including but not limited to advertising,
office expenses, salaries and other expenses relating to selling efforts, the
printing of prospectuses and reports for other than existing Participants and
the preparation and distribution of advertising material and sales literature.
Each expenditure must be specifically approved in advance by the Chief
Executive Officer or the Chief Investment Officer of the Trust, who will
provide at least quarterly to the Trustees a written report setting forth
amounts expended and the purposes for which the expenditures were made. In
approving the Plan for Distribution in accordance with the requirements of
Rule 12b-1 under the Investment Company Act, the Trustees (including the
disinterested Trustees, none of whom have any direct or indirect financial
interest in the Plan for Distribution or any related agreements) considered
various factors and determined that there is a reasonable likelihood that the
Plan for Distribution will benefit the Trust and its Participants because a
relatively constant flow of funds into the Trust, even at times when asset
values are relatively high, will tend to offset the effect of possible
liquidation effected to obtain cash for redemptions from the Trust when asset
values are relatively low. The Plan for Distribution will continue in effect
until December 31, 1999, unless earlier terminated by vote of a majority of
the Trust's outstanding Units or by a majority of disinterested Trustees. Any
change in the Plan for Distribution that would materially increase the amount
of distribution expense borne by the Trust requires Participants' approval;
any other material change requires approval by the Trustees, including a
majority of the disinterested Trustees. The Plan for Distribution may
continue in effect for successive one-year periods, provided that each
continuance is specifically approved: (a) by a vote of the majority of the
Trust's Trustees; and (b) by the vote of a majority of the Trustees who are
disinterested and who have no direct or indirect financial interest in the
Plan for Distribution or any related agreements. Any agreements relating to
the Plan for Distribution will be terminable upon 60 days written notice
without payment of any penalty by vote of a majority of Trustees who are not
interested persons.
In general, SEC Rule 12b-1, with which the Trust will comply, requires
that such a plan be approved in a specified manner by the holders of voting
securities and Trustees, that quarterly reports of distribution expenses be
made to the Trustees and that the plan be terminable upon specified
conditions.
Of the $535,613 of sales and distribution expenses incurred for the year
ended December 31, 1998, the following amounts were expended on each of the
categories listed below. All such amounts were paid in cash.
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Year Ended
Category December 31, 1998
- --------- -----------------
Printing and mailing of prospectuses
to other than current security holders $8,034
Compensation to sales personnel
(salaries plus fringe benefits) $367,903
Other (includes travel and meeting
expenses, office supplies, consulting
fees and expenses and printing and
mailing of sales literature) $159,676
TOTAL $535,613
No interested person of the Trust or any disinterested Trustee had any
direct or indirect financial interest in the operation of the Plan for
Distribution or related agreements during the year ended December 31, 1998
with the possible exception of Director of Investor Relations Arnold who, if
he were determined to be an interested person of the Trust, would have such an
interest because part of his compensation is covered by the Plan.
PURCHASING UNITS
Only Labor Organizations and Eligible Pension Plans are eligible to own
Units. A Labor Organization means an organization of any kind, any agency,
employee representation committee, group, association, or plan in which
employees participate directly or through affiliated organizations, and which
exists for the purpose, in whole or in part, of dealing directly or through
affiliated organizations with employers concerning terms or conditions of
employment and any employee benefit plan of such an organization, or any other
organization which is, in the discretion of the Board of Trustees, affiliated
with or sponsored by such an organization. An Eligible Pension Plan is a
pension plan constituting a qualified trust under IRC Section 401(a) that has
beneficiaries who are represented by a Labor Organization and the management
of which has the discretionary right to invest funds of beneficiaries without
the direct intervention or control of those beneficiaries.
The price of Units is based on Net Asset Value or NAV. Net Asset Value
for a particular purchase will be determined as of each Valuation Date
following receipt of the purchase order by dividing the value of the Trust's
portfolio plus any cash and other assets (including interest and dividends
accrued but not collected) less all liabilities (including accrued expenses
but excluding capital and surplus), by the number of Units outstanding as of
that Valuation Date.
Whole or fractional Units may be purchased as of monthly Valuation Dates.
A request for purchase of Units must be received by the Trust before the
Valuation Date as of which they are to be issued. A minimum initial purchase
of $50,000 is required. A request for purchase of Units must be accompanied
by cash or by a subscription agreement providing for a cash escrow of the
amount to be invested as of the forthcoming Valuation Date. See "VALUATION OF
UNITS" in this Statement of Additional Information for a discussion of the
valuation methods used by the Trust in determining the market price of its
portfolio assets.
Forms of subscription agreements with banks providing for a cash escrow
pursuant to which escrowed amounts will be held in interest-bearing form are
available from the Trust. There is no sales charge or commission payable in
connection with the purchase of Units or the escrow.
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For additional information about purchasing Units, please see "BUYING AND
SELLING UNITS IN THE TRUST -- PURCHASING UNITS" in the Prospectus.
REDEMPTION OF UNITS
A request for redemption of Units will be honored if it is in writing and
received 15 days or more before the Valuation Date on which the Units are to
be redeemed. Securities may be redeemed in whole or fractional Units.
Payment in satisfaction of duly tendered requests for redemption will be made
by check or wire transfer as soon as practicable after the Net Asset Value of
the Trust is ascertained for the Valuation Date as of which redemption is
effected, but in any event no later than seven business days after the Net
Asset Value has been calculated. It usually takes 7 to 10 business days to
calculate the Trust's Net Asset Value after a Valuation Date.
Upon the agreement of the redeeming Participant, the Trust may tender
securities or mortgages or other Trust assets in partial or full satisfaction
of a duly tendered request for redemption. Such securities, mortgages or
other assets will be treated for redemption purposes as the cash equivalent of
their value on the Valuation Date on which redemption is effected. A
Participant receiving such assets may incur expenses in disposing of such
assets for cash.
Section 22(c) of the Investment Company Act and SEC Rule 22c-1 thereunder
provide that no registered investment company issuing a redeemable security
and no principal underwriter of such company shall sell or redeem any such
security except at a price based on the current net asset value of such
security that is next computed after receipt of a tender of such security for
redemption or of an order to purchase such security. Section 22(e) provides
that no registered investment company shall postpone the date of payment upon
redemption of a redeemable security in accordance with its terms for more than
seven days after the tender of such security for redemption except in certain
limited circumstances. The Trust's redemption policies do not conform to the
foregoing requirements. The Trust has obtained an exemption from generally
applicable redemption requirements on the grounds that the interests of its
Participants will make investment and redemption other than on a quarterly
basis unnecessary and that daily valuation of the Trust's portfolio would be
unduly burdensome. The Board of Trustees has implemented monthly valuations
of the Trust's assets, which enables the Trust to sell and redeem Units on a
monthly, rather than quarterly, basis.
There may be times when a Participant may experience a delay in selling
Units. This could happen if the Trust receives more redemption requests in a
month than it can satisfy by liquidating assets at their market value. The
Trust will not liquidate assets at a discount from their market value in order
to satisfy redemption requests. This delay would not exceed 120 days beyond
the last business day of the month following the Trust's timely receipt of the
redemption request, unless the Trust were forced to liquidate the portion of
the Trust's portfolio (up to 10%) which may be invested in assets that cannot
be sold within 120 days without a discount from market value. The Trust has
never failed to satisfy any redemption request on a timely basis.
For additional information about selling or redeeming Units, please see
"BUYING AND SELLING UNITS IN THE TRUST--SELLING OR REDEEMING UNITS" in the
Prospectus.
VALUATION OF UNITS
The price of Units is based on Net Asset Value as of each monthly
Valuation Date, which is determined by dividing the value of the Trust's
portfolio plus any cash and other assets (including interest and dividends
accrued but not collected) less all liabilities (including accrued expenses
but excluding capital and surplus) as of that Valuation Date by the number of
Units then outstanding.
Valuations of the Trust's short-term assets are prepared by the Trust.
The Trust has retained an independent third-party valuation firm to perform
the monthly valuation of all long-term investments. A summary of the current
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valuation methodology used by the third-party valuation firm, in consultation
with our management, with respect to various categories of investments is as
follows:
Short-Term Investments
Short-Term Investments consisting of repurchase agreements, commercial
paper, bankers acceptances, investment trusts, other investments and
warehousing loans, which mature less than sixty days from the Valuation Date
are valued at amortized cost which approximates value. Short-term investments
which mature more than sixty days from the Valuation Date are valued at the
last reported sales price on the last business day of the month or the mean
between the reported bid and ask price if there was no sale. Short-term
investments maturing more than sixty days from the Valuation Date for which
there are no quoted market prices are valued to reflect current market yields
for securities with comparable terms and interest rates.
Long-Term Investments
Long-Term Investments consisting of mortgage-backed securities, permanent
mortgages, construction loans, participation certificates and other mortgage-
backed obligations are valued using published prices, dealer bids or cash flow
models discounted using market-based discount and prepayment rates, developed
individually for each investment. The market-based discount rate is composed
of a risk-free yield (i.e., a U.S. Treasury Note with a weighted average life
comparable to the security being valued), adjusted for an appropriate risk
premium. The risk premium reflects actual premiums in the marketplace over
the yield on U.S. Treasury securities of a comparable risk and maturity to the
investment being valued as adjusted for other market considerations. On
investments for which involve the construction and permanent financing, value
is determined based upon the total amount of the commitment for the term of
the construction period plus the permanent mortgage loan period. For
investments which involve only construction period financing, the outstanding
principal balance of the underlying loan is used to approximate value,
assuming no decline in credit quality.
Contingent Interest Loans
Contingent Interest Loans. Contingent interest mortgage loans bear a
base rate of interest at a rate below the market rate for non-contingent
interest mortgage loans prevailing at the time the loan was made in return for
the right to receive as additional interest a portion of (i) net cash flow
from operations and/or (ii) proceeds from the sale or refinancing of the
related project. In general, the interest in the early years is lower than
would be the case for non-contingent interest mortgage loans, but increases in
later years as net operating cash flow increases and/or proceeds of a sale or
refinancing are received, and the contingent interest payable in connection
therewith is added to the base interest. The Trust, as holder of the
contingent interest loan or of an interest therein or of a obligation secured
thereby, is entitled to receive additional interest in excess of the base
interest rate. Because the amount of any proceeds from net cash flow cannot
be determined in advance, and the amount of any proceeds from a sale or
refinancing cannot be determined before a sale or refinancing actually occurs,
it is not possible to value the contingent interest feature with precision.
The values of non-contingent mortgage loans are affected primarily by
changes in interest rates and secondarily by the performance of the underlying
property. With regard to contingent interest mortgage loans, however, the
performance of the underlying property becomes a more important determinant of
value.
Contingent interest mortgage loans generally are accounted for by an
estimate of the underlying property's value in those circumstances where no
exchange market exists. It is possible that the exchange value that would
take place between a willing buyer and a willing seller could differ from the
estimated value, and that the difference could be significant. The estimated
value is determined by an appraisal method that discounts the expected cash
flows of the underlying property. During the initial years the investment is
carried at outstanding principal amounts plus accrued interest (assuming no
inherent credit problems with the underlying property). In later years, as
the property matures,
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we may record appreciation or depreciation in the value of the investment
based on whether the performance of the underlying property exceeds or falls
short of expectations. As long as the underlying property is projected to
generate net operating cash flow at a level which would produce interest above
the base rate, the amount of the projected contingent interest obligation is
accruable by us throughout the term of the investment. In no event, however,
will the carrying value of the underlying property exceed its appraised value
at any reporting date.
Determining the value of underlying properties necessarily requires
assumptions and estimates about future events and cash flows of the
properties. The Trust intends to engage a qualified MAI appraiser to perform
the appraisal of underlying property every five years and to place into effect
appropriate procedures to assess the relevance of individual appraisals so
that the Trust may update them annually.
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Privately Collateralized Mortgage Investments; State and Local
Government-related Investments:
(1) Public ratings. Obligations which carry a public rating from one
or more nationally recognized rating agencies are valued to reflect current
market yields as determined by giving effect to the average of quotes obtained
from dealers in such obligations for securities of comparable quality,
interest rates and maturities.
(2) No public rating with recourse to issuer and/or with credit
enhancement. Obligations which do not carry a public rating but are with
recourse to the issuer and/or have the benefit of credit enhancement from a
private or public entity are valued to reflect current market yields as
determined by giving effect to the average of quotes obtained from dealers in
such obligations for securities of comparable yield and term to maturity and
of a quality which, in our determination, is most nearly comparable to
obligations in any one or more of the following categories:
(a) obligations which carry a private rating upon which we are
entitled to rely shall be valued against securities having
comparable public or private ratings;
(b) obligations which are guaranteed or otherwise secured by the
general credit or moral obligation of a state or local government
or an agency or instrumentality thereof shall be compared to other
publicly sold obligations of the particular state or local
government or agency or instrumentality thereof carrying comparable
guaranties or security arrangements;
(c) obligations with respect to which no other publicly sold
obligations issued or guaranteed or otherwise secured by a
particular state or local government or agency or instrumentality
thereof are available (for purposes of determining comparable
quality) will be valued as if they were comparable in quality to
the lowest rated "investment grade" obligations of the particular
issuer with respect to which comparable quotes are available, and
if the only obligations of such issuer with respect to which
comparable quotes are available are of a grade higher than the
lowest rated investment grade, we will make an appropriate
discount from quotes on such obligations to reflect a reduction to
the lowest rated investment grade; or
(d) obligations which have credit enhancement provided through a letter
of credit, insurance or another form of guaranty provided by a
private entity will be valued against other publicly sold obligations
having comparable quality credit enhancement.
(e) obligations with respect to which no publicly sold securities of
comparable quality are found in accordance with the foregoing
guidelines will be valued by management on the basis of the
particular facts and circumstances of the case based on investments
that are comparable with respect to terms, quality and yield.
The averaging of quotes from dealers may be supplemented by application
of the following valuation criteria when, in the opinion of management, the
application of such supplemental criteria is warranted or desirable:
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(i) discounting of expected future cash flows;
(ii) assessing the nature of the issuer or the entity providing credit
enhancement, as applicable, risks it is subject to, historical
patterns of revenue assessment and collection;
(iii) assessing tangible book value and financial condition of the issuer
or the entity providing credit enhancement, as applicable;
(iv) assessing revenue history of the issuer or the entity providing
credit enhancement, as applicable.
Obligations with respect to which a notice of redemption has been issued
will be valued on the basis of their current market yield and yield to
maturity, if we have no reason to believe that payment on the obligations will
not be made at the call date. Any obligations (i) which are in default or
(ii) with respect to which one or more underlying assets are in default and
there is no mortgage insurance or other credit enhancement available to assure
full and timely payment will be valued by management based upon the particular
facts and circumstances of the case.
(3) No public rating without recourse to issuer and without credit
enhancement. Obligations which do not carry a public rating, are without
recourse to the issuer, and are without credit enhancement will be valued by
management on the basis of the particular facts and circumstances of the case
based on investments that are comparable with respect to terms, quality and
yield.
In addition to the valuation methods described above, all investments are
reviewed and appropriate adjustments are made to reflect the effect of income
(collected or accrued), realized and unrealized gains and losses, expenses and
any material impairments in value arising from the specific conditions of
investment (e.g., mortgage in default).
DISTRIBUTIONS AND TAX ISSUES
DISTRIBUTIONS
The Trust, at the end of each calendar month, makes pro rata
distributions of net income earned during the preceding month. Such
distributions are made in cash. Pursuant to an Internal Revenue Service
ruling received by the Trust, a Participant may authorize the Trust
automatically to reinvest any dividends to which the Participant is entitled
in the Trust in exchange for a corresponding amount of Units, calculated at
the Net Asset Value as of the end of the calendar month.
TAX ISSUES
The Prospectus contains information about the federal income tax
considerations applicable to the Trust and certain federal income tax
consequences of ownership of Units. Certain supplementary information is
presented below.
The Trust has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves the Trust (but not Participants) from paying federal income tax
on income which is distributed to Participants and permits net capital gains
of the Trust (i.e., the excess of net capital gains from the sale of assets
held for more than 12 months over net short-term and long-term capital losses)
to be treated as capital gains of the Participants, regardless of how long
Participants have held their Units in the Trust.
Qualification as a regulated investment company requires, among other
things, that (a) at least 90% of the Trust's annual gross income (without
reduction for losses from the sale or other disposition of securities) be
derived from interest, dividends, payments with respect to securities loans,
and gains from the sale or other disposition of securities or options thereon
or foreign currencies, or other income derived with respect to its business of
investing in such
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securities or currencies; (b) the Trust diversify its holdings so that, at the
end of each quarter of the taxable year (i) at least 50% of the market value
of the Trust's assets is represented by cash, U.S. Government securities and
other securities limited in respect of any one issuer to an amount not greater
than 5% of the market value of the Trust's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of
its assets is invested in the securities of any one issuer (other than U.S.
government securities); and (c) the Trust distribute to Participants at least
90% of its net taxable investment income (including short-term capital gains)
other than long-term capital gains and 90% of its net tax exempt interest
income in each year.
The Trust would be subject to a 4% non-deductible excise tax on certain
amounts if they are not distributed (or not treated as having been
distributed) on a timely basis in accordance with a calendar year distribution
requirement. The Trust intends to distribute to Participants each year an
amount sufficient to avoid the imposition of such excise tax.
The Trust may purchase debt securities that contain original issue
discount. Original issue discount that accrues in a taxable year is treated
as income earned by the Trust and is subject to the distribution requirements
of the Internal Revenue Code. Because the original issue discount earned by
the Trust in a taxable year may not be represented by cash, the Trust may have
to dispose of other securities and use the proceeds to make distributions to
satisfy the Internal Revenue Code's distribution requirements. Debt
securities acquired by the Trust also may be subject to the market discount
rules.
PERFORMANCE DATA
The Trust may periodically include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective Participants. Total return figures are based on the Trust's
historical performance and are not intended to indicate future performance.
Average annual total return is determined for Trust Units in accordance with
formulas specified by the SEC.
Average annual total return quotations for the specified periods are
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return is computed assuming all distributions
are reinvested and taking into account all applicable recurring and
nonrecurring expenses.
The Trust also may quote annual, average annual and annualized total
return and aggregate total return performance data for various periods. Such
data will be computed as described above, except that as required by the
periods of the quotations, actual annual, annualized or aggregate data, rather
than average annual data, may be quoted. Actual annual or annualized total
return data generally will be lower than average annual total return data
since the average rates of return reflect compounding of return; aggregate
total return data generally will be higher than average annual total return
data since the aggregate rates of return reflect compounding over a longer
period of time. The Trust's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate such total return on a
hypothetical $10,000 investment in the Trust at the beginning of each
specified period.
On occasion, the Trust may compare its performance to that of the Lehman
Brothers Aggregate Bond Index, Salomon Brother Mortgage Index or other
industry indices or data, which comparisons may be made on a risk-adjusted
basis. When comparing its performance to a market index, the Trust may refer
to various statistical measures derived from the historic performance of the
Trust and the index, such as standard deviation and beta. As with other
performance data, performance comparisons should not be considered indicative
of the Trust's relative performance for any future period.
The Trust's total return will vary depending on market conditions, the
securities comprising the Trust's portfolio, the Trust's operating expenses
and the amount of realized and unrealized net capital gains or losses during
the
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period. The value of an investment in the Trust will fluctuate and a
Participant's Units, when redeemed, may be worth more or less than their
original cost.
GENERAL INFORMATION
SECURITIES OFFERED
Beneficial interests of the Trust are divided into Units representing
equal portions of Trust assets. Rights arising from ownership of Units are
set forth in the Declaration of Trust. The Declaration of Trust can be
amended by vote of a majority of Trustees without any requirements of a vote
by holders of Units. However, the Declaration of Trust provides that,
notwithstanding anything to the contrary contained in the Declaration of Trust
or any amendment thereto, no part of the Trust that equitably belongs to any
investor (other than such part as is required to pay the expenses of the
Trust) is to be used for any purpose other than the exclusive benefit of the
investors. In addition, fundamental investment policies may not be changed
without the approval of holders of a majority of the Trust's outstanding
Units.
Each Unit carries the right to vote to elect a Class of Trustees, to
ratify selection of the auditors for the Trust and to approve changes in
investment policy. Each Unit entitles the holder thereof to participate pro
rata with all other Units in the distribution of assets in any liquidation of
the Trust. No preemptive rights attach to Units; the Trust has the right to
sell or exchange Units without offering the same to the holders of the then
outstanding Units.
The majority of jurisdictions in the United States recognize a trust,
such as the Trust, as a separate legal entity, wholly distinct from its
beneficiaries. In those jurisdictions, the beneficiaries of a trust, such as
the Participants in the Trust, are not liable for the debts or other
obligations of the trust. A few jurisdictions, particularly Texas and Kansas,
do not recognize so-called "business trusts" as separate legal entities and
hold the beneficiaries of such trusts personally liable for actions of the
business trusts. The Trust nevertheless does not expect to exclude otherwise
eligible investors in Kansas and Texas and other such jurisdictions from
investing in Units.
The Declaration of Trust requires that every written undertaking contain
a provision stating that such undertaking is not binding upon any investor
personally and that any person, firm, corporation or association dealing with
the Trustees shall be limited to satisfying any obligation, liability or
covenant of the Trustees out of the Trust property and not out of the personal
property of any investor. In most jurisdictions, no personal liability will
attach to the holders of Units on any undertaking containing such a provision.
However, in those jurisdictions that refuse to recognize the separate status
of trusts such as the Trust, Participants could be held personally liable for
claims against the Trust. These claims could include contract claims where
the provision referred to above is omitted from the undertaking, tort claims,
tax claims and certain other statutory liabilities. If such liability were
ever imposed upon Participants, they would be liable only to the extent that
Trust assets and insurance were not adequate to satisfy the claims.
Units are not transferable and are not assignable. No holder of a Unit
has the authority to pledge the Unit as collateral for any loan. The Trust
does not issue certificates to evidence ownership of Units. In lieu thereof,
Units are issued and redeemed by bookkeeping entry and without physical
delivery of any securities.
The Trust may be terminated at any time by the Trustees after notice in
writing to all Participants. The Trust's Declaration of Trust may be amended
or altered at any time by the Trustees.
Any inquiries or expressions of interest concerning sales transactions
should be referred to the Director of Investor Relations at Trust
headquarters, 1717 K Street, N.W., Suite 707, Washington, D.C. 20006.
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AUDITORS
Arthur Andersen LLP, 1666 K Street, N.W., Washington, D.C., was approved
by the Participants at the 1998 Annual Meeting of Participants as the
independent certified public accountants for the Trust for the period ending
December 31, 1998. Arthur Andersen LLP audits the financial statements of the
Trust at the conclusion of each fiscal year, prepares applicable tax returns
for the Trust and counsels the officers of the Trust with respect to
accounting, taxation and general business matters from time to time.
CUSTODIAN
Bankers Trust Company, New York, New York acts as a bank custodian of
Trust investment securities pursuant to a safekeeping agreement dated February
1, 1998, as amended. For providing such safekeeping services, the Bank
charges the Trust an annual fee of $75,000.
LEGAL MATTERS
Certain legal matters in connection with the offering of Units were
reviewed for the Trust by Swidler Berlin Shereff Friedman, LLP, 3000 K Street,
N.W., Suite 300, Washington, D.C. 20007.
REPORTS TO SHAREHOLDERS
The Trust sends to all Participants at least semi-annually reports
showing the Trust's portfolio and other information. An annual report,
containing financial statements audited by independent auditors, is sent to
Participants each year. After the end of each year, Participants will receive
Federal income tax information regarding capital gains distributions.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information do not
contain all the information set forth in the Registration Statement and the
exhibits relating thereto, which the Trust has filed with the SEC, Washington,
D.C., under the Securities Act of 1933, as amended and the Investment Company
Act, to which reference is hereby made.
FINANCIAL STATEMENTS
Reference is hereby made to the Financial Statements of the AFL-CIO
Housing Investment Trust filed with the Securities and Exchange Commission on
March 5, 1999 as part of the Trust's Annual Report to Participants, which are
incorporated herein by reference.
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APPENDIX A
S&P DEBT RATING DEFINITIONS
Excerpted from S&P "Credit Week", April 18, 1994, page 15.
A S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information,
or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
INVESTMENT GRADE
AAA -- Debt rated 'AAA' has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA -- Debt rated 'AA' has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small
degree.
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A -- Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated 'BBB' is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC', and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation
and 'CCC' the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
BB -- Debt rated 'BB' has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The 'BB' rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied 'BBB-' rating.
B -- Debt rated 'B' has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'BB' or 'BB-' rating.
CCC-- Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The 'CCC'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'B' or 'B-' rating.
CC -- The rating 'CC' typically is applied to debt subordinated to
senior debt that is assigned an actual or implied 'CCC' rating.
C -- The rating 'C' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC-' debt rating. The 'C'
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
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CI -- The rating 'CI' is reserved for income bonds on which no interest
is being paid.
D -- Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The 'D' rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from 'AA' to 'CC' may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
c -- The letter 'c' indicates that the holder's option to tender the
security for purchase may be canceled under certain prestated conditions
enumerated in the tender option documents.
L -- The letter 'L' indicates the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is
federally insured and interest is adequately collateralized. In the case of
certificates of deposit, the letter 'L' indicates that the deposit, combined
with other deposits being held in the same right and capacity, will be honored
for principal and accrued pre-default interest up to the federal insurance
limits within 30 days after closing of the insured institution or, in the
event that the deposit is assumed by a successor insured institution, upon
maturity.
p -- The letter 'p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
* Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.
N.R. -- Not rated.
Debt Obligations of Issuers outside the U.S. and its territories are
rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
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APPENDIX B
S&P STATE AGENCY RATINGS
Excerpted from S&P "Credit Review",
February 7, 1994, pages 59-61.
State housing finance agencies (HFAs) represent an important presence in
the municipal bond market, with over $80 billion of debt outstanding. These
agencies have a 10 to 20-year history of debt issuance and have funded over
one million loans for first-time buyers of single-family homes and over
900,000 units of rental housing. Many agencies have built up a considerable
level of expertise in all areas of finance, development, and portfolio
management. In addition, because of their prudent and conservative approach
and many successful years of bond issuance, many HFAs have built up
significant fund balances either in their own general funds or under various
bond resolutions.
S&P's assessment of the managerial, administrative and financial
resources of agencies is an integral part of the bond rating. Managerial and
administrative capabilities are evaluated based upon meetings with the agency
at its offices, at which time the team of S&P analysts focuses on all systems
and procedures applicable to the bonds being rated. The specific areas of
focus are detailed in the attachment entitled "Checklist for Good Management."
The assessment of these capabilities is important because in addition to their
role as issuer, many agencies lend support to their bond programs depending on
their ability to:
- Perform the role of master servicer and directly service loan
portfolios;
- Manage investment portfolio to provide ongoing credit quality and
meet liquidity needs;
- Directly provide primary mortgage insurance and portfolio loss
coverage, or participate in risk sharing programs; and
- Generate bond cash flows at the time of the rating, and at critical
junctures of bond administration, such as prior to extension of
acquisition periods, exercising open flow of funds, recycling of
prepayments to make new loans and non-pro rata redemptions.
In addition to S&P's recognition of an agency's ability to perform these
responsibilities, additional flexibility in bond programs is often permitted.
For example, with regard to [certain housing bonds], S&P uses a blended rating
approach in determining the appropriate ratings of credit enhancement
providers, depending upon the level of investments the magnitude, duration and
purpose of the credit support, and such factors as the agency's cash flow
strength and portfolio performance. Agencies can also receive flexibility in
investment maturity standards, if they can substantiate their ability to
provide liquidity as needed. In the area of cash flow standards, agencies who
act as master servicer for their programs and demonstrate a strong track
record of good portfolio performance and monitoring, can reduce the lag in
receipt of mortgage payments on `AA' rated transactions from 60 to 30 days.
Other reserves can be reduced as agency financial strength and track
records dictate.
GENERAL OBLIGATION RATINGS. State HFAs may also be assigned their own
general obligation ratings. Although several agencies' debt incorporates a
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general obligation pledge, the rating on that debt has traditionally addressed
the credit strength of the primary security for the bonds, such as the
mortgage portfolio, reserves and investments. When an agency has been
afforded its own general obligation rating, the rating on the bonds reflects
the overall financial strength of the agency first.
TOP TIER STATUS. Top tier status was developed by S&P in 1986 to
recognize agencies with superior managerial and administrative strength who
also showed the willingness and the ability to lend financial support to their
bond programs. The top tier designation affords agencies increased
flexibility and can result in higher ratings than would be attainable based
solely on the credit strength of the bonds being rated. To date, 12 state
HFAs have been designated top tier. Local housing finance agencies are also
eligible, as evidenced by the recent addition of New York City Housing
Development Corporation, to the list of Top Tier agencies. The seven
guidelines for Top Tier status are as follows:
Years Issuing Bonds. S&P looks at the years of experience in active
management of the entire agency in the tax-exempt bond area. Continuity of
management and the agency's ability to resolve difficult situations in the
face of changing legislatures, changing governors and changing economic cycles
over the past 10 to 15 years are evaluated. S&P also focuses on the track
records of the agency, on its programs and overall operations and any lapses
in years issuing bonds.
Unrestricted Fund Balance. S&P will examine two levels: the overall
percentage of total unrestricted funds to total debt, and the percentage of
liquid unrestricted funds to total mortgages outstanding. As guidelines, the
percentages should be in the range of total unencumbered fund balances equal
to 4% of outstanding bonds, of which a minimum of 2% of outstanding mortgages
is liquid (i.e. with maturities of 18 months or less). This 4% ratio cannot
include money pledged to risk share programs, self-insurance funds,
multifamily coinsurance, letter of credit reimbursement obligations or any
other programs where the agency is taking on additional risk, that is not
covered by indentured monies. S&P reviews these ratios annually and factors
in all upcoming risks on issues anticipated for the coming year. Further,
these unencumbered fund balances should be stable over several fiscal years.
Surpluses under specific resolutions are eligible to be counted among agency
fund balances as long as they can be made available as needed. S&P will
examine whether the funds to be considered unrestricted are tangible assets
available for any general agency use. Outstanding debt should include
short-term obligations and overall debt may be reduced, for calculation
purposes, if it is considered to have S&P's lowest degree of risk or highest
ratings.
Administrative Capabilities. In general, S&P will evaluate the
degree of portfolio oversight and computerization of the agency's entire
operations. Established procedures should be in effect requiring periodic
reports to senior staff as well as the board of directors. In addition, an
agency should be able to substantiate its ability to assume servicing of a
given portfolio, if necessary, without delays. Parallel monitoring, including
access to (or duplicates) of actual loan documents, indicate the agency's
level of preparedness. An ideal situation is when an agency maintains
parallel systems with the servicer and can track the loans individually
themselves, on a daily basis instead of relying solely on servicer's reports.
Periodic reviews of the performance of the entire portfolio should be designed
to address problems at an early stage of development.
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Investment Policy. S&P will focus on the investment of unrestricted
fund balances and other funds being counted to meet financial standards for
top tier, including procedures for making investment decisions and monitoring
the investment portfolio. Written investment guidelines are considered
essential to good management. Investment standards should meet S&P's
standards at the `A' rating level. It is viewed positively when an agency is
on line with the trustee, which enables them to have immediate access to all
investment decisions as parallel computer systems are maintained.
Internal Controls and Financial Management. On a regular basis, S&P
will evaluate the agency's ability to produce audited financial reports,
including balance sheets, revenue and expenditure statements, changes in fund
balances, and changes in financial position. Interim statements need not be
audited or include notes to financials, but should be prepared on the same
basis as audited statements. An agency's accounting and/or financial control
area, as indicated on an organizational chart, will be evaluated as a separate
department. Long-term financial planning and the ability to deliver annual
cash flow projections on bond programs is considered favorably.
Portfolio Quality. The performance of an agency's single-family
portfolio is evaluated in comparison to the national and respective state
averages based on Mortgage Bankers Association (MBA) statistics, and compared
to the performance of other state agency portfolios. Other appropriate
measures may be used and the relative risk, including any available offsetting
coverage, will be considered. All loan portfolios, whether under rated or
unrated programs, will be assessed according to S&P's single-family mortgage
loan criteria, as detailed in [S&P's Credit Review, February 7, 1994].
Multifamily portfolios will be addresses according to S&P's multifamily
criteria. Good portfolio performance and close monitoring as outlined in the
"Checklist for Good Management" are earmarks of a top tier agency. Most
agencies do experience portfolio problems from time to time due to economic
and market downturns. This would not preclude an agency from being designated
top tier as long as they demonstrate strong portfolio oversight and the
ability to turn around problem situations.
State Support. S&P will examine any agency's legislative mandate
and review the degree to which a state interacts with the agency's programs
and purpose. S&P looks for a positive relationship where the state is working
with the housing agency to address the state's housing needs. Top tier
agencies should be able to demonstrate strong state support for its programs.
Past appropriations or expected future appropriations would be considered
evidence of state government support. As mentioned previously, S&P is
especially concerned about potential threats to agency fund balances. S&P
should be notified immediately of any such event. S&P's general obligation
group will assist in evaluating the degree of state involvement and financial
control of its housing finance agency. As part of the top tier review, S&P
may meet with members of state government, as well as the agency's board, to
better understand the interaction among the agency, state governments and its
board.
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APPENDIX C
S&P STATE HOUSING FINANCE AGENCY G.O. DEBT CRITERIA
From S&P Creditweek, February 7, 1994
A state housing finance agency (HFA) G.O. rating is a comprehensive
assessment of the agency's ability to meet its general obligations. The
diverse nature of state HFAs has led S&P to develop a "top-down" analytical
approach that takes market, as well as agency-specific, risks into account
when evaluating how an agency generates revenue and what factors could
adversely affect its ability to meet G.O. debt service.
One might expect S&P's analysis of a state HFA to be analogous to its
analysis of a financial institution, such as a commercial thrift. However,
the institutions are quite different. Thrifts have experienced wide
mismatches between the maturities of assets and liabilities, which led to
substantial losses in the 1980s. They have registered losses, reflecting
severe asset quality problems. In addition, thrifts have depositors and make
lending decisions based on profit and dividends for shareholders.
Unlike thrifts, state HFAs have the luxury of matching the maturities of
their assets and liabilities by issuing tax-exempt debt, thereby minimizing
their interest rate exposure. Agency assets consist primarily of mortgage
loans for single-family homeownership and rental housing for low- and
moderate-income individuals and families. The relatively low tax-exempt
interest rates and access to federal, state, and local housing assistance
programs provide the necessary subsidy to create high-quality, below-market-
rate loans. In addition, state HFAs serve the public and, therefore, are
answerable to state legislatures. The public nature of state HFAs makes the
autonomy of their management and security of general fund balances an
important credit consideration.
S&P evaluates the capacity and willingness of state HFAs to repay their
G.O. debt by examining four basic analytical areas:
- State economy,
- Legislative mandate,
- Management,
- Earnings quality and financial strength.
THE ECONOMY
The state's economic base is a critical element in determining how the
housing market will perform and has a direct impact on the agency's financial
performance. The general characteristics and strengths of an agency are
assessed relative to both local and national economic factors. This includes
evaluating the impact of changes in demand for housing, the impact of changing
regulatory and legislative environment for low- and moderate-income housing,
and the state's dependence on specific industries and how that may affect the
agency's mortgage portfolio.
The key economic factor in S&P's analysis is the demand for the state's
housing stock. This is directly affected by the employment base in the region
and the desirability of the area to current and potential employers and
residents. Therefore, factors to be considered include:
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- Composition by employment sector--manufacturing, trade,
construction, services, government and agriculture;
Concentration in major employers or reliance on particular
industries;
- Employer commitment to the state--importance of state facilities
and employees to the overall strategy of the employers, business
development plans, age of plant, and industry prospects;
- Employment trends and quality of the local labor force; and
Regional economic patterns to assess relative gains in employment
and income growth.
LEGISLATIVE MANDATE
The importance a state government places on housing--both homeownership
and rental--can be a significant rating factor. S&P needs to be assured that
the long-term viability of the agency has the full support of the governor and
state legislature. S&P looks for security of agency fund balances and
continued management autonomy. In many instances, however, much of the
initial funding for the agencies may have been provided by the state and key
members of the agencies may have been appointed by the governor or the
legislature.
Unlike commercial banks, mortgage finance corporations, and savings and
loans, state HFAs face political pressures. Therefore, S&P prefers to see
lending decisions insulated from the political process.
The key to this analysis is the ability to identify detractors of the
authority, if there are any, and find bipartisan support for the authority's
programs. This can be demonstrated by a history of legislative approvals of
annual budgets, special programs, additional funding, housing legislation, and
so forth. Also, the autonomy of the management team, ideally, should be
unaffected by gubernatorial and legislative elections. The agency also should
anticipate the housing needs of the legislatures' constituents and continue to
develop programs to address them.
MANAGEMENT
S&B initially assesses the operating performance of the state HFA under
consideration, focusing on organization, philosophy, strategies, and
administrative procedures. The agency should have a long track record so S&P
can assess the continuity of management and the agency's ability to resolve
difficult situations over its operating history. S&P also evaluates the
agency's administrative capabilities as to degree of portfolio oversight, loan
servicing capability, planning procedures, and computerization. This analysis
incorporates S&P's "Top-Tier" guidelines. The Top Tier designation is the
recognition of an agency's history of superior portfolio management and
underwriting, depth of financial resources, prudent investment policies, and
other characteristics.
Next, financial management is considered. Historical financial
performance, as well as the experience and qualifications of financial
personnel and overall management, all have an impact on the bottom line.
Major aspects of financial management that are considered include the
structure of debt, knowledge of and response to interest rate movements,
management of cash and other assets, and financial reporting. Although some
aspects of financial management, such as cash flow generation, may be
contracted out, effective management includes active review and oversight of
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all financial operations. Reliance on financial advisers without a strong
knowledge of the intricacies of financing techniques are viewed negatively.
S&P looks at the methodology used by management in evaluating interest
rate risk, its tolerance for such risk, and the degree to which it measures
and reacts to interest rate changes. This has been increasingly important in
the current interest rate environment. Interest rates directly affect the
competitiveness of the agency's product--mortgages. The ability to issue tax-
exempt debt allows an agency to finance mortgages to first-time home buyers at
rates below the conventional market. Therefore, the spread between tax-exempt
and taxable yields directly affects the agency's ability to provide below-
market mortgage rates.
S&P also focuses on the investment of fund balances, both restricted and
unrestricted, as well as bond funds. S&P reviews the amount of funds being
invested, who manages the money, how daily investment decisions are made, and
what type of guidelines are in place. The agency's investments should meet
S&P's standard permitted investment guidelines, as well as be rated as high as
the agency's G.O. rating.
A state HFA's accounting quality, both historical and current, is
reviewed. This includes the quality of external auditor's opinion, use of
generally accepted accounting principles, the impact of accounting for mergers
and acquisitions, asset and liability valuations, recognition of income,
pension liabilities, and accounting for asset sales and hedge transactions.
EARNINGS QUALITY & FINANCIAL STRENGTH
The assessment of earnings quality and financial strength is important in
determining an appropriate credit rating. Financial performance for the past
five years is reviewed, with emphasis placed on any notable fluctuations. A
premium is placed on consistency of performance. However, one bad year is not
necessarily a negative factor, unless it signifies the beginning of a
permanent shift.
S&P uses income statement analysis to evaluate revenue sources, cost
controls, and profitability in tandem with a balance sheet analysis of
liquidity, capitalization, and asset quality. Both approaches require further
evaluation of an agency's cash accumulation levels, types of investments,
interfund borrowing, historical use of debt, loan-loss reserves, real estate
owned, net charge-offs, equity and unrestricted fund balances. In addition,
S&P reviews the most recent budgets of the state HFA, relying on the
aforementioned income statement and balance sheet analysis.
S&P also continues to evaluate the quality of the agency's mortgage
collateral. The focus is on portfolio size, dwelling type, loan types,
payment characteristics, mortgage insurance and guaranties, loan underwriting
criteria, and location. The agency's loan portfolio performance is measured
against comparable state agency and Mortgage Bankers Association delinquency
statistics.
While financial performance is important it must be viewed in conjunction
with the other rating factors--the economy, management, and the agency's
relationship with the state. However, analysis of an agency's financial
performance is essential in determining the capacity of a state HFA to repay
its G.O. debt.
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THE FUTURE
S&P believes many state HFAs have the capacity to issue debt rated based
on their G.O. pledges. S&P already has used this comprehensive analysis to
evaluate the ability of an agency's capital base to absorb loan losses, as
well as to determine whether the agency's assets are of sufficient rating
quality and liquidity to support the G.O. rating. That agency was the Alaska
Housing Finance Corp., which in 1991 was the first housing agency to receive a
rating based solely on its G.O. pledge.
The G.O. rating has been used by state HFAs to lend support to financings
that may not have been ratable relying on the underlying collateral alone.
Also, the rating allows an HFA to hedge against negative arbitrage by issuing
commercial paper to finance mortgage warehousing activities.
In the future, the rating may be used in conjunction with HUD's
anticipated risk-sharing program. The regulations provide for streamlined
state agency qualification for those agencies with G.O. debt rated 'A' or
higher. However, it is important to note that, although many agencies have
rated G.O. debt, many of the ratings are based on the underlying collateral
and not the G.O. of the agency itself.
A G.O. rating also brings with it the added burden of better disclosure
and more uniform accounting practices. For example, commercial paper ratings
required a minimum of quarterly reporting to S&P to maintain the outstanding
ratings. Therefore, state HFAs must be mindful of the additional
responsibility a G.O. rating confers and how that responsibility may affect
their housing programs.
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APPENDIX D
THOMSON BANKWATCH RATING CHARACTERISTICS
A Company possesses an exceptionally strong balance sheet and earnings
record, translating into an excellent reputation and very good access to
its natural money markets. If weakness or vulnerability exists in any
aspect of the company's business, it is entirely mitigated by the
strengths of the organization.
A/B Company is financially very solid with a favorable track record and no
readily apparent weakness. Its overall risk profile, while low, is not
quite as favorable as for companies in the highest rating category.
B A strong company with a solid financial record and well received by its
natural money markets. Some minor weaknesses may exist but any
deviation from the company's historical performance levels should be
both limited and short-lived. The likelihood of a problem developing is
small, yet slightly greater than for a higher-rated company.
B/C Company is clearly viewed as a good credit. While some shortcomings are
apparent, they are not serious and/or are quite manageable in the short-
term.
C Company is inherently a sound credit with no serious deficiencies, but
financials reveal at least one fundamental area of concern that prevents
a higher rating. Company may recently have experienced a period of
difficulty, but those pressures should not be long-term in nature. The
company's ability to absorb a surprise, however, is less than that for
organizations with better operating records.
C/D While still considered an acceptable credit, the company has some
meaningful deficiencies. Its ability to deal with further deterioration
is less than that for better-rated companies.
D Company's financials suggest obvious weaknesses, most likely created by
asset quality considerations and/or a poorly structured balance sheet.
A meaningful level of uncertainty and vulnerability exists going
forward. The ability to address further unexpected problems must be
questioned.
D/E Company has areas of major weakness which may include funding and/or
liquidity difficulties. A high degree of uncertainty exists as the
company's ability to absorb incremental problems.
E Very serious problems exist for the company, creating doubt as to its
continued viability without some form of outside assistance - regulatory
or otherwise.
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