<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
INVESTORS REAL ESTATE TRUST
--------------------------
(Exact name of registrant as specified in governing instruments)
12 SOUTH MAIN STREET
MINOT, ND 58701
(Address of principal executive offices, including zip code)
----------------------
TIMOTHY P. MIHALICK
12 SOUTH MAIN STREET
MINOT, ND 58701
(Name and address of agent for service)
Copies of communications to:
THOMAS A. WENTZ, JR., ESQ.
PRINGLE & HERIGSTAD, P.C.
P.O. BOX 1000
MINOT, ND 58702-1000
(701) 852-0381
FAX (701) 857-1361
----------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable on or after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, check the following box. /X/
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of securities Amount to be Proposed Maximum Proposed Maximum Amount of
to be registered registered offering price aggregate offering registration fee
per unit price
- ------------------- ---------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Investors Real 1,000,000 shares $7.85 per share $7,850,000.00 $1,570.00
Estate Trust Shares aggregate offering
of Beneficial price
Interest
</TABLE>
The registrant hereby amends this registration statement on such dates or
date as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
I
<PAGE>
Cross Reference Sheet
Part I. Information Required in Prospectus
<TABLE>
<CAPTION>
Page Location In
Item This S-11 Filing
- ---- ----------------
<S> <C>
1 Forepart of Registration Statement and Outside Front Cover
Page of Prospectus......................................................I
2 Inside Cover Page of Prospectus.........................................N/A
3 Summary Information, Risk Factors and Ratio of Earnings to
Fixed Charges.....................................................8 to 19
4 Determination of Offering Price..........................................22
5 Dilution.................................................................22
6 Selling Security Holders................................................N/A
7 Plan of Distribution.....................................................22
8 Use of Proceeds....................................................23 to 25
9 Selected Financial Data.............................................25 & 26
10 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................27 to 36
11 General Information as to Investors Real Estate Trust..............36 to 39
12 Policy with Respect to Certain Activities..........................39 to 41
13 Investment Policies of Investors Real Estate Trust..................41 & 42
14 Description of Real Estate.........................................42 to 47
15 Tax Treatment of IRET and Its Security Holders.....................52 to 60
16 Market Price Of and Dividends on IRET's Shares of Beneficial
Interest.........................................................64 to 66
17 Description of IRET's Securities....................................66 & 67
18 Legal Proceedings.......................................................N/A
19 Security Ownership of Certain Beneficial Owners
and Management...................................................67 to 69
20 Directors and Executive Officers...................................67 to 69
21 Executive Compensation.............................................70 to 74
22 Certain Relationships and Related Transactions.....................70 to 74
23 Selection, Management and Custody of IRET's Investments..................74
24 Policies with Respect to Certain Transactions............................74
25 Limitations of Liability...........................................75 to 76
26 Financial Statements and Information..............................82 to 126
27 Interests of Named Experts and Counsel...................................77
28 Disclosure of Commission Position on Indemnification for Securities
Act Liabilities........................................................75
Part II. Information Not Required in Prospectus
<CAPTION>
Item
- ----
<S> <C>
30 Other Expenses of Issuance and Distribution.............................127
31 Sales to Special Parties................................................127
32 Recent Sales of Unregistered Securities.................................127
33 Indemnification of Directors and Officers...............................128
34 Treatment of Proceeds from Stock Being Registered.......................128
35 Financial Statements and Exhibits................................128 to 130
36 Undertakings......................................................130 & 131
</TABLE>
II
<PAGE>
Prospectus
INVESTORS REAL ESTATE TRUST
12 South Main Street
Minot, ND 58701
(701) 852-1756
1,000,000 SHARES OF BENEFICIAL INTEREST
$7.85 PER SHARE
-------------------
<TABLE>
<CAPTION>
THE OFFERING: Per Share Total
--------- ----------
<S> <C> <C>
Public Price $7.85 $7,850,000
Selling Commission $ .63 630,000
----- ----------
Proceeds to IRET $7.22 $7,220,000
</TABLE>
The offering price may be higher than the market price of our shares on the
day of purchase.
TRADING SYMBOL: NASDAQ SmallCap Market-SM- - IRETS
THE COMPANY: We are a Real Estate Investment Trust formed in 1970 and own
apartment and commercial buildings in North Dakota and nine adjoining states.
RISKS: This investment involves material risks and there is no guarantee of
return on investment. See "Risk Factors" beginning on page 12.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES,
OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
These shares will be offered for sale by various securities broker-dealers
who are members of the National Association of Securities Dealers, Inc., and
agree to participate in this offering.
November ____, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Prospectus Page
---------------
<S> <C>
SUMMARY OF THE OFFERING....................................................1-5
THE COMPANY..................................................................6
BUSINESS OBJECTIVES..........................................................7
Portfolio Mix...........................................................7
Leverage................................................................7
AVAILABLE INFORMATION CONCERNING IRET........................................7
Securities and Exchange Commission......................................7
Reports to Security Holders.............................................8
Incorporation by Reference..............................................8
RISK FACTORS.................................................................8
Price of Shares Arbitrarily Determined..................................8
High Leverage...........................................................9
Failure to Qualify as a Real Estate Investment Trust....................9
Best Efforts Sale.......................................................9
Business Environment....................................................9
Risks Related to Mortgage Lending......................................10
Relationship with Advisor..............................................10
Conflict of Interest...................................................10
Environmental Liability................................................11
Competition............................................................11
Liquidity..............................................................12
Front-End Fees.........................................................12
COMPENSATION TABLE..........................................................12
CONFLICTS OF INTEREST.......................................................13
Transactions with Affiliates and Related Parties.......................14
Compensation to the Advisor and Conflicts of Interest..................14
Competition by the Trust with Affiliates...............................14
Non-Arm's Length Agreements............................................15
Lack of Separate Representation........................................15
DETERMINATION OF OFFERING PRICE.............................................15
DILUTION....................................................................15
PLAN OF DISTRIBUTION........................................................15
WHO MAY INVEST..............................................................16
USE OF PROCEEDS.............................................................16
SELECTED FINANCIAL DATA - ANNUAL............................................18
</TABLE>
<PAGE>
<TABLE>
<S> <C>
TWO YEAR SELECTED FINANCIAL DATA - QUARTERLY RESULTS........................19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................20
General................................................................20
Three Months Ended July 31, 1998 ......................................20
Fiscal Year 1998 Compared to Fiscal Year 1997..........................21
Fiscal Year 1997 Compared to Fiscal Year 1996..........................27
GENERAL INFORMATION AS TO INVESTORS REAL ESTATE TRUST.......................29
Organization of Iret...................................................29
Governing Instruments of IRET..........................................29
Independent Trustees...................................................30
Shareholder Meetings...................................................31
STRUCTURE OF IRET...........................................................31
POLICY WITH RESPECT TO CERTAIN ACTIVITIES...................................32
To Issue Senior Securities.............................................32
To Borrow Money........................................................32
To Make Loans To Other Persons.........................................33
Mortgage Loans Receivable..............................................33
To Invest in the Securities of Other Issuers for the Purpose of
Exercising Control...............................................33
To Underwrite Securities of Other Issuers..............................33
To Engage in the Purchase and Sale (or Turnover) of Investments........33
To Offer Securities in Exchange for Property...........................33
To Repurchase or Otherwise Reacquire Its Shares or Other Securities....34
To Make Annual and Other Reports to Shareholders.......................34
INVESTMENT POLICIES OF IRET.................................................34
Investments in Real Estate or Interests in Real Estate.................34
Investments in Real Estate Mortgages...................................35
Investments in Other Securities........................................35
Investments in Securities Of or Interests In Persons Primarily
Engaged in Real Estate Activities................................35
DESCRIPTION OF REAL ESTATE..................................................35
INVESTMENT PORTFOLIO - INVESTORS REAL ESTATE TRUST
AS OF JULY 31, 1998..............................................35
Real Estate Owned................................................35 to 40
Title..................................................................40
Insurance..............................................................40
Planned Improvements...................................................40
Contracts or Options to Sell...........................................40
Occupancy and Leases...................................................40
SHARES AVAILABLE FOR FUTURE SALE............................................40
OPERATING PARTNERSHIP AGREEMENT.............................................41
Management.............................................................41
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Transferability of Interests...........................................42
Capital Contribution...................................................43
Exchange Rights........................................................43
Registration Rights....................................................44
Operations.............................................................44
Distributions..........................................................44
Allocations............................................................45
Term...................................................................45
Fiduciary Duty.........................................................45
Tax Matters............................................................45
TAX TREATMENT OF IRET AND ITS SECURITY HOLDERS..............................45
Federal Income Tax.....................................................45
North Dakota Income Tax................................................47
Taxation of IRET's Shareholders........................................47
Taxation of Tax-Exempt Shareholders....................................48
Tax Considerations for Foreign Investors...............................49
Backup Withholding.....................................................49
State and Local Taxes..................................................49
Other Tax Considerations...............................................49
Tax Aspects of the Operating Partnership...............................50
Classification as a Partnership........................................50
Income Taxation of the Operating Partnership and Its Partners..........51
Partners, Not Partnerships, Subject To Tax.............................51
Partnership Allocations................................................51
Tax Allocations With Respect To Contributed Property...................52
Basis in Operating Partnership Interest................................52
Sale of Operating Partnership's Property...............................53
ERISA CONSIDERATIONS........................................................54
MARKET PRICE OF AND DIVIDENDS ON IRET'S SHARES OF BENEFICIAL INTERESTS......57
Market for the Shares of Beneficial Interest...........................57
Dividend and Share Price History.......................................58
DIVIDEND REINVESTMENT PLAN..................................................59
DESCRIPTION OF IRET'S SECURITIES............................................59
Description of Shares of Beneficial Interest...........................59
Restrictions on Transfer...............................................60
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............60
EXECUTIVE COMPENSATION AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...63
ADVISORY AGREEMENT..........................................................64
Basic Compensation.....................................................65
Additional Compensation................................................65
Limitation.............................................................65
Roger R. Odell.........................................................66
Thomas A. Wentz, Sr....................................................66
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SELECTION, MANAGEMENT AND CUSTODY OF IRET'S INVESTMENTS.....................67
Management of IRET's Investments.......................................67
POLICIES WITH RESPECT TO CERTAIN TRANSACTIONS...............................67
LIMITATIONS OF LIABILITY....................................................67
LEGAL MATTERS...............................................................70
EXPERTS.....................................................................70
GLOSSARY OF TERMS...........................................................70
CONSOLIDATED FINANCIAL STATEMENTS - AS OF APRIL 30, 1998 AND 1997
AND INDEPENDENT AUDITOR'S REPORT..............................F-1 to F-37
- THREE MONTHS ENDED JULY 31, 1998 (UNAUDITED)...............F-38 to F-45
</TABLE>
<PAGE>
SUMMARY OF THE OFFERING
THIS SECTION SUMMARIZES INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS
AND IS INTENDED FOR QUICK REFERENCE ONLY. THIS IS NOT A COMPLETE DESCRIPTION
OF THE INVESTMENT. YOU SHOULD READ AND EVALUATE ALL OF THIS PROSPECTUS
BEFORE YOU PURCHASE OUR SHARES. THE PLACE IN THE PROSPECTUS WHERE YOU CAN
FIND MORE INFORMATION ABOUT EACH TOPIC IS IDENTIFIED AT THE END OF EACH
PARAGRAPH.
A GLOSSARY OF TERMS IS PROVIDED AT THE END OF THIS DOCUMENT.
OUR OFFERING. We are offering to sell to the public 1,000,000 of our shares
of Beneficial Interest at a price of $7.85 per share. We will be represented
by brokerage firms who are members of the National Association of Securities
Dealers who will use their best efforts to sell our shares to the public for
an 8% commission. If you decide to buy our shares, you will pay $7.85 per
share of which approximately $.63 will be paid to the selling brokerage firm
and the balance of approximately $7.22 will be paid to us. See "Plan of
Distribution."
WHO MAY INVEST. We are offering shares to residents of the following states:
North Dakota, South Dakota, Montana, Minnesota, Colorado, Illinois, Florida,
Michigan and Washington. Other states may be added by a supplement to this
Prospectus. Special disclaimers and investor qualification standards may apply
to some of the above states. See "Who May Invest."
A BRIEF DESCRIPTION OF OUR COMPANY. We are a North Dakota Real Estate Trust
which has been in business since 1970. We have our only office in Minot, North
Dakota, and own a diversified portfolio of apartment complexes and commercial
properties in North Dakota and 9 surrounding states. We currently own over
5,000 apartment units and the total original investment in real estate assets
exceeds $240,000,000. See "The Company."
CAPITALIZATION. The following shows the amount of assets we owned on July 31,
1998, as well as the liabilities that we owed and the partnership and
shareholder equity. We also show the total assets that will be owned IF we sell
all of the 1,000,000 shares being offered. See "Capitalization."
<TABLE>
<CAPTION>
As of July 31, 1998 After sale of 1,000,000 shares
<S> <C> <C>
Total Assets $ 231,976,590 $ 239,010,590
Less Liabilities (151,016,663) (151,016,663)
Less Minority Interest
in Operating Partnership (10,590,410) (10,590,410)
-------------- --------------
Shareholders' Equity $ 70,369,581 $ 77,403,517 (1)
</TABLE>
(1) Reflects costs of issue of $816,000 deducted from total sale proceeds of
$7,850,000, resulting in the addition of $7,034,000 to total assets.
1
<PAGE>
FINANCIAL INFORMATION. The following table will give you an overview of our
financial performance during the past five years. See "Financial Statements."
SELECTED FINANCIAL DATA - ANNUAL
<TABLE>
<CAPTION>
Year Ended April 30
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(Restated)
<S> <C> <C> <C> <C> <C>
Consolidated Income Statement Data
Revenue $ 32,407,545 $ 23,833,982 $ 18,659,665 $ 13,801,123 $ 11,583,008
Operating income 4,691,198 3,499,443 3,617,807 3,560,318 3,135,426
Gain on repossession/
sale of investments 465,499 398,424 994,163 407,512 64,962
Minority interest portion
of operating partnership
income (141,788) (18) -- -- --
Net income 5,014,909 3,897,879 4,611,970 3,967,830 3,200,388
Balance Sheet Data
Total real estate
investments 213,211,369 177,891,168 122,377,909 84,005,635 63,972,042
Total assets 224,718,514 186,993,943 131,355,638 94,616,744 72,391,548
Shareholders' equity 68,152,626 59,997,619 50,711,920 37,835,654 29,997,189
Consolidated Per Share Data
Net income $ .32 $ .28 $ .38 $ .38 $ .36
Gain of repossession/
sale of investments .03 .03 .08 .04 .01
Dividends .42 .39 .37 .34 .33
Tax status of dividend
Capital gain 2.9% 21.0% 1.6% 11.0% 7.37%
Ordinary income 97.1% 79.0% 98.4% 89.0% 92.63%
Return of capital 0.0% 0.0% 0.0% 0.0% 0.00%
</TABLE>
WE ARE A "REAL ESTATE INVESTMENT TRUST." The federal income tax code
contains special provisions for companies that wish to operate as real estate
investments trusts ("REITS"). A REIT will not be subject to federal income
tax if it complies with tax laws. We have qualified as a REIT and intend to
do so in the future. See "Tax Treatment of IRET and Its Security Holders."
UPREIT. We are structured as an "Umbrella Real Estate Investment Trust" or
UPREIT. This means that we conduct our business through a limited partnership
- -IRET Properties, a North Dakota Limited Partnership. Through our subsidiary,
IRET, Inc., we act as the general partner of the limited partnership and own
approximately 90% of partnership assets. By operating as an UPREIT, we are
able to acquire real estate in exchange for limited partnership units of IRET
Properties which are exchangeable on a one-for-one basis for our shares,
subject to certain restrictions. See "Operating Partnership Agreement."
EXTERNALLY ADVISED. We have no employees. Instead, our business is conducted
through independent contractors. Our advisor is Odell-Wentz & Associates,
LLC, a North Dakota Limited Liability Company, whose members are Roger R.
Odell and Thomas A. Wentz, Sr. The advisory company receives fees based on
the capitalization of IRET as well as compensation for giving advice with
respect to property purchases based on the purchase price of each property
that is acquired. The independent trustees who serve on the Board of Trustees
also receive compensation. The following is a summary of the compensation
paid to the advisor and the trustees as
2
<PAGE>
well as other administrative expenses incurred during the past five fiscal
years. See "Advisory Agreement."
<TABLE>
<CAPTION>
Fiscal Years Ending April 30
----------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Advisor's and Trustees'
Compensation $304,898 $336,142 $458,019 $559,149 $ 745,907
Advisory Investigation Fee 89,514 49,836 117,506 177,834 141,465
Other Administrative Expenses 46,557 79,974 162,588 158,627 271,738
-------- -------- -------- -------- ----------
TOTAL FEES $366,406 $440,969 $465,952 $895,610 $1,159,110
Fees as Percent of Net
Invested Assets of the Trust .68% 0.55% 0.6% 0.5% 0.5%
</TABLE>
CONFLICTS. The advisory company and the trustees are able to personally
invest in competing real estate and to conduct other business activities
which may be in conflict with our business activities. See "Conflicts of
Interest."
PROPERTY MANAGEMENT. We hire independent property managers to provide the
day-to-day management of each real estate investment that we own. See
"Management of IRET's Investments."
OFFERING PRICE. The offering price of $7.85 has been arbitrarily determined
by our Board of Trustees. The price is higher than the price at which our
shares have traded and have been sold in the past. See "Market Price of and
Dividends on IRET's Shares of Beneficial Interest."
FRONT-END FEES. For the money that is being raised by this offering, there
are front-end fees. A front-end fee is a cost or expense of the offering
which must be paid regardless of the number of shares sold. The fees are
capped in that under no situation shall they exceed the capped amount:
<TABLE>
<CAPTION>
Type Minimum Cap
---- ------- ---
<S> <C> <C>
Selling agent commission
8% of the amount sold -0- $ 628,000
Legal Fees $15,000 $ 15,000
Advertising, Printing and
Promotion Expenses $15,000 $ 162,000
Registration Fees $10,000 $ 10,000
Accounting Fees $ 1,000 $ 1,000
------- ---------
$41,000 $ 816,000
</TABLE>
DIVIDENDS. We have paid 110 consecutive quarterly dividends beginning June 30,
1971. Dividends are paid in mid-January, April 1st, July 1st and October 1st of
3
<PAGE>
each year. The dividend paid on October 1, 1998, was $.115 per share. See
"Dividend History."
USE OF PROCEEDS. We will use the net proceeds from the sale of shares under
this offering to continue our apartment building program. We are currently
building apartments in Bismarck and Grand Forks, North Dakota, and Billings,
Montana. See "Use of Proceeds."
RISK FACTORS. An investment in our shares involves risk, including the risk
of loss of your entire investment. See "Risk Factors" for a more complete
discussion of factors that you should consider before purchasing our shares.
These risks include:
- - PRICE OF SHARES ARBITRARILY DETERMINED: The price of our shares has been
arbitrarily determined by us and is a higher price than the price paid by
the current holders of our shares and may be higher than the current market
price of the shares.
- - FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST: We intend to continue
to qualify as a real estate investment trust under the Internal Revenue
Code, but may fail to do so.
- - BEST EFFORTS SALE: The shares are being sold by the Soliciting Dealers on
a "best efforts" basis. The selling agents are only required to use their
best efforts to locate purchasers of the shares, but are not obligated to
ensure that a minimum number or that even any shares are sold.
- - BUSINESS ENVIRONMENT: The results of our operations will depend upon the
availability of opportunities for the profitable investment and
reinvestment of the funds available to us and general economic conditions
over which we have no control.
- - HIGH LEVERAGE: We seek to borrow approximately 70% of the cost of real
estate purchased or constructed.
- - RELATIONSHIP WITH ADVISOR: Our operating expenses, including compensation
to the advisor and the trustees, must be met regardless of profitability.
- - CONFLICTS OF INTEREST: We are subject to various conflicts of interest with
the Advisor or Trustees which may negatively impact operations.
- - ENVIRONMENTAL LIABILITY: Investments in real property create a potential
for environmental liability on the part of the owner of or any mortgage
lender on such real property.
- - COMPETITION: Investments of the types in which we are interested may be
purchased on a negotiated basis by many kinds of institutions, including
other REITs, mutual savings banks, savings and loan associations,
commercial banks, insurance companies and, to a lesser extent, pension
funds, credit unions and individuals.
4
<PAGE>
- - LIQUIDITY: No assurance can be given that a purchaser of our shares under
this Offering would be able to resell such shares when desired. Since
October 17, 1997, our shares have been listed for trading on the National
Association of Securities Dealers Automated Quotation System Small
Capitalization Index (NASDAQ), but no assurance can be given that such
listing will continue.
THIS IS THE END OF THE SUMMARY SECTION.
5
<PAGE>
THE COMPANY
Investors Real Estate Trust (hereinafter "IRET"), a registered real estate
trust, was organized under the laws of the State of North Dakota on July 31,
1970. IRET has qualified and operated as a "real estate investment trust"
under Sections 856-858 of the Internal Revenue Code since its inception.
Since February 1, 1997, IRET carries on its activities through IRET
Properties, a North Dakota Limited Partnership. See "Structure of IRET."
IRET, pursuant to the requirements of Sections 856-858 of the Internal
Revenue Code which govern real estate investment trusts, invests in real
estate equities and mortgages.
IRET has its only office at 12 South Main, Minot, North Dakota 58701, (701)
852-1756, and operates principally within the State of North Dakota, although
it has real estate investments in the states of Minnesota, South Dakota,
Nebraska, Montana, Georgia, Colorado, Wisconsin, Idaho, Washington and
Arizona.
IRET operates on a fiscal year ending April 30. For its past three fiscal
years, its sources of operating revenue, total expenses, net real estate
investment income, capital gain income, total income, and dividend
distributions are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending 4/30
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE FROM OPERATIONS
Real Estate Rentals $31,694,586 $22,972,368 $17,635,297
Interest, Discount & Fees 712,959 861,613 1,024,368
----------- ----------- -----------
$32,407,545 $23,833,981 $18,659,665
EXPENSE $27,716,347 $20,334,538 $15,041,858
----------- ----------- -----------
NET REAL ESTATE INVESTMENT
INCOME $ 4,691,198 $ 3,499,443 $ 3,617,807
GAIN ON SALE OF INVESTMENTS
(CAPITAL GAIN) 465,499 398,424 994,163
MINORITY INTEREST PORTION
OF OPERATING PARTNERSHIP
INCOME (141,788) (18) -0-
----------- ----------- -----------
NET INCOME $ 5,014,909 $ 3,897,849 $ 4,611,970
----------- ----------- -----------
----------- ----------- -----------
PER SHARE
Net Income $ .32 $ .28 $ .38
Dividends Paid $ .42 $ .39 $ .37
</TABLE>
As indicated above, IRET's principal source of operating revenue is rental
income from real estate properties owned by IRET. A minor amount of revenue
is derived from interest on short-term investments in government securities
and interest on savings deposits. In addition to operating income, IRET has
received capital gain
6
<PAGE>
income when real estate properties have been sold at a price in excess of the
depreciated cost of said properties.
IRET has no employees. Its business is conducted through the services of an
independent contractor (Odell-Wentz & Associates L.L.C., a North Dakota
Limited Liability Company having as its members Roger R. Odell and Thomas A.
Wentz, Sr.) which serves as the advisor to IRET. Since the inception of IRET
and until January 1, 1986, Roger R. Odell, 12 South Main, Minot, North
Dakota, served as advisor to IRET, providing office facilities, administering
day-to-day operations of IRET, and advising with respect to investments and
investment policy. Effective January 1, 1986, IRET entered into a revised
advisory agreement with Mr. Odell and Thomas A. Wentz, Sr., and on January 1,
1994, with Odell-Wentz & Associates, L.L.C.
Mr. Odell is a graduate of the University of Texas, receiving his B.A. degree
in 1947. He has been a resident of Minot, North Dakota since 1947. From 1947
to 1954, he was employed by Minot Federal Savings & Loan Association, serving
as secretary of the association from 1952 to 1954. Since 1954, Mr. Odell has
been a realtor in Minot, serving as an officer and stockholder of Watne
Realty Company from 1954 to January 1, 1970, and since that time as the owner
of his own realty firm.
Mr. Wentz is a graduate of Harvard College and Harvard Law School, receiving
his A.B. degree in 1957 and his L.L.B. degree in 1960. He has been a resident
of Minot, North Dakota, since 1962.
BUSINESS OBJECTIVES
IRET seeks to realize shareholder value by regular increases in the
quarter-yearly cash dividends paid to its shareholders and in appreciation in
the value of its shares of Beneficial Interest. See "Market Price and
Dividends on IRET's Shares of Beneficial Interest" for a description of share
prices and dividends during its 28 year history.
PORTFOLIO MIX. IRET's investment strategy is to maintain its real estate
investment portfolio at approximately 75% invested in multi-family apartment
complexes located in North Dakota and surrounding states and the remaining
25% of real estate owned in commercial property (warehouses, retirement
homes, manufacturing plants, offices, and retail properties) leased to single
tenants for 14 years or longer.
LEVERAGE. An essential ingredient of IRET's investment strategy is to
leverage its equity capital by borrowing up to 70% of the cost of real estate
properties acquired for its portfolio. IRET seeks to acquire real estate that
will yield net operating income in an amount that will exceed the interest
rate payable on the mortgage indebtedness.
AVAILABLE INFORMATION CONCERNING IRET
SECURITIES AND EXCHANGE COMMISSION: IRET is currently a reporting company
pursuant to the Securities Exchange Act of 1934 and in accordance therewith
annually files a Form 10-K and quarterly Forms 10-Q for the first three
quarters of each year with the Securities and Exchange Commission. The
information filed by IRET can be inspected and copied at the public reference
facilities maintained by the Securities
7
<PAGE>
and Exchange Commission in Washington, DC, at 450 Fifth Street NW, Room 1024,
Washington, DC 20549, (202-272-3100). Copies of said information can be
obtained from the Public Reference facility at prescribed rates.
IRET has filed with the Securities and Exchange Commission a Registration
Statement on Form S-11 under the Securities Act of 1933 and the rules and
regulations promulgated thereunder, with respect to the Shares of Beneficial
Interest offered pursuant to this Prospectus. This Prospectus, which is part
of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits and financial statement
schedules thereto. For further information with respect to IRET and the
Shares, reference is made to the Registration Statement and such exhibits and
financial statement schedules, copies of which may be examined without charge
at or obtained upon payment of prescribed fees from, the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and will also be available for inspection and copying
at the regional offices of the Commission located at 13th Floor, 7 World
Trade Center, New York, New York, 10048 and at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. The Commission maintains a Website at
http:/www.sec.gov and reports, proxy and information statements and other
information regarding registrants that file electronically with the
Commission (including IRET) can be obtained from that site.
Statements contained in this Prospectus as to the contents of any contract or
other document that is filed as an exhibit to the Registration Statement are
not necessarily complete, and each such statement is qualified in its
entirety by reference to the full text of such contract or document.
REPORTS TO SECURITY HOLDERS: IRET shall furnish shareholders with annual
reports on or about July 25th of each year containing financial statements
audited by IRET's independent accountants, with quarterly reports for the
first three quarters of each year containing unaudited summary financial and
other information, and with such other reports as IRET deems appropriate or
as required by law.
INCORPORATION BY REFERENCE: Copies of any document or part thereof
incorporated by reference in this prospectus but not delivered therewith is
available free of charge upon request made to Timothy P. Mihalick, 12 South
Main Street, Minot, ND 58701 (701-852-1756).
RISK FACTORS
An investment in the shares involves various risks. You should carefully
consider the following risks:
PRICE OF SHARES ARBITRARILY DETERMINED: The price of the shares has been
arbitrarily determined by IRET and is a higher price than the price paid by
most of the current holders of IRET's shares. The offering price set forth on
the cover page of this Prospectus should not be considered an indication of
the actual value of the shares. The price may be higher than the price at
which IRET shares trade on the NASDAQ Small-Cap Market. The book value of
IRET shares of beneficial interest is substantially less than the purchase
price to new shareholders under this Offering. As of July 31, 1998, the book
value of the 16,767,369 shares then
8
<PAGE>
outstanding was $4.20. Assuming all of the shares registered under this
Offering are sold, the estimated resulting book value will be $4.36 per
share. Thus, a purchasing shareholder paying $7.85 per share under this
Offering will incur an immediate book value dilution of $3.49 per share.
HIGH LEVERAGE: IRET seeks to borrow approximately 70% of the cost of real
estate purchased or constructed. This amount of leverage may expose IRET to
cash flow problems in the event rental income decreases. Such a scenario may
require IRET to sell properties at a loss or default on the mortgage, thus
losing the property through foreclosure.
FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST: IRET intends to
continue operating so as to qualify as a real estate investment trust under
the Internal Revenue Code of 1986, as amended (the "Code"). Although IRET
believes that it is organized and will continue to operate in such a manner,
no assurance can be given that IRET will remain qualified as a REIT.
Qualification as a REIT involves the application of highly technical and
complex code provisions for which there are only limited judicial or
administrative interpretations. No assurance can be given that legislation,
new regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualifications as a REIT or
the federal income tax considerations of such qualifications. If in any
taxable year IRET failed to qualify as a REIT, IRET would not be allowed a
deduction for distribution to shareholders in computing its taxable income
and would be subject to federal income tax on its taxable income at regular
corporate rates. Unless entitled to relief under certain statutory
provisions, IRET also would be disqualified from treatment as a REIT for the
four taxable years following the year during which qualification is lost. As
a result, the funds available for distribution to IRET's shareholders would
be reduced for each of the years involved. Although IRET currently intends to
continue to operate in a manner designed to qualify as a REIT, it is possible
that future economic, market, legal, tax or other considerations may cause
IRET's Board of Trustees to revoke the REIT election.
BEST EFFORTS SALE: The shares are being sold by the Soliciting Dealers on a
"best efforts" basis whereby the selling agent is only required to use its
best efforts to locate purchasers of the shares, but is not obligated to
ensure that a minimum number or that even any shares are sold. Therefore, no
assurance is given as to the amount of proceeds that will be available for
investment by IRET. In the event fewer than all the Shares are sold during
the offering period (which is 365 days from the date of this document), IRET
would have fewer cash assets to apply toward its business plan. In such
event, the fixed operating expenses of IRET, as a percentage of gross income,
would be higher and consequently reduce the taxable income distributable to
shareholders.
BUSINESS ENVIRONMENT: The results of operations of IRET will depend, among
other things, upon the availability of opportunities for the investment and
reinvestment of the funds of IRET. The yields available from time to time on
mortgages and other real estate investments depend to a large extent on the
type of security involved, the type of investment, the condition of the money
market, the geographical location of the property, general economic
conditions, competition, and other factors, none of which can be predicted.
Trust funds are presently invested in real estate in North Dakota and several
other states. As a result, IRET may be subject to
9
<PAGE>
substantially greater risk than if its investments were more dispersed
geographically. Local conditions, such as competitive overbuilding or a
decrease in employment, may adversely affect the performance of IRET's
investments. In the area in which IRET operates, the economy is dependent on
the areas of agriculture and mineral development. If these areas do not
perform satisfactorily, the ability of IRET to realize profits from its
business of real estate investments will be adversely affected.
RISKS RELATED TO MORTGAGE LENDING: All real property investments are subject
to some degree of risk, which, in some cases, varies according to the size of
the investment as a percentage of the value of the real property. In the
event of a default by a borrower on a mortgage loan, it may be necessary for
IRET to foreclose its mortgage or engage in negotiations which may involve
further outlays to protect IRET's investment. The mortgages securing IRET's
loans may be, in certain instances, subordinate to mechanics' liens,
materialmen's liens, or government liens and, in instances in which IRET
invests in a junior mortgage, to liens of senior mortgages, and IRET may be
required to make payments in order to maintain the status of the prior lien
or to discharge it entirely. In certain areas, IRET might lose first priority
of its lien to mechanics' or materialmen's liens by reason of wrongful acts
of the borrower. It is possible that the total amount which may be recovered
by IRET in such cases may be less than its total investment, with resultant
losses to IRET.
Loans made by IRET may, in certain cases, be subject to statutory
restrictions limiting the maximum interest charges and imposing penalties,
which may include restitution of excess interest, and, in some cases, may
affect enforceability of the debt. There can be no assurance that all or a
portion of the charges and fees which IRET receives on its loans may not be
held to exceed the statutory maximum, in which case IRET may be subjected to
the penalties imposed by the statutes.
RELATIONSHIP WITH ADVISOR: Certain operating expenses of IRET, including
compensation to the advisor and trustees, must be met regardless of
profitability. The advisor's fee is computed as a percentage of the
investments of IRET. (See "Advisory Agreement".) IRET will be dependent upon
the Advisor for essentially all aspects of its business operations. Because
the Advisor has experience in the specialized business segment in which IRET
operates, the loss of the Advisor, for any reason, would likely have a
material adverse affect on IRET's operations. The Advisor may terminate its
relationship upon 60 days notice by either the Advisor or IRET.
CONFLICT OF INTEREST: The Advisor is entitled to receive an advisory fee
equal to a percentage of the Net Invested Assets of IRET. (See "Advisory
Agreement".) The Advisor also will receive fees in connection with IRET's
acquisition or construction business based upon a percentage of the amount
paid.
Any trustee or officer may have personal business interests and may engage in
personal business activities, which may include the acquisition, syndication,
holding, management, development, operation or investment in, for his own
account or for the account of others, interests in entities engaged in the
real estate business and any other business. Any trustee or officer may be
interested as trustee, officer, director, shareholder, partner, member,
advisor or employee, or otherwise
10
<PAGE>
have a direct or indirect interest in any entity which may be engaged to
render advice or services to IRET, and may receive compensation from such
entity as well as compensation as trustee, officer or otherwise hereunder.
Neither the Advisor nor its affiliates are prohibited from providing the same
services to others, including competitors. These relationships may produce
conflicts in the Advisor's and its affiliates' allocation of time and
resources among various projects. The Advisor and its affiliates believe they
have sufficient personnel to discharge their responsibilities to IRET. All
agreements and arrangements, including those relating to compensation,
between IRET and the Advisor or any of their affiliates will not be the
result of arm's-length negotiations. However, such conflicts will be resolved
by the following factors: (i) IRET intends to be in substantial compliance
with the Statement of Policy Regarding Real Estate Investment Trusts adopted
by the North American Securities Administrators Association, Inc. ("NASAA")
which has a specific limitation on certain fees and on the amount of IRET's
operating expenses, including compensation to the Advisor during the
operating stage of IRET; (ii) the Advisor is aware of other programs being
offered in the marketplace and intends to structure its business
relationships so as to be competitive with such other programs; (iii) such
agreements and arrangements are subject to approval by a majority of IRET's
independent trustees. IRET, the Advisor and the principals of IRET and
Advisor are not represented by separate counsel. IRET is represented by the
law firm of Pringle & Herigstad, P.C., which has also acted and will continue
to act as counsel to IRET and various affiliates of the Advisor with respect
to other matters.
ENVIRONMENTAL LIABILITY: Investments in real property create a potential for
environmental liability on the part of the owner of or any mortgage lender on
such real property. Under federal and state legislation, property owners are
liable for cleanup expenses in connection with hazardous wastes or other
hazardous substances found on their property. No assurance can be given that
a substantial financial liability may not occur with respect to properties
owned or acquired in the future by IRET. It is the policy of IRET to obtain a
Phase I environmental survey upon purchasing property and, as of the date of
this Prospectus, IRET is unaware of any environmental liability with respect
to properties in its portfolio.
COMPETITION: Investments of the types in which IRET is interested may be
purchased on a negotiated basis by many kinds of institutions, including
mutual savings banks, savings and loan associations, commercial banks,
insurance companies and, to a lesser extent, pension funds, credit unions and
individuals. In addition, there are a number of other real estate investment
trusts in operation, some of which may be active in one or more of IRET's
areas of investment. Investments must thus be made by IRET in competition
with such other entities. The yields available on mortgage and other real
estate investments depend upon many factors, including the supply of money
available for such investments and the demand for mortgage money. The
presence of the foregoing competitors increases the available supply of funds
to prospective borrowers from IRET. All these factors, in turn, vary in
relation to many other factors such as general and local economic conditions,
conditions in the construction industry, opportunities for other types of
investments, international, national and local political affairs,
legislation, governmental regulation, tax laws, and other factors. IRET
cannot predict the effect which such factors will have on its operations.
11
<PAGE>
LIQUIDITY: No assurance can be given that a purchaser of IRET shares under
this Offering would be able to resell such shares when desired. Effective
October 17, 1997, IRET shares of Beneficial Interest have been traded on the
National Association of Securities Dealers Automated Quotation System Small
Capitalization Index (NASDAQ). No assurance can be given that IRET shares
will continue to be traded on such market.
FRONT-END FEES: For the money that is being raised by this offering, there
are front-end fees. A front-end fee is a cost or expense of the offering
which must be paid regardless of the number of shares sold. The Declaration
of Trust caps all front-end fees for organizational or sale purposes at no
more than 15% of the total offering. In the present case, the total front-end
fees will be not more than 12%, which is below the capped amount. The fees
are capped in that under no situation shall they exceed the capped amount:
<TABLE>
<CAPTION>
Type Minimum Cap
---- ------- ---
<S> <C> <C>
Selling agent commission
8% of the amount sold -0- $628,000
Legal Fees $15,000 $ 15,000
Advertising, Printing and
Promotion Expenses $15,000 $162,000
Registration Fees $10,000 $ 10,000
Accounting Fees $ 1,000 $ 1,000
------- --------
$41,000 $816,000
</TABLE>
COMPENSATION TABLE
The following table sets forth the fees and other compensation which IRET is
to pay in association with this offering. The total operating expenses of
IRET shall not exceed the greater of 2% of its average invested assets or 25%
of its net income for any fiscal year. From the inception of IRET in 1970,
this requirement has been met.
Item of Compensation Recipient Amount/Method
- -------------------- --------- -------------
Advisory Fee Odell-Wentz & Associates The advisor will earn
annually an additional
base fee of $49,238 once
the sale proceeds of
$7,034,000 are invested.
(.7% of net invested
assets).
Advisor Additional Odell-Wentz & Associates 1/2 of 1% of the 1st
Compensation $2,500,000 of value of
all acquired assets,
except new construction
12
<PAGE>
is 1/2 of 1% of the
total cost. Upon
investment of sale
proceeds, the fee will
be a minimum of $12,500
to a possible maximum of
$35,170.
Incentive Fees N/A While authorized by the
Restated Declaration of
Trust, no incentive fees
shall be paid to anyone.
This may be changed by a
vote of the Trustees at
anytime with incentive
fees then payable for
future transactions as
limited by the Restated
Declaration of Trust.
Broker-Dealer Fees Selling Brokerage Firms (Eight percent or $.63
of each share sold) for a
total possible commission
of $628,000.
Advertising and Up to an additional two
Promotional Expenses percent of gross proceeds
of $7,850,000 ($157,000)
may be paid as
compensation for
advertising and
promotional expenses.
Experts' Fees Pringle & Herigstad, P.C. $15,000 for legal fees,
plus filing fees,
accounting fees and
printing costs estimated
to be $16,000.
CONFLICTS OF INTEREST
IRET will be subject to various conflicts of interest arising from its
relationship with the Advisor, (Odell-Wentz & Associates, L.L.C.), and its
affiliates. The Advisor, its affiliates and the trustees of IRET are not
restricted from engaging for their own accounts in business activities of the
type conducted by IRET, and occasions may arise when the interests of IRET
would be in conflict with those of one or more of the trustees, the Advisor
or their affiliates. These individuals and affiliates have been engaged in
the business of real estate for approximately 40 years. With respect to the
conflicts of interest described herein, the trustees of IRET, of which a
majority are independent, will endeavor to exercise their fiduciary duties to
IRET in a manner that will preserve and protect the rights of IRET and the
interests of the shareholders in the event of any conflicts of interest
between IRET and the Advisor or its affiliates. Any transactions between IRET
and any trustee,
13
<PAGE>
the Advisor or any of their affiliates, other than the purchase or sale, in
the ordinary course of IRET's business, will require the approval of a
majority of the trustees who are not interested in the transaction.
TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES: The Advisor and its
affiliates may receive compensation from IRET for providing various services.
IRET's Board of Trustees (a majority of whom are independent of the Advisor
and its affiliates) will have oversight responsibility with respect to such
services to ensure that such services are provided on terms no less favorable
to IRET than IRET could obtain from unrelated persons or entities and are
consistent with IRET's investment objectives and policies. (See "Compensation
Table" and "The Advisory Agreement".)
COMPENSATION TO THE ADVISOR AND CONFLICTS OF INTEREST: The Advisor is
entitled to receive an advisory fee equal to a percentage of the Net Invested
Assets of IRET. (See "Advisory Agreement".) The Advisor also will receive
fees in connection with IRET's acquisition or construction of real properties
based upon a percentage of the amount paid. Accordingly, a conflict of
interest could arise since, depending upon the circumstances, the retention,
acquisition or disposition of a particular project could be advantageous to
the Advisor, but detrimental to IRET, or vice-versa. The decision whether to
liquidate IRET or the decision to acquire, retain or dispose of certain
properties and the terms and conditions thereof, may also create conflicts of
interest.
In resolving conflicts of interest, the Board of Trustees has a fiduciary
duty to act in the best interests of IRET as a whole. IRET and the Advisor
believe that it would not be possible, as a practical matter, to eliminate
these potential conflicts of interest. However, the Advisory Agreement must
be renewed annually by the affirmative vote of a majority of the independent
trustees. Any conflict will be resolved by a majority of the independent
trustees, who may not renew the Advisory Agreement if they determine that the
Advisor is not satisfactorily performing its duties. In connection with the
performance of their fiduciary responsibilities, the existence of such
possible conflicts will be only one of the factors for the trustees to
consider in determining the appropriate action to be taken by IRET.
COMPETITION BY IRET WITH AFFILIATES: Any trustee or officer may have
personal business interests and may engage in personal business activities,
which may include the acquisition, syndication, holding, management,
development, operation or investment in, for his own account or for the account
of others, of interests in entities engaged in the real estate business and
any other business. Any trustee or officer of IRET may be interested as
trustee, officer, director, shareholder, partner, member, advisor or
employee, or otherwise have a direct or indirect interest in any entity which
may be engaged to render advice or services to IRET, and may receive
compensation from such entity as well as compensation as trustee, officer or
otherwise hereunder.
Neither the Advisor nor its affiliates are prohibited from providing the same
services to others, including competitors. These relationships may produce
conflicts in the Advisor's and its affiliates' allocation of time and
resources among various projects. The Advisor and its affiliates believe they
have sufficient personnel to discharge their responsibilities to IRET.
14
<PAGE>
NON-ARM'S-LENGTH AGREEMENTS: All agreements and arrangements, including
those relating to compensation, between IRET and the Advisor or any of their
affiliates will not be the result of arm's-length negotiations. However, such
conflicts will be resolved by the following factors: (i) IRET intends to be
in substantial compliance with the Statement of Policy Regarding Real Estate
Investment Trusts adopted by the North American Securities Administrators
Association, Inc. ("NASAA") which has a specific limitation on certain fees
and on the amount of IRET's operating expenses, including compensation to the
Advisor during the operating stage of IRET; (ii) the Advisor is aware of
other programs being offered in the marketplace and intends to structure its
business relationships so as to be competitive with such other programs;
(iii) such agreements and arrangements are subject to approval by a majority
of IRET's independent trustees.
LACK OF SEPARATE REPRESENTATION: IRET, the Advisor and the principals of
IRET and Advisor are not represented by separate counsel. IRET is represented
by the law firm of Pringle & Herigstad, P.C., which has also acted and will
continue to act as counsel to the Advisor and various affiliates of the
Advisor with respect to other matters. Thomas A. Wentz, Jr., is a trustee of
IRET and a partner in Pringle & Herigstad, P.C.
DETERMINATION OF OFFERING PRICE
The offering price of $7.85 per share has been arbitrarily established by
IRET and is higher than the recent market price for said shares (see Market
Price Of and Dividends on IRET's Shares of Beneficial Interest).
DILUTION
The book value of IRET shares of beneficial interest is substantially less
than the purchase price to new shareholders under this Offering. As of July
31, 1998, the book value of the 16,767,369 shares then outstanding was $4.20.
Assuming all of the shares registered under this Offering are sold, the
estimated resulting book value will be $4.36 per share. Thus, a purchasing
shareholder paying $7.85 per share under this Offering will incur an
immediate book value dilution of $3.49 per share.
PLAN OF DISTRIBUTION
The shares offered by this Prospectus shall be sold by Broker-Dealers who are
members of the National Association of Securities Dealers and have entered
into a Sales Agreement with IRET.
All shares shall be sold on a "best efforts" basis with no guarantee or
requirement that any shares be sold. All sales to purchasers are subject to
certain requirements as follows:
For each share sold, the selling Broker-Dealer shall receive a commission of
eight percent (approximately $.63 per share). No other compensation or fees
other than the percentage commission shall be paid by IRET to said
Broker-Dealers. The relationship between the Broker-Dealers and IRET may be
terminated by either party at any time for any reason. All Broker-Dealers
have the opportunity to sell the entire Offering.
15
<PAGE>
WHO MAY INVEST
In order to purchase shares, an investor must be a resident of one of the
following states: North Dakota, South Dakota, Montana, Minnesota, Colorado,
Illinois, Washington, Michigan, Florida and such other states as may be added
by a supplement to this Prospectus. In the following states, the following
disclaimers apply and the purchaser must satisfy the following investor
qualifications imposed by that state:
Illinois -
These securities have not been approved or disapproved by the Secretary of
State of Illinois or the State of Illinois, nor has the Secretary of State
of Illinois or the State of Illinois passed upon the accuracy or adequacy
of this Prospectus. Any representation to the contrary is a criminal
offense.
Minnesota and Washington -
1) Either individually or with a spouse has an annual gross income of at
least ($60,000 for Minnesota) and ($45,000 for Washington) during the
previous calendar year, have a net worth of at least ($60,000 for
Minnesota) and ($45,000 for Washington) (exclusive of principal
residence and its furnishings and automobile), and are purchasing
shares for only the investors own account or retirement plan.
2) Either individually or with a spouse have a net worth of at least
($225,000 for Minnesota) and ($150,000 for Washington) (exclusive of
the principal residence and its furnishings and automobiles), and are
purchasing shares for only the investors own account or retirement
plan.
USE OF PROCEEDS
The net proceeds from the sale of the 1,000,000 shares offered to the public
will be added to IRET's operating capital to be used to construct apartment
properties in connection with its general business purposes.
The following table sets forth information concerning the projected use of
proceeds from the sale of units, assuming that the entire offering of
1,000,000 shares is sold. The figures listed cannot be precisely calculated
at the present time and may vary materially from the amounts shown.
Assuming all the offered shares are sold after deduction from the offering
proceeds of all the front-end fees and expenses associated with the offering,
approximately 89 percent of the total sale proceeds raised by this offering
will be invested by IRET in real property or related investments.
<TABLE>
<CAPTION>
DOLLARS PERCENT
<S> <C> <C>
GROSS OFFERING PROCEEDS 7,850,000 100.00%
SELLING COMMISSIONS - 628,000 8.00%
LEGAL FEES - 15,000 Less than 1% (.00191)
ADVERTISING, PRINTING AND
PROMOTION EXPENSES - 162,000 Less than 3% (.0206)
REGISTRATION FEES - 10,000 Less than 1% (.00127)
16
<PAGE>
ACCOUNTING FEES - 1,000 Less than 1% (.00013)
----------
CASH AVAILABLE FOR CONSTRUCTION
OF PROPERTIES $7,034,000 89.61%
</TABLE>
As of the date of this Prospectus, IRET is constructing 67-unit apartment
buildings in Billings, MT, Bismarck, ND, and Grand Forks, ND, and plans to
construct the additional apartments described below. These apartments are of
a design and type previously constructed by IRET during the past four years
in Sioux Falls, South Dakota (98 units), Bismarck, North Dakota (116 units),
Minot, North Dakota (196 units), Billings, Montana (165 units) and Grand
Forks, North Dakota (183 units). The apartments constructed in Sioux Falls,
Bismarck, Minot, Billings and Grand Forks have rented at projected rental
rates and, in the judgment of management, will produce a satisfactory
investment return. IRET intends to continue the construction of this type of
apartment building as follows:
Apartments Under Construction
-----------------------------
<TABLE>
<CAPTION>
City Units Estimated Cost
---- ----- --------------
<S> <C> <C>
Billings, MT 67 $ 4,250,000
Bismarck, ND 134 8,500,000
Grand Forks, ND 67 4,250,000
Planned Apartment Construction
------------------------------
<CAPTION>
City Units Estimated Cost
---- ----- --------------
<S> <C> <C>
Grand Forks, ND 134 $ 8,500,000
Bismarck, ND 67 4,250,000
Billings, MT 67 4,250,000
-----------
Total - Planned Apartment Construction $34,000,000
</TABLE>
IRET owns all of the land necessary for the planned apartment construction,
but has not arranged for the financing that would be necessary. Thus, no
assurance can be given that IRET will successfully complete this construction
program.
IRET will also continue to consider other real estate investment
opportunities that are presented to it, but is not obligated at the date of
this Prospectus to acquire any real estate investments other than the
additions to its portfolio described in "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Three Months Ended July
31, 1998", and expects to concentrate its efforts and resources on the
planned apartment construction projects described above during the next 18
month period.
IRET will also derive funds to fund the properties under construction that
are described above from the following sources:
- DEPRECIATION REVENUE. As a "Real Estate Investment Trust" under the
Internal Revenue Code, IRET must distribute at least 95% of its
taxable income. However, in computing taxable income, a deduction for
depreciation of the buildings owned by IRET is allowed. In the Fiscal
year ended April 30, 1998, this depreciation deduction was $4,791,907.
17
<PAGE>
The amount of this depreciation is used by IRET to acquire addition
real estate investments.
- LOANS. IRET seeks to borrow approximately 70% of the cost of real
estate purchased. The objective is to purchase real estate at a price
which will yield a higher percentage return than the interest rate
payable on the mortgage loan. This "leverage" is essential to
producing a satisfactory return to the shareholders of IRET. (No
assurance can be given that the income actually earned on real estate
investments made by IRET will be higher than the interest rate paid on
IRET's mortgage loans.) As of July 31, 1998, the ratio of mortgage
liabilities to total Trust real estate assets was $134,059,974 of
mortgage liabilities to $213,211,369 of net real estate owned or
62.9%. Thus, as much as $50,626,614 could be borrowed on the existing
portfolio before reaching the desired debt ratio of 70% (present
equity in real estate of $213,211,369, minus mortgages of $134,059,974
equals $79,151,395 divided by 30% = $263,837,983, minus present real
estate owned of $213,211,369 equals $50,626,614) (no assurance can be
given that this amount of borrowed funds would be available).
- MARKETABLE SECURITIES/CREDIT LINE. IRET maintains an investment in
marketable government insured securities ($3,453,882 as of July 31,
1998) which securities are held in brokerage accounts with Smith
Barney. The current policy of said broker is to allow IRET to borrow
up to 90% of the market value of these securities for short-term
needs. Also, IRET may enter into short-term credit line borrowing
agreements with banks if the need arises. (As of the date of this
Prospectus, IRET has credit lines of $11,500,000.) No assurance can
be given that either of these borrowing arrangements would be
available to IRET.
SELECTED FINANCIAL DATA - ANNUAL
<TABLE>
<CAPTION>
Year Ended April 30
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(Restated)
<S> <C> <C> <C> <C> <C>
Consolidated Income Statement Data
Revenue $ 32,407,545 $ 23,833,981 $ 18,659,665 $ 13,801,123 $ 11,583,008
Operating income 4,691,198 3,499,443 3,617,807 3,560,318 3,135,426
Gain on repossession/
sale of investments 465,499 398,424 994,163 407,512 64,962
Minority interest portion
of operating partnership
income (141,788) (18) -- -- --
Net income 5,014,909 3,897,849 4,611,970 3,967,830 3,200,388
Balance Sheet Data
Total real estate
investments $213,211,369 177,891,168 122,377,909 84,005,635 63,972,042
Total assets 224,718,514 186,993,943 131,355,638 94,616,744 72,391,548
Shareholders' equity 68,152,626 59,997,619 50,711,920 37,835,654 29,997,189
Consolidated Per Share Data
Net income $ .32 $ .28 $ .38 $ .38 $ .36
Gain of repossession/
sale of investments .03 .03 .08 .04 .01
18
<PAGE>
Dividends .42 .39 .37 .34 .33
Tax status of dividend
Capital gain 2.9% 21% 1.6% 11.0% 7.37%
Ordinary income 97.1% 79% 98.4% 89.0% 92.63%
Return of capital 0.0% 0.0% 0.0% 0.00% 0.00%
</TABLE>
TWO YEAR SELECTED FINANCIAL DATA - QUARTERLY RESULTS
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------
7-31-97 10-31-97 1-31-98 4-30-98
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Consolidated Income Statement Data
Revenues $ 7,183,761 $ 7,996,262 $ 8,440,393 $ 8,787,129
Income before gains on
sale of investments 894,045 1,233,451 1,358,752 1,204,950
Net gain on sale of investments 39,069 83,579 326,138 16,713
Net income 933,105 1,307,607 1,620,884 1,153,313
Per share
Income before gains on
sale of investments .06 .08 .08 .07
Net gain on sale of investments -- .01 .02 --
<CAPTION>
Quarter Ended
-----------------------------------------------------
7-31-96 10-31-96 1-31-97 4-30-97
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Consolidated Income Statement Data
Revenues $ 4,966,475 $ 5,474,027 $ 6,383,030 $ 7,010,450
Income before gains on
sale of investments 978,107 1,048,154 1,027,117 446,065
Net gain on sale of investments 252,062 -- 138,629 7,733
Minority interest of unitholders
in operating partnership -- -- -- (18)
Net income 1,230,169 1,048,154 1,165,746 453,780
Per share
Income before gains on
sale of investments .07 .08 .07 .03
Net gain on sale of
investments .02 -- .01 --
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
GENERAL: IRET has operated as a "real estate investment trust" under
Sections 856-858 of the Internal Revenue Code since its formation in 1970.
IRET is in the business of owning income producing real estate investments.
On February 1, 1997, IRET restructured itself as an Umbrella Partnership Real
Estate Investment Trust (UPREIT). No other major changes in IRET's business
has occurred from the organization of IRET in 1970 to the date of this
Prospectus, and none are planned at this time.
This discussion and analysis should be read in conjunction with the audited
financial statements prepared by Brady Martz and Associates who have served
as the auditor for IRET since its inception.
Certain matters included in this discussion are forward-looking statements
within the meaning of federal securities laws. Although IRET believes that
the expectations reflected in such forward-looking statements are based on
reasonable assumptions, it can give no assurance that the expectations
expressed will actually be achieved. Many factors may cause actual results
to differ materially from IRET's current expectations, including general
economic conditions, local real estate conditions, the general level of
interest rates and the availability of financing, timely completion and lease
up of properties under construction, and various other economic risks
inherent in the business of owning and operating investment real estate.
THREE MONTHS ENDED JULY 31, 1998:
RESULTS OF OPERATION. IRET had an excellent First Quarter. Improved
occupancy, rent increases and lower interest rates all contributed to
strong gains in revenues, Funds form Operations and net income.
FUNDS FROM OPERATIONS. Funds from Operations for the first three
months of Fiscal 1998 increased to $2,603,229, compared to $1,993,082
generated in the same period of the prior fiscal year, an increase of
31%. On a per share basis, Funds from Operations increased to 16
cents per share, compared to 13 cents for the prior year, an increase
of 23%. Funds from Operations is regarded as the appropriate measure
of performance for Real Estate Investment Trusts.
OPERATING INCOME. Operating income increased to $1,327,423 for the
first quarter compared to $894,044 earned in the same period last
year. The first quarter of last year saw a temporary spike in our
vacancy rate for apartment properties which did not happen this year.
Last year's experience appears to have been a temporary phenomena.
SMITH BUILDING. The first quarter results are all the more impressive
considering the continued vacancy of the former Smith furniture store
in Boise, Idaho. We have been close to signing leases with two
tenants and continue to work with one. Hopefully, the building can be
re-rented soon.
20
<PAGE>
We expect continued good results for the remainder of the current fiscal
year. Occupancy rates are above normal and we expect to be able to raise
rents in most communities. In particular, the new apartments built in
Billings, Bismarck and Grand Forks have rented up quickly. We have
additional land in those communities and plan to continue our building
program. We are also negotiating to acquire other apartment complexes in
Rochester, MN, Boise, ID, and Vancouver, WA.
SALE OF PROPERTIES. During the first quarter of Fiscal 1999, IRET sold the
48-unit Park Place apartment complex in Waseca, MN, for $960,000, realizing
a gain of $366,000.
ACQUISITIONS. The following properties were acquired by IRET during the
First Quarter:
<TABLE>
<S> <C>
Edgewood Vista Alzheimer Facility - Billings, MT $ 965,000
Edgewood Vista Alzheimer Facility - Sioux Falls, SD 965,000
Corner Express Convenience Store - Minot, ND 1,200,000
-----------
$ 3,130,000
Construction of the following property was completed during the First
Quarter and is in the rent-up phase:
67-unit Cottonwood Apartments, Phase I - Bismarck, ND $ 4,590,731
-----------
Total major additions to portfolio $ 7,720,731
-----------
-----------
</TABLE>
The following properties are under construction:
67-unit Cottonwood Apartments, Phase II - Bismarck, ND
Great Plains Software home office complex - Fargo, ND
FINANCIAL CONDITION. IRET's financial condition continues to be very
strong. The July 31, 1998, balance sheet shows cash and marketable
securities of $7,187,562, compared to the $6,389,446 on hand three months
earlier. Total assets increased to $231,976,590 from the April 30, 1998,
total of $224,718,514. Liabilities increased to $151,016,663 versus the
April 30, 1998, figure of $148,276,615. Shareholder equity increased to
$70,369,518, from $68,152,626 on April 30, 1998.
DIVIDENDS. IRET paid a regular dividend of 11 cents per share on July 1,
1998, to shareholders of record at the close of business on June 11, 1998.
This was an increase from the 10.7 cents per share dividend paid on April
1, 1998, and was the 109th consecutive quarterly dividend paid by IRET.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997.
OVERVIEW. An improvement in occupancy rates for IRET's apartment
communities and good results from newly acquired properties resulted
in a significant increase in Funds From Operations and earnings for
IRET's 28th year, which ended April 30, 1998. Total assets and
shareholder equity also
21
<PAGE>
increased materially and IRET Shares of Beneficial Interest were
listed on the NASDAQ Small-Cap in October of 1997.
FUNDS FROM OPERATIONS. Funds From Operations (taxable income
increased by non-cash deductions of real estate asset depreciation and
amortization, and reduced by capital gain income and other
extraordinary income items) for Fiscal 1998 increased to $9,447,425
($.60 per share), compared to $7,144,622 ($.51 per share) received in
Fiscal 1997, and the $5,977,431 ($.49 per share) recognized in Fiscal
1996.
EARNINGS. IRET's net taxable earnings for Fiscal Year 1998 increased
to $5,014,909 from the $3,897,849 earned in Fiscal 1997 and the
$4,611,970 earned in Fiscal 1996. On a per share basis, net taxable
earnings increased to $.32 per share in Fiscal 1998 from $.28 in
Fiscal 1997 (an increase of 14%), but a decline of $.06 per share from
the $.38 earnings in Fiscal 1996. The increase in taxable earnings
resulted from increased rental income which resulted from a higher
occupancy level in apartment communities owned by the Operating
Partnership.
REVENUES. Total revenues of the Operating Partnership for Fiscal 1998
were $32,407,545, compared to $23,833,982 in Fiscal 1997 (an increase
of 36%) and $18,659,665 in Fiscal 1996. The increase in revenues
received during Fiscal 1998 in excess of the prior year revenues was
$8,573,564. This increase resulted from:
<TABLE>
<S> <C>
Rent from 7 properties acquired in Fiscal 1998 $ 2,658,085
Rent from 11 properties acquired in Fiscal 1997
In excess of that received in Fiscal 1997 5,310,670
An increase in rental income on existing properties 893,976
An increase in rent on Smith Home Furnishing Building
(bankruptcy of tenant) 54,021
A decrease in rent - properties sold during 1997 (194,534)
A decrease in interest income (148,654)
-----------
$ 8,573,564
-----------
-----------
</TABLE>
This increase in revenue resulted primarily from the addition of new
real estate properties to the portfolio. Rents received on properties
owned prior to the beginning of Fiscal Year 1998 saw an increase in
scheduled rents of 2%, and the occupancy level for those properties
increased from approximately 90% to slightly over 94% resulting in an
increase in rental income from those properties of $893,976. The new
properties acquired during Fiscal Years 1997 and 1998 generated nearly
$8,000,000 of new revenues.
Interest income continued to decline as IRET completes the
repositioning of its investment portfolio from a mix of real estate
equities and mortgage loans to one consisting entirely of real estate
equities. Management is of the opinion that the long term yields from
real estate equity investments will exceed that available from
interest income on mortgage loans but, in the short run, the switch
has resulted in lower immediate revenues and taxable income.
22
<PAGE>
Capital gain income for Fiscal 1998 was $465,499 resulting from the
sale of three investment properties. This compares to $398,424 of
capital gain income recognized in Fiscal 1997 and the $994,163
recognized in Fiscal 1996. IRET will continue to seek to market
several of its older and smaller apartment properties.
NET TAXABLE INCOME. The $1,117,060 increase in net taxable income for
Fiscal 1998 over the net income earned in the prior fiscal year
resulted from:
<TABLE>
<S> <C>
An increase in gain from sale of investments $ 67,075
An increase in net rental income (rents, less utilities,
maintenance, taxes, insurance and management) 5,733,442
A decrease in interest income (148,654)
An increase in interest expense (2,840,328)
An increase in depreciation expense (1,207,316)
An increase in operating expenses and advisory trustee
services (299,869)
An increase in amortization expense (45,520)
An increase in Minority interest of Operating Partnership
Income (141,770)
----------
$1,117,060
----------
----------
</TABLE>
PROPERTY ACQUISITIONS. The Operating Partnership added nearly
$40,000,000 of real estate investments to its portfolio during Fiscal
1998, including:
<TABLE>
<S> <C>
Commercial:
Edgewood Vista, East Grand Forks, MN $ 892,500
Edgewood Vista, Minot, ND 6,191,410
Apartments:
Units Description
125 Jenner Properties - Grand Forks (90), Devils
Lake (18) & Dickinson (17), ND $ 2,350,000
108 Kirkwood Manor - Bismarck, ND 3,175,000
248 Magic City Realty Portfolio - Minot, ND 5,270,000
67 Country Meadows - Billings, MT 4,496,134
122 Park East Apartments - Fargo, ND 4,900,000
**67 Legacy Apartments (Phase II) - Grand Forks, ND 3,489,937
67 Cottonwood Apartments - Bismarck, ND 4,522,347
64 Chateau Apartments - Minot, ND 2,364,090
*67 Cottonwood Apartments (Phase II) - Bismarck, ND 1,362,805
--- ----------------------------------------------- -----------
935 Total $39,014,223
</TABLE>
*PROPERTY NOT PLACED IN SERVICE AT APRIL 30, 1998. ADDITIONAL
COSTS ARE STILL TO BE INCURRED.
**REPRESENTS COSTS TO COMPLETE A PROJECT STARTED IN YEAR ENDED
APRIL 30, 1997.
23
<PAGE>
PROPERTY DISPOSITIONS. During Fiscal 1998, the Operating Partnership
sold three real estate properties - Superpumper Convenience Store in
New Town, ND; Superpumper Convenience Store in Bottineau, ND; and a
48-unit apartment complex in Scottsbluff, NE, realizing a total
capital gain of $465,499.
FISCAL 1998 DIVIDENDS. The following dividends were paid during
Fiscal 1998:
<TABLE>
<CAPTION>
Date Per Share Dividend
---- ------------------
<S> <C>
July 1, 1997 $.10125
October 1, 1997 .10300
January 16, 1998 .10500
April 1, 1998 .10700
-------
$.41625
</TABLE>
The Fiscal 1998 pay-out represented a 6.7% increase over the dividends
paid during the prior Fiscal Year of $.39 per share.
FUNDS FROM OPERATIONS. The funds derived during Fiscal 1998 by IRET
from its operations increased by 20% over the prior year and by 34%
from the Fiscal 1996 level ($9,447,425 in Fiscal 1998, versus
$7,144,604 in 1997 and $5,977,431 in 1996). On a per share basis,
Funds From Operations increased to $.60 per share from $.51 in Fiscal
1997 (an increase of 18%) and the $.49 generated in Fiscal 1996. IRET
uses the definition of "Funds From Operations" recommended by the
National Association of Real Estate Investment Trusts which is "net
income (computed in accordance with generally accepted accounting
principles), excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization of real estate
assets, and after adjustments for unconsolidated partnerships and
joint ventures calculated on the same basis." It is emphasized that
funds from operations as so calculated and presented does not
represent cash flows from operations as defined under generally
accepted accounting principles and should not be considered as an
alternative to net income as an indication of operating performance or
to cash flows as a measure of liquidity or ability to fund all cash
needs. (See the Consolidated Statements of Cash Flows in the
Consolidated Financial Statements attached hereto.)
The following is a comparison of dividends paid during the past five
fiscal years to Funds From Operations (as defined above):
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal Fiscal 1995 Fiscal 1994
ITEM 1998 1997 1996 (Restated) (Restated)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Income (GAAP) $ 5,014,909 $ 3,897,849 $ 4,611,970 $ 3,967,830 $ 3,200,388
Adjustments
Gain from
Property Sales (465,499) (398,424) (994,163) (407,512) (64,962)
- -----------------------------------------------------------------------------------------------------
Operating Income $ 4,549,410 $ 3,499,425 $ 3,617,807 $ 3,560,318 $ 3,135,426
Plus Depreciation 4,791,907 3,584,591 2,261,724 1,767,294 1,323,474
Plus Amortization 106,108 60,588 97,900 20,659 28,199
- -----------------------------------------------------------------------------------------------------
Funds from Operations $ 9,447,425 $ 7,144,604 $ 5,977,431 $ 5,348,271 $ 4,487,099
Dividends Paid $ 6,518,627 $ 5,508,689 $ 4,439,034 $ 3,660,986 $ 3,102,061
- -----------------------------------------------------------------------------------------------------
$ 2,928,798 $ 1,635,915 $ 1,538,397 $ 1,687,285 $ 1,385,038
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
24
<PAGE>
Management expects that the Funds From Operations (as defined above)
will continue to improve during Fiscal 1999 and will continue to
exceed dividends paid in the coming year.
LIQUIDITY AND CAPITAL RESOURCES. Important investment and financing
events in Fiscal 1998 were:
The net proceeds from sale of Shares of Beneficial Interest under
Best Efforts offerings were $8,421,858.
An additional $8,583,519 of equity capital was contributed to the
Operating Partnership in UPREIT transactions.
Seven property loans were refinanced. The new loans totalled
$27,000,000, were at a lower interest rate than the old loans and
generated $3,245,000 of additional cash for investment in new
properties.
Nearly $40,000,000 of new real estate investments were acquired
by the Operating Partnership.
IRET's financial condition at the end of Fiscal 1997 continued at the
very strong level of its prior fiscal year.
IRET's shareholder equity increased to $68,152,626 from
$59,997,619 on April 30, 1997, a gain of $8,155,007 (14%).
Equity capital on April 30, 1996, was $50,711,920. These
increases result from the sale of shares of beneficial interest
and the reinvestment of dividends in new shares.
Liabilities of the Operating Partnership increased to
$148,276,615 from $126,995,321 on April 30, 1997. IRET's
liabilities on April 30, 1996, were $80,643,718.
Total assets of the Operating Partnership increased to
$224,718,514 from $186,993,943 on April 30, 1997. IRET's total
assets on April 30, 1996, were $131,355,638.
Cash and marketable securities were $6,389,446 compared to the
year earlier figure of $6,457,182 and $7,127,131 on April 30,
1996.
In addition to its cash and marketable securities, IRET
Properties has an unsecured line of credit agreements with First
International Bank & Trust and First Western Bank & Trust, both
of Minot, ND, of $6,500,000, of which $1,000,000 was in use on
April 30, 1998.
AFFILIATED PARTNERSHIPS. IRET sponsored and served as a general
partner of seven limited partnerships. Because of IRET's position as
a general partner and creditor of these partnerships and because the
partnerships (with the exception of Chateau Properties) did not
produce sufficient cash flow to pay debts due to IRET as scheduled
prior to Fiscal Year 1996, the financial statements of IRET and the
seven partnerships were consolidated for
25
<PAGE>
financial reporting purposes to more properly depict the financial
status of IRET. During Fiscal Year 1996, a new mortgage loan was
negotiated by Chateau Properties, Ltd., on its 64-unit apartment
building in Minot, North Dakota. As a result of this refinancing,
the partnership paid the balance that it owed to IRET on the contract
for deed under which the apartment building had been purchased from
IRET. Further, IRET was not required to guarantee the new mortgage
loan made by the partnership. Accordingly, for Fiscal 1996 and 1997,
IRET is accounting for its partnership interest in Chateau Properties
under the equity method of accounting. Prior financial statements
have been restated to reflect this change. On April 1, 1998, Chateau
Properties was merged into the Operating Partnership.
The six consolidated partnerships are as follows:
<TABLE>
<CAPTION>
Year Property IRET
Name Formed Owned Ownership
---- ------ -------- ---------
<S> <C> <C> <C>
Sweetwater Properties, Ltd. 1981 114 Units Apts. 0%
Bison Properties, Ltd. 1982 125 Units Apts. 20%
First Avenue Building, Ltd. 1981 16,500 Sq. Ft. Office Bldg. 20%
Eastgate Properties, Ltd. 1983 116 Units Apts. 18%
Colton Heights, Ltd. 1984 18 Unit Apt. Bldg. 18.69%
Hill Park Properties, Ltd. 1985 96 Units Apts. 7.14%
</TABLE>
On May 1, 1998, all six partnerships were merged into the Operating
Partnership.
CONSOLIDATED FINANCIAL STATEMENTS. The financial statement included
in this Prospectus consolidates the financial statements of IRET and
the above six limited partnerships. All material inter-company
transactions and balances have been eliminated on the consolidated
statement. The principal impact of this consolidation on the
statement of operations is to reduce reported income as a result of
increased depreciation. On the balance sheet, related mortgage loans
and the investment in partnerships is reduced and real estate owned is
increased. Also, the deferred income account is decreased and the
retained earnings account is also decreased.
IMPACT OF INFLATION. The costs of utilities and other rental expenses
continue to increase, but in most areas, IRET has been able to
increase rental income sufficiently to cover inflationary increases in
rental expense. Increases in rental income are not precluded by
long-term lease obligations except for a few commercial properties
subject to long-term net lease agreements. Thus, as market conditions
allow, rents will be increased to cover inflationary expenses and to
provide a better return to IRET.
ECONOMIC CONDITIONS. Fiscal 1998 saw improved economic conditions in
the northern plains states in which IRET operates. Occupancy rates
for residential properties increased to 94% from the year earlier
level of 90.5% and scheduled rent levels for Trust properties improved
slightly in Fiscal 1998 by about 2%. The mild winter of 1997-98 also
impacted earnings by decreasing snow removal cost, utility expenses
and vacancy rates.
26
<PAGE>
YEAR 2000 COSTS. IRET has requested its principal vendors to inform
it of any anticipated problems associated with the Year 2000 issue for
computer hardware and software. IRET itself does not own or operate
computer systems and will have no direct costs to up-date such
systems. However, IRET could be impacted by computer failures of its
third-party vendors. IRET has been informed by these service
providers (including its Advisor - Odell-Wentz & Associates, LLC) that
computer systems will be Year 2000 compliant by the end of 1998. IRET
does not anticipate that the Year 2000 problem will have any material
cost to it.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996. IRET's Fiscal Year 1997,
which ended on April 30, 1997, saw a continuation of IRET's rapid growth
with assets owned increasing by more than 40%. IRET's 27th year ended with
total assets, revenues, funds from operations and shareholder equity all
reaching record levels.
FUNDS FROM OPERATIONS. Funds from Operations (taxable income increased
by non-cash deductions of depreciation and amortization, and reduced
by capital gain income and other extraordinary income items) for
Fiscal 1997 increased to $7,144,622 ($.51 per share), compared to
$5,977,431 ($.49 per share) generated by IRET in Fiscal 1996 and the
$5,434,244 ($.52 per share) recognized in Fiscal 1995.
EARNINGS. IRET's net taxable earnings for Fiscal Year 1997 decreased
to $3,897,849 from the $4,611,970 earned in Fiscal 1996 and the
$3,967,830 earned in Fiscal 1995. Approximately one-half of the
decrease in earnings from the Fiscal 1996 level resulted from a
decrease in capital gain income. In Fiscal 1997, $398,424 of capital
gain income was recorded, as compared to $994,163 in the prior year.
The other principle reason for the decline in taxable income is the
continuing acquisition by IRET of new real estate investments which
result in an increase in depreciation allowance. In Fiscal 1997,
$3,584,591 of depreciation was recorded as compared to $2,261,724 in
the prior year. This will result in a significant portion of IRET's
dividends being sheltered from income tax by the increased
depreciation allowance.
On a per share basis, net taxable income was $.28 per share for Fiscal
1997, compared to $.38 per share recorded in both Fiscal 1996 and
1995.
REVENUES. Total revenues for Fiscal 1997 were $23,833,982, compared to
$18,659,665 in Fiscal 1996 (an increase of 28%) and $13,801,123 in
Fiscal 1995. The increase in revenues received during Fiscal 1997 in
excess of the prior year revenues was $5,174,317. This increase
resulted from:
<TABLE>
<S> <C>
Rent from 11 properties acquired in
Fiscal 1997 $4,451,266
Rent from 7 properties acquired in
Fiscal 1996 in excess of that
received in Fiscal 1996 1,526,453
</TABLE>
27
<PAGE>
<TABLE>
<S> <C>
A decrease in rental income on
existing properties (-5.4%) (625,949)
An increase in rent on Smith Home
Furnishing Building (bankruptcy of
tenant) 61,892
A decrease in rent - properties sold
during 1996 (76,590)
A decrease in interest income (162,755)
----------
$5,174,317
</TABLE>
This increase in revenue resulted primarily from the addition of new
real estate properties to the portfolio. Rents received on properties
owned prior to the beginning of Fiscal Year 1996 saw an increase in
scheduled rents of 2.25%, but the occupancy level for those properties
decreased from approximately 95% to slightly over 90% resulting in a
decrease in rental income from those properties of $625,949. However,
the new properties acquired during Fiscal Years 1996 and 1997
generated nearly $6,000,000 of new revenues.
Interest income continued to decline as IRET completes the
repositioning of its investment portfolio from a mix of real estate
equities and mortgage loans to one consisting entirely of real estate
equities. Management is of the opinion that the long term yields from
real estate equity investments will exceed that available from
interest income on mortgage loans but, in the short run, the switch
does result in lower immediate revenues and taxable income.
Capital gain income for Fiscal 1997 was $398,424 resulting from the
sale of two older and smaller investment properties. This compares to
$994,163 of capital gain income recognized in Fiscal 1996 and the
$407,512 recognized in Fiscal 1995. IRET will continue to seek to
market several of its older and smaller apartment properties.
NET TAXABLE INCOME. The $714,121 decrease in net taxable income for
Fiscal 1997 over the net income earned in the prior fiscal year
resulted from:
<TABLE>
<S> <C>
A decrease in gain from sale of investments $ (595,739)
An increase in net rental income (rents,
less utilities, maintenance, taxes,
insurance and management) 3,518,152
A decrease in interest income (162,755)
An increase in interest expense (2,091,037)
An increase in depreciation expense (1,322,867)
An increase in operating expenses and
advisory trustee services (97,169)
A decrease in amortization expense 37,312
An increase in Minority interest of
Operating Partnership Income (18)
------------
$ (714,121)
</TABLE>
28
<PAGE>
PROPERTY ACQUISITIONS. IRET added nearly $60,000,000 of real estate to
its portfolio during Fiscal 1997, including:
<TABLE>
<S> <C>
Commercial:
-----------
Computer City, Kentwood, MI $ 2,113,574
Edgewood Vista, Missoula, MT 962,428
Wedgwood Retirement Inns, Sweetwater, GA 2,810,000
Units Apartments
----- ----------
67 Circle 50, Billings, MT* $ 1,519,855
98 South Pointe II, Minot, ND** 1,024,234
60 Rosewood Court, Sioux Falls, SD 1,938,245
116 Legacy Apts., Grand Forks, ND** 3,573,057
98 Rocky Meadows, Billings, MT** 2,654,554
210 Miramont Apts., Fort Collins, CO 14,235,461
192 Neighborhood Apts., Colorado Springs, CO 10,849,561
108 Woodridge Apts., Rochester, MN 6,398,096
67 Cottonwood Lake, Bismarck, ND* 1,055,862
360 Park Meadows Apts., St. Cloud, MN 10,242,747
-----------
Total $59,377,674
</TABLE>
*Property not placed in service at April 30, 1997. Additional costs
are still to be incurred.
**Represents costs to complete a project started in year ending April
30, 1996.
PROPERTY DISPOSITIONS. During Fiscal 1997, IRET sold a 24 plex
apartment building in Hutchinson, MN, realizing a gain of $252,000. It
also recognized a gain of $138,600 from the previous sale of an 18
plex apartment building in Mandan, ND. It is management's intention
to continue to market IRET's older and smaller apartment projects.
GENERAL INFORMATION AS TO INVESTORS REAL ESTATE TRUST
ORGANIZATION OF IRET. Investors Real Estate Trust is a registered real
estate investment trust organized and governed under the laws of North
Dakota. IRET has qualified as a real estate investment trust under Sections
856-858 of the Internal Revenue Code during all years of its existence.
GOVERNING INSTRUMENTS OF IRET. IRET was organized on July 31, 1970. IRET
will continue, unless sooner terminated by a majority vote of the
shareholders, until the expiration of 20 years after the death of the last
survivor of the seven original trustees. All of the original Trustees are
still living, the youngest being 63 years of age. The existence of IRET may
be extended indefinitely by action of the Trustees approved by the vote of
shareholders holding fifty per cent or more of the outstanding shares. IRET
has 10 Trustees.
29
<PAGE>
INDEPENDENT TRUSTEES. IRET adheres to NASAA guidelines requiring a majority
of the Board to be composed of independent Trustees. The Glossary at the end
of this document defines independent Trustee. Pursuant to NASAA guidelines,
IRET considers the following Trustees as independent:
Ralph A. Christensen has served as an independent Trustee since 1970. He is
a retired rancher. Mr. Christensen is a former Director of First Bank -
Minot, N.A. Mr. Christensen has over 25 years experience dealing with
multi-family and commercial real property.
John F. Decker has served as an independent Trustee since August 18, 1998.
Mr. Decker is an Investment Advisor and Managing Director with Piper,
Jaffray, Inc., and resides in Everett, Washington.
Mike F. Dolan has served as an independent Trustee since 1978. Mr. Dolan was
owner and operator of Monarch Concrete until the company's sale in 1980. Mr.
Dolan is also active as an independent oil developer. Mr. Dolan has over 25
years experience dealing with multi-family and commercial real property.
J. Norman Ellison, Jr., has served as an independent Trustee since 1970. Mr.
Ellison was the former owner and operator of Ellison's department store in
Minot. He is a partner of Ellison Realty Co. and former Director of First
Bank - Minot, ND. Mr. Ellison has over 25 years experience dealing with
multi-family and commercial real property.
Daniel L. Feist has served as an independent Trustee since 1985. Mr. Feist
is a general contractor and President of Feist Construction and Realty Inc.
Mr. Feist is a former Director of First Bank - Minot, N.A., and N.D.
Holdings, Inc., of Minot, ND. Mr. Feist has over 25 years experience dealing
with multi-family and commercial real property.
Patrick G. Jones has served as an independent Trustee since 1986. He is the
former Manager and Director of the Minot Daily News as well as former
President of Central Venture Capital, Inc. Mr. Jones is an active investor.
Mr. Jones has over 25 years experience dealing with multi-family and
commercial real property.
Jeff L. Miller has served as an independent Trustee since 1985. He is the
former President of Coca-Cola Bottling Co. of Minot. He is currently
President of M & S Concessions, Inc. Mr. Miller is a former Director of
First Bank -Minot, N.A. Mr. Miller has over 25 years experience dealing with
multi-family and commercial real property.
IRET considers the following Trustees as not independent:
C. Morris Anderson has served as a Trustee since 1970. He was a partner and
founder of Magic City Realty, Ltd., the owner of rental properties now owned
by IRET. He is also the President of North Hill Bowl, Inc., a business
operating a bowling alley, restaurant and lounge in Minot. Mr. Anderson is a
Director of International Inn, Inc., and Norwest Bank - Minot, N.A. Mr.
Anderson has over 25 years experience dealing with multi-family and
commercial real property.
30
<PAGE>
Roger R. Odell has served as a Trustee since 1970. He is a partner in IRET's
advisor, Odell-Wentz & Associates. He is a Director of IRET's principal
property management company - Investors Management & Marketing, Inc. He is
also a Director of Inland National Securities, Inc., one of the
broker-dealers selling IRET's common stock and was a partner with Mr.
Anderson in Magic City Realty, Ltd.
Thomas A. Wentz, Jr., has served as a Trustee since 1996. He is a partner in
IRET's legal counsel, Pringle & Herigstad, P.C. Mr. Wentz is the general
partner of WENCO, a North Dakota Limited Partnership, which owns commercial,
multi-family and farm real estate.
SHAREHOLDER MEETINGS. The governing provisions of IRET require the holding
of annual meetings. It is the policy of the Board of Trustees to hold the
annual meeting in Minot, North Dakota, during the month of August. All
shareholders shall be given not less than 30 days prior written notice.
Special meetings of the shareholders may be called by the chief executive
officer, by a majority of the trustees or by a majority of the Independent
Trustees, and shall be called by an officer of IRET upon written request of
the shareholders holding in the aggregate of not less than 10% of the
outstanding shares of IRET entitled to vote at such meeting. Upon receipt of
a written request, either in person or by mail, stating the purpose or
purposes of the meeting, IRET shall provide all shareholders within ten days
after receipt of said request, written notice, either in person or by mail,
of a meeting and the purpose of such meeting to be held on a date not less
than fifteen nor more than sixty days after the distribution of such notice,
at a time and place specified in the request, or if none if specified, at a
time and place convenient to shareholders. The holders of a majority of
shares in IRET, present in person or by proxy, shall constitute a quorum at
any meeting.
STRUCTURE OF IRET
IRET carries on its activities directly and through subsidiaries and an
Operating Partnership. IRET Properties, a North Dakota Limited Partnership,
was organized on January 31, 1997, and, since February 1, 1997, is the
principle entity through which IRET operates. All assets (except for
Qualified REIT Subsidiaries) and liabilities of IRET have been contributed to
the Operating Partnership in exchange for a general partnership interest in
the Operating Partnership. IRET, INC., a North Dakota corporation, and a
wholly owned subsidiary of IRET acts as the general partner of the Operating
Partnership. As the sole shareholder of IRET, INC., which in turn is the
sole general partner of the Operating Partnership, IRET has the exclusive
power under the Operating Partnership Agreement to manage and conduct the
business of the Operating Partnership, subject to certain limitations
contained in the Operating Partnership Agreement. See "Operating Partnership
Agreement."
IRET's interest in the Operating Partnership will entitle it to receive all
quarterly or yearly cash distributions from the Operating Partnership and to
be allocated its pro-rata share of the profits and losses of the Operating
Partnership. IRET owned in excess of 91.9% of the Operating Partnership on
July 31, 1998. It is expected that the Operating Partnership will merge with
other partnerships or acquire real estate from other persons in exchange for
limited partnership units.
31
<PAGE>
When certain properties were acquired by IRET, the lender financing the
properties required, as a condition of the loan, that the properties be owned
by a "single asset entity." Accordingly, IRET organized three wholly owned
subsidiary corporations for the purpose of holding title to these investment
properties in order to comply with the conditions of the lender. They are:
Pine Cone - IRET, INC., a Colorado corporation, formed to own the 195-unit
Pine Cone apartment complex located in Fort Collins, Colorado; Miramont -
IRET, INC., a Colorado corporation, formed to own the 210-unit Miramont
apartment complex located in Fort Collins, Colorado; and West Stonehill -
IRET, INC., a Minnesota corporation, formed to own the 313-unit West
Stonehill apartment complex located in St. Cloud, Minnesota.
IRET formerly was the general partner and held investment interests in 7
limited partnerships. They were: Eastgate Properties, Ltd.; Bison
Properties, Ltd.; First Avenue Building, Ltd.; Sweetwater Properties, Ltd.;
Hill Park Properties, Ltd.; Colton Heights, Ltd.; and Chateau Properties,
Ltd. All of the above limited partnerships, except Chateau Properties, Ltd.,
were consolidated with IRET for financial reporting purposes. All of these
partnerships have been merged into IRET Properties, with Chateau on April 1,
1998, and the other six on May 1, 1998.
POLICY WITH RESPECT TO CERTAIN ACTIVITIES
The following information is a statement of IRET's policy as it pertains to
the described activities.
TO ISSUE SENIOR SECURITIES. IRET has issued and outstanding Investment
Certificates which are senior to the shares of Beneficial Interest being
offered under this Prospectus. The Investment Certificates are issued for a
definite term and annual interest rate (currently 6 1/2% for 6 months; 7% for
1 year; 7 1/2% for 3 years and 8% for 5 years). In the event of dissolution
of IRET, the Investment Certificates would be paid in preference to the
shares of Beneficial Interest. As of October 31, 1997, the Investment
Certificates outstanding totaled $9,579,002. The Trust does not plan on
issuing other senior securities in the future.
TO BORROW MONEY. IRET plans to continue to borrow money. IRET relies on
borrowed funds in pursuing its investment objectives and goals. The policy
concerning borrowed funds is vested solely with the Board of Trustees and may
be changed by a majority of the Board without a vote of the shareholders.
IRET intends to continue borrowing funds in the future.
Over the past three fiscal years, IRET has borrowed funds as follows:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Cost of Property
Acquired $39,014,223 $59,377,674 $40,660,975
Net Increase in
Mortgages Payable $18,325,028 $44,035,887 $21,702,852
Percent of Acquisition
Price Represented by
Net Increase in
Mortgages Payable 47% 74% 53%
</TABLE>
32
<PAGE>
TO MAKE LOANS TO OTHER PERSONS. As part of IRET's business plan, Trust funds
have been loaned to third parties. The loans are in the form of mortgages
secured by real estate. The decision to make loans is vested solely with the
Board of Trustees and may be changed by a majority of the Board without a
vote of the shareholders.
IRET has no present plans to make additional loans of Trust funds, but may do
so in the future.
IRET had the following outstanding mortgage loans at the end of its most
recent Fiscal Year:
MORTGAGE LOANS RECEIVABLE:
--------------------------
<TABLE>
<CAPTION>
Real Estate 7/31/98
Location Security Balance Rate
- -------- ----------- ------- ----
<S> <C> <C> <C>
Fargo, ND
- ---------
Great Plains Software Office Complex $1,701,308 9.5%
Gilbert, AZ
- -----------
NE 1/4-27-2-6 Commercial Land 678,700 8%
Other Mortgages
- ---------------
Over $100,000 $ 938,196 8-9%
$20,000 to $49,999 78,474 8-9%
Less than $20,000 41,630 7-9%
----------
TOTAL $3,438,308
Unearned Discounts (4,818)
Allowance for Losses (120,314)
Deferred Gain (2,000)
----------
$3,311,176
----------
----------
</TABLE>
TO INVEST IN THE SECURITIES OF OTHER ISSUERS FOR THE PURPOSE OF EXERCISING
CONTROL. Other than the formation of its Operating Partnership - IRET
Properties - and its three Qualified REIT Subsidiaries, IRET has not invested
in the securities of other issuers for the purpose of exercising control over
such issuer and has no plans to do so. The decision to do so is vested
solely in the Board of Trustees and may be changed without a vote of the
shareholders.
TO UNDERWRITE SECURITIES OF OTHER ISSUERS. IRET has no plans to engage in
such an activity.
TO ENGAGE IN THE PURCHASE AND SALE (OR TURNOVER) OF INVESTMENTS. IRET has no
plans to engage in such an activity.
TO OFFER SECURITIES IN EXCHANGE FOR PROPERTY. Commencing on February 1,
1997, IRET operates principally through IRET Properties, a North Dakota
Limited Partnership, of which IRET is the sole general partner. Such a
structure allows IRET to offer Limited Partnership Units in exchange for real
estate. IRET currently has plans to offer Limited Partnership Units in
exchange for real estate on a continuous and ongoing basis. All exchanges
shall be subject to approval by the Board of Trustees on such terms and
conditions which are deemed reasonable by the trustees.
33
<PAGE>
TO REPURCHASE OR OTHERWISE REACQUIRE ITS SHARES OR OTHER SECURITIES. As a
"real estate investment trust" under federal income tax laws, IRET intends to
invest only in real estate assets. IRET is authorized, but not obligated, to
repurchase its own shares and has and may do so from time to time if the
trustees deem such action to be appropriate. (See "Determination of Offering
Price.")
TO MAKE ANNUAL AND OTHER REPORTS TO SHAREHOLDERS. IRET is required to
provide an annual report to shareholders during the month of July. The
annual report contains a financial statement certified by an independent
public accountant. Provision of the annual report to shareholders may only be
changed by a vote of a majority of the shareholders. IRET has a policy of
providing quarterly reports to the shareholders during January, April, July
and October. The quarterly reports do not contain a financial statement
certified by an independent public accountant. The provision of a quarterly
report to the shareholders may be changed by a majority of the Board without
a vote of the shareholders.
INVESTMENT POLICIES OF REGISTRANT
INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE. IRET currently owns
real estate located in 10 states. The company may invest in real estate or
interests in real estate which is located anywhere in the United States.
IRET may invest in any type of real estate or interest in real estate
including, but not limited to, office buildings, apartment buildings,
shopping centers, industrial and commercial properties, special purpose
buildings and undeveloped acreage, except IRET may not invest more than 10%
of net assets in unimproved real estate, excluding property being developed
or property where development will be completed within a reasonable period.
The method of operating IRET's real estate shall be delegated to a management
company as it pertains to the day-to-day management. All major operating
decisions concerning IRET's operation of its real estate shall be made by the
Board.
The method of financing the purchase of real estate investments shall be
primarily from borrowed funds and the sale of shares. The income generated
from rental income and interest income is planned to be distributed to
shareholders as dividends. IRET will rely on proceeds from the sale of
shares offered by this Prospectus to expand its portfolio of real estate
investments.
There is no limitation on the number or amount of mortgages which may be
placed on any one piece of property, provided that the overall ratio of
liabilities to assets for IRET must not exceed 80%. As of July 31, 1998, the
ratio of total liabilities ($151,016,663) to total assets ($231,976,590) was
65%.
It is not IRET's policy to acquire assets primarily for possible capital
gain. Rather, it is the policy of IRET to acquire assets primarily for income.
IRET has no limitation on the amount or percentage of assets which will be
invested in any specific property, except that not more than 10% of assets
can consist of unimproved real estate.
34
<PAGE>
Any Trust policy as it relates to investments in real estate or interests in
real estate may be changed by the Board at anytime without a vote of the
shareholders.
INVESTMENTS IN REAL ESTATE MORTGAGES. While IRET has made mortgage loans in
the past, it is the current policy of IRET not to make any further mortgage
loans.
Any Trust policy as it relates to mortgage loans may be changed by the Board
at anytime without a vote of the shareholders.
INVESTMENTS IN OTHER SECURITIES. IRET has purchased and now owns United
States guaranteed obligations and shares of five other real estate investment
trusts. These purchases are made solely for the purpose of holding cash until
future real estate investments are identified. No investments in other types
of securities are planned.
Any Trust policy as it relates to investments in other securities may be
changed by the Board at anytime without a vote of the shareholders.
INVESTMENTS IN SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN
REAL ESTATE ACTIVITIES. IRET owns shares in five publicly traded REITs,
acquired at a cost of $610,066. No other purchases of such securities are
contemplated at this time.
Any Trust policy as it relates to investments in other securities may be
changed by the Board at anytime without a vote of the shareholders.
DESCRIPTION OF REAL ESTATE
IRET owned the following properties as of July 31, 1998:
<TABLE>
<CAPTION>
REAL ESTATE OWNED: FISCAL MORTGAGE
1999 YEAR PAYABLE
SIZE/TYPE OCCUPANCY PURCHASED COST INTEREST RATE
<S> <C> <C> <C> <C> <C>
APARTMENTS
Dakota Arms 18 Unit 94% 1996 $605,771 $371,643
Minot, ND Apt. Bldg. 8.50%
Fairfield 24 Unit 93% 1988 $425,770 $90,820
Marshall, MN Apt Bldg 9.00%
41 East Apts 41 Unit 88% 1989 $395,744 $225,114
Dickinson, ND Apt. Bldg 8.125
Sunchase Apts. 2 18-unit 97% 1988 $1,016,047 $451,623
Fargo, ND Apt Bldgs. 9.04%
BEULAH CONDOS ND 22 Condo 52% 1983 $465,983 --
Beaulah, ND Units
BISON PROPERTIES 125 Apt Units 94% 1972 $1,766,345 $59,929
Jamestown, 10.00%
Cooperstown, ND
CANDLELIGHT APTS 44 Units 97% 1993 $877,185 $492,604
Fargo, ND Apt. Bldg 8.50%
</TABLE>
35
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
CENTURY APTS 120 Unit 91% 1986 $1,910,950 $1,512,990
Dickinson, ND Apt Complex 7.8785%
CENTURY APTS 192 Unit 88% 1986 $3,860,860 $2,561,301
Williston, ND Apt Complex 7.8785%
CHATEAU APTS 64 Unit 96% 1998 $2,374,787 $1,660,138
Minot, ND Apt. Complex 7.8785%
COUNTRY MEADOWS 49 Unit 95% 1998 $4,498,854 $2,638,407
Billings, MT Apt Complex 7.51%
COLUMBIA PARK PHASE Vacant land N/A Not $725,627 --
Grand Forks, ND Completed
COTTONWOOD LAKE 268 Unit Lease - Up 1998 $7,479,517 --
Bismarck, ND Apt Complex
CRESTVIEW APTS 152 Unit 94% 1994 $4,777,255 $3,400,000
Bismarck, ND Apt Bldg 6.91%
FOREST PARK ESTATES 270 Unit 98% 1993 $7,008,964 $3,955,602
Grand Forks, ND Apt Complex 8.188%
EASTGATE PROPERTIES 116 Unit 93% 1970 $1,999,867 --
Moorhead, MN Apt Complex
COLTON HEIGHTS 18 Unit 76% 1984 $919,632 $332,583
Minot, ND Apt Bldg 10.5%
HERITAGE MANOR 182 Unit - Acquisition $58,959 --
Rochester, MN Apt Complex Phase
HILL PARK PROPERTIES 92 Unit 93% 1985 $3,009,942 $1,394,755
Bismarck, ND Apt Complex 7.8785%
JENNER PROP. 125 Units 92% 1997 $2,468,976 $1,345,424
Grand Forks, ND Apt Bldgs 9.50%
Dickinson, ND
Devils Lake, ND
KIRKWOOD MANOR 108 Units 94% 1997 $3,502,108 $2,270,000
Bismarck, ND Apt Bldgs 7.07%
LEGACY APTS 132 Unit 99% 1996 $10,659,801 $6,483,281
Grand Forks, ND Apt Complex 7.07%
MAGIC CITY APTS 248 Units 91% 1997 $5,370,950 $2,686,503
Minot, ND Apt Bldgs 8.50%
MIRAMONT APT 210 Unit 98% 1996 $14,272,020 $11,515,140
Ft. Collins, CO Apt Complex 8.25%
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
NEIGHBORHOOD APT 192 Unit 97% 1996 $11,032,496 $7,373,741
Colorado Springs, CO Apt Complex 7.98%
NORTH POINTE 49 49 Unit 98% 1995 $2,401,690 $1,691,713
Bismarck, ND Apt Bldg 7.12%
OAK MANOR APTS 27 Unit 97% 1989 $302,357 $231,189
Dickinson, ND Apt Bldg 9.00%
OAKWOOD ESTATES 160 Unit 89% 1993 $5,443,596 $3,403,051
Sioux Falls, SD Apt Complex 7.8785%
OXBOW APTS 120 Unit 98% 1994 $4,977,633 $3,381,866
Sioux Falls, SD Apt Complex 7.8785%
PARK EAST APTS 122 Units 98% 1997 $4,922,449 $3,494,038
Fargo, ND Apt. Complex 6.82%
PARK MEADOWS APT 360 Unit 90% 1997 $10,816,214 $7,871,186
St. Cloud, MN Apt Complex 8.07%
PINE CONE APTS 195 Unit 96% 1994 $13,178,177 $10,519,143
Ft. Collins, CO Apt Complex 7.125%
POINTE WEST APTS 90 Unit 88% 1994 $3,877,641 $2,400,000
Rapid City, SD Apt Complex 6.91%
PRAIRIE WINDS APTS 48 Unit 93% 1993 $1,977,971 $1,329,496
Sioux Falls, SD Apt Bldg 7.71%
ROCKY MEADOWS 98 Unit 91% 1996 $6,646,989 $2,856,677
Billings, MT Apt Complex 7.75%
SOUTH POINTE 196 Unit 94% 1995 $10,254,629 $6,468,315
Minot, ND Apt Complex 7.12%
SOUTHVIEW APTS 24 Unit 85% 1994 $697,126 --
Minot, ND Apt Bldg
SOUTHWIND APTS 164 Unit 96% 1996 $5,619,601 $4,080,014
Grand Forks, ND Apt Complex 7.12%
SWEETWATER PROPERTIES 114 Unit 88% 1972 $1,795,659 $186,985
Devils Lake & Grafton, ND Apt Bldgs 9.75%
WEST STONEHILL 313 Unit 96% 1995 $11,392,889 $7,884,901
St Cloud, MN Apt Complex 7.93%
WOODRIDGE APTS 108 Unit 99% 1996 $6,502,643 $4,256,658
Rochester, MN Apt Complex 7.85%
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Other Properties 81 Units 88% 1987-1991 $849,260 $12,757
- less than $300,000 cost 8.75%
---------------------------------------
Total Residential $183,140,634
---------------------------------------
COMMERCIAL
401 SOUTH MAIN 9,200 sq. ft. 79% 1987 $604,030 --
Minot, ND Commercial Bldg
408 1ST STREET SE Rental House 100% 1986 $46,907 --
Minot, ND
CREEKSIDE OFFICE BUILDING Office Bldgs 90% 1992 $1,677,221 $1,246,183
Billings, MT 7.38%
LESTER CHIROPRACTIC CLINIC 5,000 sq. ft. 100% 1988 $268,917 --
Bismarck, ND Clinic Bldg
WALTERS 214 SO MAIN 3,500 sq. ft. 100% 1978 $111,915 --
Minot, ND Retail Bldg
ARROWHEAD SHOPPING CNTR 80,000 sq. ft. 99% 1973 $2,713,004 --
Minot, ND Shopping Center
BARNES & NOBLE 30,000 sq. ft. 100% 1994 $3,292,012 $2,110,085
Fargo, ND Retail/Whse. 7.98%
BARNES & NOBLE 30,000 sq. ft. 100% 1995 $3,669,101 $2,285,926
Omaha, NB Retail/Whse. 7.98%
CARMIKE THEATRE 28,528 sq. ft. 100% 1994 $2,545,737 $1,978,644
Grand Forks, ND 10 screen theatre 7.75%
COMPUTER CITY 16,080 sq. ft. 100% 1996 $2,113,574 $1,487,346
Kentwood, MI Strip Shopping 7.75%
CORNER EXPRESS 4,674 sq. ft. 100% 1998 $1,196,342 $0
Minot, ND Convenience/Gas --
EDGEWOOD VISTA 10,314 sq. ft. 100% 1998 $968,855 $0
Billings, MT Assisted Living --
EDGEWOOD VISTA 10,314 sq. ft. 100% 1998 $969,835 $0
Sioux Falls, SD Assisted Living --
EDGEWOOD VISTA 10,314 sq. ft. 100% 1997 $962,428 $623,892
Missoula, MT Assisted Living 9.75%
EDGEWOOD VISTA 10,314 sq. ft. 100% 1997 $899,821 $624,460
East Grand Forks, MN Assisted Living 8.10%
</TABLE>
38
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
EDGEWOOD VISTA 77,211 sq. ft. 100% 1997 $6,275,931 $3,584,091
Minot, ND Assisted Living 8.27%
FIRST AVENUE BUILDING 16,500 sq. ft. 84% 1981 $838,544 --
Minot, ND Office Bldg.
GREAT PLAINS SOFTWARE 121,600 sq. ft. -- Not Completed $3,207,844 --
Fargo, ND Office Complex
HUTCHINSON TECHNOLOGY Manufacturing 100% 1993 $4,429,026 $2,187,750
Sioux Falls, SD Plant 8.75%
LINDBERG BUILDING Office/Whrse 100% 1992 $1,455,789 $1,191,825
Eden Prairie, MN 7.625
MINOT PLAZA 11,200 sq. ft. 100% 1993 $508,796 --
Minot, ND Strip Shopping
PETCO WAREHOUSE 18,000 sq. ft 100% 1994 $1,278,934 $761,837
Fargo, ND Retail/Whrse 8.38%
PIONEER SEED Office/Whse. 100% 1992 $653,876 $297,310
Moorhead, MN 8.375%
RETAIL WAREHOUSE 70,000 sq. ft. 30% 1994 $5,646,485 $3,503,105
Boise, ID Retail/Whse. 9.75%
STONE CONTAINER Manufacturing 100% 1995 $4,998,485 $2,990,416
Fargo, ND Plant 8.25%
SUPERPUMPER Gas Station/ 100% 1988 $428,777 --
Crookston, MN Conven. Store
SUPERPUMPER Gas Station/ 100% 1986 $297,064 --
Emerado, ND Conven. Store
SUPERPUMPER Gas Station/ 100% 1991 $485,007 --
Grand Forks, ND Conven. Store
SUPERPUMPER Gas Station/ 100% 1987 $239,212 --
Langdon, ND Conven. Store
SUPERPUMPER Gas Station/ 100% 1993 $120,600 --
Sidney, MT Conven. Store
</TABLE>
39
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
WEDGEWOOD RETIREMENT Assisted Living 100% 1996 $ 3,971,879 $1,527,788
Sweetwater, GA 8.0375
Total Commercial $56,906,255
Total Real Estate Owned $240,046,889 $137,324,811
Less: Accumulated Depreciation (22,575,451)
Net Carrying $217,471,438
Value
</TABLE>
TITLE. The title to all of the above properties is in the name of IRET
Properties, IRET or a wholly owned subsidiary, in fee simple (in each case,
IRET has in its files an attorney's title opinion or a title insurance policy
evidencing its title).
INSURANCE. In the opinion of management, all of said properties are
adequately covered by casualty and liability insurance.
PLANNED IMPROVEMENTS. There are no plans for material improvements to any of
the above properties.
CONTRACTS OR OPTIONS TO SELL. As of July 31, 1998, IRET had not entered into
any contracts or options to sell any of the above properties.
OCCUPANCY AND LEASES. Occupancy rates shown above are for the three months
ended July 31, 1998. In the case of apartment properties, lease arrangements
with individual tenants vary from month-to-month to one year leases, with the
normal term being six months. Leases on commercial properties vary from one
year to 20 years.
SHARES AVAILABLE FOR FUTURE SALE
Under its Restated Declaration of Trust, IRET is authorized to issue an
unlimited number of its shares of Beneficial Interest. See "Description of
Shares of Beneficial Interest."
The shares of Beneficial Interest issued in connection with this offering and
two prior registrations of 4,600,000 shares of Beneficial Interest will be
freely tradable by persons other than "affiliates" of IRET without
restriction under the Securities Act of 1933, as amended, subject to certain
limitations on ownership set forth in the Restated Declaration of Trust. See
"Description of IRET's Securities - Restrictions on Transfer."
Pursuant to the Operating Partnership Agreement, the Limited Partners (other
than IRET) will have exchange rights which, beginning one year after the
acquisition of such limited partnership units, enable them to cause the
operating partnership to exchange their limited partnership units for cash
or, at the option of the General Partner, Trust shares of Beneficial Interest
on a one-for-one basis. Shares of Beneficial Interest of IRET, other than
those issued under this registration and the prior registrations which were
effective July 9, 1996, and March 14, 1997, respectively, will be
"restricted" securities under the meaning of Rule 144 of the
40
<PAGE>
Securities Act of 1933 and may not be sold in the absence of registration
under the Securities Act of 1933 unless an exemption from registration is
available, including exemptions contained in Rule 144.
In general, under Rule 144 as currently in effect, if two years have elapsed
since the later of the date of acquisition of restricted securities from IRET
or any "affiliate" of IRET, as that term is defined under the Securities Act
of 1933, the acquiror or subsequent holder thereof is entitled to sell within
any three month period a number of shares that does not exceed the greater of
one percent (1%) of the then outstanding shares of Beneficial Interest or the
average weekly trading volume of the shares of Beneficial Interest during the
four calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission. Sales under Rule 144 also are
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about IRET. If three years have
elapsed since the date of acquisition of restricted shares from IRET or from
any affiliate of IRET and the holder thereof is deemed not to have been an
affiliate of IRET at any time during the three months preceding a sale, such
holder would be entitled to sell such shares in the public market under Rule
144(k) without regard to the volume limitations, manner of sale provisions,
public information requirements or notice requirements.
IRET has agreed under the Operating Partnership Agreement that it will file
with the Securities and Exchange Commission a shelf registration on Form S-3
under Rule 415 of the Securities Act or any similar rule adopted by the
Commission with respect to any Trust shares of Beneficial Interest that may
be issued upon exchange of limited partnership units in the operating
partnership, pursuant to Section 8.06 of the Operating Partnership Agreement
and to use its best efforts to have such registration statement declared
effective under the Securities Act of 1933.
No prediction can be made as to the effect, if any, that future sales of
shares of Beneficial Interest, or the availability of such shares for future
sale, will have on the market price of the shares of Beneficial Interest
prevailing from time to time. Sales of substantial amounts of shares of
Beneficial Interest, or the perception that such sales could occur, may
adversely affect prevailing market prices of such shares. See "Risk Factors
- - Liquidity."
OPERATING PARTNERSHIP AGREEMENT
The following summary of the material terms of the Operating Partnership
Agreement, and the descriptions of certain provisions thereof set forth
elsewhere in this Prospectus, is qualified in its entirety by reference to
the Operating Partnership Agreement, which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
MANAGEMENT. The Operating Partnership has been organized as a North Dakota
limited partnership pursuant to the terms of the Agreement of Limited
Partnership of the Operating Partnership (the "Operating Partnership
Agreement"). Pursuant to the Operating Partnership Agreement, the General
Partner, as the sole general partner of the Partnership, has full, exclusive
and complete responsibility and discretion in the management and control of
the Operating Partnership, and the Limited Partners have no authority in
their capacity as Limited Partners to transact business for, or
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participate in the management activities or decisions of, the Operating
Partnership except as required by applicable law. However, any amendment to
the Operating Partnership Agreement that would (i) adversely affect the
Exchange Rights (as defined herein), (ii) adversely affect the Limited
Partners' rights to receive cash distributions, (iii) alter the Operating
Partnership's allocations of capital of the Operating Partnership, requires
the consent of Limited Partners (other than the General Partner) holding more
than fifty percent (50%) of the Units held by such partners.
TRANSFERABILITY OF INTERESTS. The General Partner may not voluntarily
withdraw from the Operating Partnership or transfer or assign its interest in
the Operating Partnership unless the transaction in which such withdrawal or
transfer occurs results in the Limited Partners receiving property in an
amount equal to the amount they would have received had they exercised their
Exchange Rights immediately prior to such transaction, or unless the
successor to the General Partners contributes substantially all of its assets
to the Operating Partnership in return for an interest in the Operating
Partnership. With certain limited exceptions, the Limited Partners may not
transfer their interests in the Operating Partnership, in whole or in part,
without the written consent of the General Partner, which consent the General
Partner may withhold in its sole discretion. The General Partner may not
consent to any transfer that would cause the Operating Partnership to be
treated as a corporation for federal income tax purposes.
The Company may not engage in any transaction resulting in a change of
control (a "Transaction") unless in connection with the Transaction the
Limited Partners receive or have the right to receive cash or other property
equal to the product of the number of Shares of Beneficial Interest into
which each Unit is then exchangeable and the greatest amount of cash,
securities or other property paid in the Transaction to the holder of one
Share of Beneficial Interest in consideration of one such Share. If, in
connection with the Transaction, a purchase, tender or exchange offer shall
have been made to and accepted by the holders of more than fifty percent
(50%) of the outstanding Shares of Beneficial Interest, each holder of Units
will receive, or will have the right to elect to receive, the greatest amount
of cash, securities, or other property which such holder would have received
had it exercised its right to redemption and received Shares of Beneficial
Interest in exchange for its OP Units immediately prior to the expiration of
such purchase, tender or exchange offer and had thereupon accepted such
purchase, tender or exchange offer.
Notwithstanding the foregoing paragraph, IRET may merge, or otherwise combine
its assets, with another entity if, immediately after such merger or other
combination, substantially all of the assets of the surviving entity, other
than Units held by IRET, are contributed to the Operating Partnership as a
capital contribution in exchange for Units with a fair market value, as
reasonable determined by IRET, equal to the agreed value of the assets so
contributed.
In respect of any Transaction described in the preceding two paragraphs, IRET is
required to use its commercially reasonable efforts to structure such
Transaction to avoid causing the Limited Partners to recognize gain for federal
income tax purposes by virtue of the occurrence of or their participation in
such Transaction, provided
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such efforts are consistent with the exercise of the Board of Trustees'
fiduciary duty under applicable law.
CAPITAL CONTRIBUTION. All assets of IRET (except its Qualified REIT
Subsidiaries) will be held by the Operating Partnership, including the
proceeds of this Offering. Although the Operating Partnership will receive
the net proceeds of the Offering, IRET and the General Partner will be deemed
to have made a capital contribution to the Operating Partnership in the
amount of the gross proceeds of the Offering and the Operating Partnership
will be deemed simultaneously to have paid the expenses paid or incurred in
connection with the Offering. The Operating Partnership Agreement provides
that if the Operating Partnership requires additional funds at any time or
from time to time in excess of funds available to the Operating Partnership
from borrowing or capital contributions, the General Partner or IRET may
borrow such funds from a financial institution or other lender and lend such
funds to the Operating Partnership on the same terms and conditions as are
applicable to the General Partner's or IRET's, as applicable, borrowing of
such funds. Moreover, the General Partner is authorized to cause the
Operating Partnership to issue partnership interests for less than fair
market value if IRET (i) has concluded in good faith that such issuance is in
the best interest of IRET and the Operating Partnership and (ii) the General
Partner makes a capital contribution in an amount equal to the proceeds of
such issuance. Under the Operating Partnership Agreement, the General
Partner generally is obligated to contribute or cause IRET to contribute the
proceeds of a share offering by IRET as additional capital to the Operating
Partnership. Upon such contribution, the General Partner or IRET, as
applicable, will receive additional Units and the General Partner's or
IRET's, as applicable, percentage interest in the Operating Partnership will
be increased on a proportionate basis based upon the amount of such
additional capital contributions. Conversely, the percentage interests of
the Limited Partners will be decreased on a proportionate basis in the event
of additional capital contributions by the General Partner or IRET. In
addition, if the General Partner or IRET contributes additional capital to
the Operating Partnership, the General Partner will revalue the property of
the Operating Partnership to its fair market value (as determined by the
General Partner) and the capital accounts of the partners will be adjusted to
reflect the manner in which the unrealized gain or loss inherent in such
property (that has not been reflected in the capital accounts previously)
would be allocated among the partners under the terms of the Operating
Partnership Agreement if there were a taxable disposition of such property
for such fair market value on the date of the revaluation.
EXCHANGE RIGHTS. Pursuant to the Operating Partnership Agreement, the
Limited Partners (other than IRET) have exchange rights ("Exchange Rights")
that enable them to cause the Operating Partnership to exchange their Units
for cash, or at the option of the General Partner, Shares of Beneficial
Interest on a one-for-one basis. The exchange price will be paid in cash in
the event that the issuance of Shares of Beneficial Interest to the
exchanging Limited Partner would (i) result in any person owning, directly or
indirectly, Shares of Beneficial Interest in excess of the Ownership
Limitation, (ii) result in shares of beneficial interest of IRET being owned
by fewer than 100 persons (determined without reference to any rules of
attribution), (iii) result in IRET being "closely held" within the meaning of
Section 856(h) of the Code, (iv) cause IRET to own, actually or
constructively, 10% or more of the ownership interest in a tenant of IRET's
or the Operating
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Partnership's real property, within the meaning of Section 856(d)(2)(B) of
the Code, or (v) cause the acquisition of Shares of Beneficial Interest by
such redeeming Limited Partner to be "integrated" with any other distribution
of Shares of Beneficial Interest for purposes of complying with the
Securities Act. The Exchange Rights may be exercised by the Limited Partners
at any time after the first anniversary of the date of their acquisition,
provided that not more than two exchanges may occur during each calendar year
and each Limited Partner may not exercise the Exchange Right for less than
1,000 Units or, if such Limited Partner holds less than 1,000 Units, all of
the Units held by such Limited Partner. See "Federal Income Tax
Considerations - Tax Aspects of the Operating Partnership." The number of
Shares of Beneficial Interest issuable upon exercise of the Exchange Rights
will be adjusted upon the occurrence of share splits, mergers, consolidations
or similar pro rata share transactions, which otherwise would have the effect
of diluting the ownership interests of the Limited Partners or the
shareholders of the Company.
REGISTRATION RIGHTS. For a description of certain registration rights held
by the Limited Partners, see "Shares Available for Future Sale."
OPERATIONS. The Operating Partnership Agreement requires that the Operating
Partnership be operated in a manner that will enable IRET to satisfy the
requirements for being classified as a REIT for federal tax purposes, to
avoid any federal income or excise tax liability imposed by the Code, and to
ensure that the Operating Partnership will not be classified as a "publicly
traded partnership" for purposes of Section 7704 of the Code.
In addition to the administrative and operating costs and expenses incurred
by the Operating Partnership, the Operating Partnership will pay all
administrative costs and expenses of IRET and the General Partner
(collectively, the "Trust Expenses") and IRET Expenses will be treated as
expenses of the Operating Partnership. IRET Expenses generally will include
(i) all expenses relating to the operation and continuity of existence of
IRET and the General Partner, (ii) all expenses relating to the public
offering and registration of securities by IRET, (iii) all expenses
associated with the preparation and filing of any periodic reports by IRET
under federal, state or local laws or regulations, (iv) all expenses
associated with compliance by IRET and the General Partner with laws, rules
and regulations promulgated by any regulatory body and (v) all other
operating or administrative costs of the General Partner incurred in the
ordinary course of its business on behalf of the Partnership.
DISTRIBUTIONS. The Operating Partnership Agreement provides that the
Operating Partnership shall distribute cash from operations (including net
sale or refinancing proceeds, but excluding net proceeds from the sale of the
Operating Partnership's property in connection with the liquidation of the
Operating Partnership) on a quarterly (or, at the election of the General
Partner, more frequent) basis, in amounts determined by the General Partner
in its sole discretion, to the partners in accordance with their respective
percentage interests in the Operating Partnership. Upon liquidation of the
Operating Partnership, after payment of, or adequate provision for, debts and
obligations of the Operating Partnership, including any partner loans, any
remaining assets of the Operating Partnership will be distributed
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to all partners with positive capital accounts in accordance with their
respective positive capital account balances. If IRET has a negative balance
in its capital account following a liquidation of the Operating Partnership,
it will be obligated to contribute cash to the Operating Partnership equal to
the negative balance in its capital account.
ALLOCATIONS. Income, gain and loss of the Operating Partnership for each
fiscal year generally is allocated among the partners in accordance with
their respective interests in the Operating Partnership, subject to
compliance with the provisions of Code Sections 704(b) and 704(c) and
Treasury Regulations promulgated thereunder.
TERM. The Operating Partnership shall continue until April 30, 2050, or
until sooner dissolved upon (i) the bankruptcy, dissolution or withdrawal of
the General Partner (unless the Limited Partners elect to continue the
Operating Partnership), (ii) the sale or other disposition of all or
substantially all the assets of the Operating Partnership, (iii) the
redemption of all limited partnership interests in the Partnership (other
than those held by IRET, if any), or (iv) the election by the General Partner.
FIDUCIARY DUTY. The Limited Partners have agreed that in the event of any
conflict in the fiduciary duties owed by IRET to its shareholders and by the
General Partner to such Limited Partners, the General Partner will fulfill
its fiduciary duties to such limited partnership by acting in the best
interests of IRET's shareholders.
TAX MATTERS. Pursuant to the Operating Partnership Agreement, the General
Partner is the tax matters partner of the Operating Partnership and, as such,
has authority to handle tax audits and to make tax elections under the Code
on behalf of the Operating Partnership.
TAX TREATMENT OF IRET AND ITS SECURITY HOLDERS
FEDERAL INCOME TAX. Since its organization, IRET has operated in a manner to
qualify as a real estate investment trust under Sections 856-858 of the
Internal Revenue Code. Under such Sections a real estate investment trust
which, in any taxable year, meets certain requirements will not be subject to
Federal income tax with respect to income which it distributes to
shareholders.
To be considered a real estate investment trust for purposes of the Federal
income tax laws, IRET must continue to meet the following requirements, among
others:
(1) At the end of each fiscal quarter at least 75% of the total assets of
IRET must consist of real estate assets (including interests in
mortgages on real property and shares in other real estate investment
trusts meeting the requirements for taxation in accordance with
Sections 856-858 of the Internal Revenue Code), cash, cash items
including receivables and government securities. As to non-real
estate investments, which may not exceed 25% of the total assets of
IRET, the securities of any one issuer acquired by IRET may not
represent more than 5% of the value of IRET's assets or more than 10%
of the outstanding voting securities of such issuer.
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(2) At least 75% of the gross income of IRET for the taxable year must be
derived from real property rents, interest on obligations secured by
mortgages on real property, abatements and refunds of real estate
taxes, gains from the sale or other disposition of real estate
interests or mortgages on real property and dividends or other
distributions on, and gains from the sale of shares of other real
estate investment trusts meeting the requirements for taxation in
accordance with Sections 856-868 of the Internal Revenue Code. An
additional 15% of the gross income of IRET must be derived from the
same sources or from dividends, or interest, or gains from the sale or
other disposition of stock or securities, or any combination of the
foregoing.
(3) Gross income for the taxable year from sales or other disposition of
stock or securities held for less than six months and of real property
(or interests in real property) held for less than four years must be
less than 30% of gross income. IRET may not hold any property
primarily for sale to customers in the ordinary course of its trade or
business.
(4) Beneficial ownership of IRET must be held by 100 or more persons
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. More
than 50% of the outstanding capital stock may not be owned, directly
or indirectly, by or for, five or fewer individuals, at any time
during the last half of the taxable year.
As a real estate investment trust, IRET will not be taxed on that portion of its
taxable income (including capital gains) which is distributed to shareholders,
if at least 95% of its real estate investment trust taxable income (taxable
income adjusted as provided in Section 857 of the Internal Revenue Code) is
distributed. However, to the extent that there is undistributed taxable income
or undistributed capital gain, IRET will be taxed as a corporation at corporate
income tax rates. IRET will not be entitled to carry back or carry forward any
net operating losses.
So long as IRET has met the statutory requirements for taxation as a real estate
investment trust, distributions made to IRET's shareholders will be taxed to
them as ordinary income or long term capital gain, as the case may be.
Distributions will not be eligible for the dividend exclusion for individuals,
or for the 85% dividends received deduction for corporations. IRET will notify
each shareholder as to what portion of the distributions in the opinion of its
counsel constitutes ordinary income or capital gain. The shareholders may not
include in their individual income tax returns any operating or extraordinary
losses of IRET, whether ordinary or capital losses.
If, in any taxable year, IRET should not qualify as a real estate investment
trust, it would be taxed as a corporation and distributions to its shareholders
would not be deductible by IRET in computing its taxable income. Such
distributions, to the extent made out of IRET's current or accumulated earnings
and profits, would be taxable to the shareholders as dividends, but would be
eligible for the dividend exclusion, or the 85% dividends received deduction for
corporations.
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The foregoing, while summarizing some of the more significant provisions of the
Internal Revenue Code which govern the tax treatment of IRET, is general in
character. For a complete statement, reference should be made to the pertinent
Code Sections and the Regulations issued thereunder.
In the opinion of the law firm of Pringle & Herigstad, P.C., counsel for IRET,
the contemplated method of operation of IRET complies with the requirements of
the Internal Revenue Code for qualification as a real estate investment trust.
The Regulations of the Treasury Department require that the trustees have
continuing exclusive authority over the management of IRET, the conduct of its
affairs and, with certain limitations, the management and disposition of IRET
property. It is the intention of the trustees to effect any amendments to the
Declaration of Trust that may be necessary in the opinion of counsel for IRET to
meet the requirements of any modification or interpretation of the Regulations.
Provision for such amendment by the trustees, without the vote or consent of the
shareholders, is contained in the Declaration of Trust.
NORTH DAKOTA INCOME TAX. In the opinion of counsel for IRET, since IRET
qualifies as a Real Estate Investment Trust for purposes of the Federal income
tax laws, it will not be subject to the North Dakota Corporate Income Tax on
that portion of its taxable income (including capital gains) which is
distributed to shareholders, provided that the 95 percent distribution
requirement outlined above is met. To the extent there is undistributed taxable
income or undistributed capital gain, IRET will be taxed as a corporation for
North Dakota income tax purposes. IRET will not be entitled to carry back or
carry forward any net operating losses. Distributions to IRET shareholders of
capital gains or taxable income will be subject to the North Dakota income tax.
TAXATION OF IRET'S SHAREHOLDERS. If IRET qualifies as a REIT, and so long as
IRET so qualifies, distributions made to IRET's shareholders out of current
or accumulated earnings and profits will be taken into account by them as
ordinary income (which will not be eligible for the dividends received
deduction for corporations). Distributions that are designated as capital
gain dividends will be taxed as long-term capital gains to the extent they do
not exceed IRET's actual net capital gain dividend for the taxable year,
although corporate shareholders may be required to treat up to 20% of any
such capital gain dividend as ordinary income. Distributions in excess of
current or accumulated earnings and profits will not be taxable to a
shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's shares of stock, but rather will reduce the adjusted basis of
such shares of stock. To the extent that such distributions exceed the
adjusted basis of shareholder's shares of stock they will be included in
income as long-term or short-term capital gain assuming the shares are held
as a capital asset in the hands of the shareholder. IRET will notify
shareholders at the end of each year as to the portions of the distributions
which constitute ordinary income, net capital gain or return of capital.
In addition, any dividend declared by IRET in October, November or December of
any year payable to a shareholder of record on a specified date in any such
month shall be treated as both paid by IRET and received by the shareholder on
December 31 of such year, despite that the dividend is actually paid by IRET
during January of the
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following calendar year. Shareholders may not include in their individual
income tax returns any net operating losses or capital losses of IRET.
In general any gain or loss upon a sale or exchange of shares by a
shareholder who has held such shares as a capital asset will be long-term or
short-term depending on whether the stock was held for more than one year;
provided, however, any loss on the sale or exchange of shares that have been
held by such shareholder for six months or less will be treated as a
long-term capital loss to the extent of distributions from IRET required to
be treated by such shareholders as long-term capital gain.
TAXATION OF TAX-EXEMPT SHAREHOLDERS. The IRS has ruled that amounts
distributed as dividends by a qualified REIT do not constitute unrelated
business taxable income ("UBTI") when received by a tax-exempt entity. Based
on that ruling the dividend income from IRET should not, subject to certain
exceptions described below, be UBTI to a qualified plan, IRA or other
tax-exempt entity (a "Tax-Exempt Shareholder") provided that Tax-Exempt
Shareholder has not held its shares as "debt financed property" within the
meaning of the Code and the shares are not otherwise used in an unrelated
trade or business of the Tax-Exempt Shareholder. Similarly, income from the
sale of Common Stock should not, subject to certain exceptions described
below, constitute UBTI unless the Tax-Exempt Shareholder has held such Common
Stock as a dealer (under Section 512(b)(5)(B) of the Code) or as "debt
financed property" within the meaning of Section 514 of the Code.
For Tax-Exempt Shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code respectively, income from
an investment in IRET will constitute UBTI unless the organization is able to
deduct properly amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in IRET. Such
prospective investors should consult their tax advisors concerning these
"set-aside" and reserve requirements.
Notwithstanding the above, however, the recently enacted Omnibus Budget
Reconciliation Act of 1993 (the "1993 Act") provides that, effective for
taxable years beginning in 1994, a portion of the dividends paid by a
"pension held REIT" shall be treated as UBTI as to any trust which (i) is
described in Section 401(a) of the Code, (ii) is tax-exempt under Section
501(a) of the Code, and (iii) holds more than 10% (by value) of the interests
in the REIT. Tax-exempt pension funds that are described in Section 401(a)
of the Code are referred to below as "qualified trusts."
A real estate investment trust is a "pension held REIT" if (i) it would not
have qualified as a real estate investment trust but for the fact that
Section 856(h)(3) of the Code (added by the 1993 Act) provides that stock
owned by qualified trusts shall be treated, for purposes of the "not closely
held" requirements, as owned by the beneficiaries of IRET (rather than by
IRET itself), and (ii) either (a) at least one such qualified trust holds
more than 25% (by value) of the interests in the REIT, OR (b) one or more
such qualified trusts, each of whom owns more than 10% (by value) of the
interests in the REIT, hold in the aggregate more than 50% (by value) of the
interests in the REIT.
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TAX CONSIDERATIONS FOR FOREIGN INVESTORS. The preceding discussion does not
address the federal income tax considerations to foreign investors of an
investment in IRET. Foreign investors in the Shares should consult their own
tax advisors concerning those provisions of the Code which deal with the
taxation of foreign taxpayers. In particular, foreign investors should
consider, among other things, the impact of the Foreign Investors Real
Property Tax Act of 1980. In addition, various income tax treaties between
the United States and other countries could affect the tax treatment of an
investment in the Shares. Furthermore, the backup withholding and
information reporting rules are under review by the United States Treasury,
and their application to the shares could be changed prospectively or
retroactively by future Treasury Regulations.
BACKUP WITHHOLDING. IRET will report to its domestic shareholders and the
IRS the amount of dividends paid during each calendar year, and the amount of
tax withheld, if any. Under the backup withholding rules, a shareholder may
be subject to backup withholding at the rate of 31% with respect to dividends
paid unless such holder (a) is a corporation or comes within certain other
exempt categories and when required, demonstrates this fact, or (b) provides
a correct taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A shareholder that does not
provide IRET with a correct taxpayer identification number may also be
subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be creditable against the shareholder's income tax
liability. In addition, IRET may be required to withhold a portion of
capital gain distributions to any shareholders who fail to certify their
non-foreign status to IRET.
STATE AND LOCAL TAXES. IRET or its shareholders may be subject to state or
local taxation in the state or local jurisdiction in which IRET's investments
or loans are located or in which the shareholders reside.
Prospective shareholders should consult their tax advisors for an explanation
of how state and local tax laws could affect their investment in the Shares.
OTHER TAX CONSIDERATIONS. In the event IRET enters into any joint venture
transactions, special tax risks might arise. Such risks include possible
challenge by the IRS of (i) allocations of income and expense items, which
could affect the computation of taxable income of IRET and (ii) the status of
the joint venture as a partnership (as opposed to a corporation). If a joint
venture were treated as a corporation, the joint venture would be treated as
a taxable entity and if IRET's ownership interest in the joint venture
exceeds 10%, IRET would cease to qualify as a REIT. Furthermore, in such a
situation even if IRET ownership does not exceed 10%, distributions from the
joint venture to IRET would be treated as dividends, which are not taken into
account in satisfying the 75% gross income test described above and which
could therefore make it more difficult for IRET to qualify as a REIT for the
taxable year in which such distribution was received and the interest in the
joint venture held by IRET would not qualify as a "real estate asset" which
could make it more difficult for IRET to meet the 75% asset test described
above. Finally, in such a situation IRET would not be able to deduct its
share of losses generated by the joint venture in computing its taxable
income. See "Failure of IRET to Qualify as a Real Estate Investment Trust"
above for a discussion of the effect of IRET's failure to meet such tests for
a taxable year. IRET will not enter
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into any joint venture, however, unless it has received from its counsel an
opinion to the effect that the joint venture will be treated for tax purposes
as a partnership. Such opinion will not be binding on the IRS and no
assurance can be given that the IRS might not successfully challenge the
status of any such joint venture as a partnership.
TAX ASPECTS OF THE OPERATING PARTNERSHIP. The following discussion
summarizes certain federal income tax considerations applicable to IRET's
investment in the Operating Partnership. The discussion does not cover state
or local tax laws or any federal tax laws other than income tax laws.
CLASSIFICATION AS A PARTNERSHIP. IRET will include in its income its
distributive share of the Operating Partnership's income and deduct its
distributive share of the Partnership's losses only if the Partnership is
classified for federal income tax purposes as a partnership rather than as a
corporation or an association taxable as a corporation. An organization
formed as a partnership will be treated as a partnership, rather than as a
corporation, for federal income tax purposes if it (i) has no more than two
of the four corporate characteristics that the Treasury Regulations use to
distinguish a partnership from a corporation for tax purposes and (ii) is not
a "publicly traded" partnership. Those four corporate characteristics are
continuity of life, centralization of management, limited liability, and free
transferability of interests. A publicly traded partnership is a partnership
whose interests are traded on an established securities market or are readily
tradable on a secondary market (or the substantial equivalent thereof). A
publicly traded partnership will be treated as a corporation for federal
income tax purposes unless at least 90% of such partnership's gross income
for a taxable year consists of "qualifying income" under Section 7704(d) of
the Code, which generally includes any income that is qualifying income for
purposes of the 95% gross income test applicable to REITs (the "90%
Passive-Type Income Exception"). See "Federal Income Tax."
The U.S. Treasury Department recently issued regulations effective for
taxable years beginning after December 31, 1995 (the "PTP Regulations") that
provide limited safe harbors from the definition of a publicly traded
partnership. Pursuant to one of those safe harbors, (the "Private Placement
Exclusion"), interests in a partnership will not be treated as readily
tradable on a secondary market or the substantial equivalent thereof if (i)
all interests in the partnership were issued in a transaction (or
transactions) that was not required to be registered under the Securities Act
of 1933, and (ii) the partnership does not have more than 100 partners at any
time during the partnership's taxable year. In determining the number of
partners in a partnership, a person owning an interest in a flow-through
entity (I.E., a partnership, grantor trust, or S corporation) that owns an
interest in the partnership is treated as a partner in such partnership only
if (a) substantially all of the value of the owner's interest in the
flow-through entity is attributable to the flow-through entity's interest
(direct or indirect) in the partnership, and (b) a principal purpose of the
use of the tiered arrangement is to permit the partnership to satisfy the
100-partner limitation. At the date of this Prospectus, the Operating
Partnership qualifies for the Private Placement Exclusion. If the Operating
Partnership is considered a publicly traded partnership under the PTP
Regulations because it is deemed to have more than 100 partners, such
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Partnership should not be treated as a corporation because it should be
eligible for the 90% Passive-Type Income Exception.
IRET has not requested, and does not intend to request, a ruling from the
Service that the Operating Partnership will be classified as a partnership
for federal income tax purposes. Instead, Pringle & Herigstad, P.C., is of
the opinion that, based on certain factual assumptions and representations,
the Operating Partnership does not possess more than two corporate
characteristics and will not be treated as a publicly traded partnership and,
thus, will be treated for federal income tax purposes as a partnership and
not as a corporation or an association taxable as a corporation, or a
publicly traded partnership. Unlike a tax ruling, an opinion of counsel is
not binding upon the Service, and no assurance can be given that the Service
will not challenge the status of the Operating Partnership as a partnership
for federal income tax purposes. If such challenge were sustained by a
court, the Operating Partnership would be treated as a corporation for
federal income tax purposes, as described below. In addition, the opinion of
Pringle & Herigstad, P.C., is based on existing law, which is to a great
extent the result of administrative and judicial interpretation. No
assurance can be given that administrative or judicial changes would not
modify the conclusions expressed in the opinion.
If for any reason the Operating Partnership was taxable as a corporation,
rather than a partnership, for federal income tax purposes, IRET would not be
able to qualify as a REIT. See "Federal Income Tax Considerations." In
addition, any change in the Partnership's status for tax purposes might be
treated as a taxable event, in which case IRET might incur a tax liability
without any related cash distribution. See "Federal Income Tax
Considerations -Requirements for Qualification - Distribution Requirements."
Further, items of income and deduction of the Partnership would not pass
through to its partners, and its partners would be treated as shareholders
for tax purposes. Consequently, the Partnership would be required to pay
income tax at corporate tax rates on its net income, and distributions to its
partners would constitute dividends that would not be deductible in computing
such Partnership's taxable income.
INCOME TAXATION OF THE OPERATING PARTNERSHIP AND ITS PARTNERS.
PARTNERS, NOT PARTNERSHIPS, SUBJECT TO TAX. A partnership is not a taxable
entity for federal income tax purposes. Rather, IRET will be required to
take into account is allocable share of the Operating Partnership's income,
gains, losses, deductions, and credits for any taxable year of the
Partnership ending within or with the taxable year of IRET, without regard to
whether IRET has received or will receive any distribution from the
Partnership.
PARTNERSHIP ALLOCATIONS. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such
allocations will be disregarded for tax purposes under section 704(b) of the
Code if they do not comply with the provisions of section 704(b) of the Code
and the Treasury Regulations promulgated thereunder. If an allocation is not
recognized for federal income tax purposes, the item subject to the
allocation will be reallocated in accordance with the partners' interests in
the partnership, which will be determined by taking into account all of the
facts and circumstances relating to the economic arrangement of
51
<PAGE>
the partners with respect to such item. The Operating Partnership's
allocations of taxable income and loss are intended to comply with the
requirements of section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTY. Pursuant to section
704(c) of the Code, income, gain, loss, and deductions attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal
income tax purposes in a manner such that the contributor is charged with, or
benefits from, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain
or unrealized loss is generally equal to the difference between the fair
market value of the contributed property at the time of contribution and the
adjusted tax basis of such property at the time of contribution. The
Treasury Department recently issued regulations requiring partnerships to use
a "reasonable method" for allocating items affected by section 704(c) of the
Code and outlining several reasonable allocation methods. The Operating
Partnership plans to elect to use the traditional method for allocating Code
section 704(c) items with respect to the Properties it acquires in exchange
for Units.
Under the Operating Partnership Agreement, depreciation or amortization
deductions of the Operating Partnership generally will be allocated among the
partners in accordance with their respective interests in the Operating
Partnership, except to the extent that the Operating Partnership is required
under Code section 704(c) to use a method for allocating tax depreciation
deductions attributable to the Properties that results in IRET receiving a
disproportionately large share of such deductions. In addition, gain on the
sale of a Property contributed to the Operating Partnership by a Limited
Partner in exchange for Units will be specially allocated to such member to
the extent of any "built-in" gain with respect to such Property for federal
income tax purposes. Depending on the allocation method elected under Code
section 704(c), it is possible that IRET (i) may be allocated lower amounts
of depreciation deductions for tax purposes with respect to contributed
Properties than would be allocated to IRET if such Properties were to have a
tax basis equal to their fair market value at the time of contribution and
(ii) may be allocated taxable gain in the event of a sale of such contributed
Properties in excess of the economic profit allocated to IRET as a result of
such sale. These allocations may cause IRET to recognize taxable income in
excess of cash proceeds, which might adversely affect IRET's ability to
comply with the REIT distribution requirements, although IRET does not
anticipate that this event will occur. The foregoing principles also will
affect the calculation of IRET's earnings and profits for purposes of
determining which portion of IRET's distributions is taxable as a dividend.
The allocations described in this paragraph may result in a higher portion of
IRET's distributions being taxed as a dividend than would have occurred had
IRET purchased the Properties for cash.
BASIS IN OPERATING PARTNERSHIP INTEREST. IRET's adjusted tax basis in its
partnership interest in the Operating Partnership generally is equal to (i)
the amount of cash and the basis of any other property contributed to the
Operating Partnership by IRET, (ii) increased by (A) its allocable share of
the Operating Partnership's income and (B) its allocable share of
indebtedness of the Operating Partnership, and (iii) reduced, but not below
zero, by (A) IRET's allocable share of
52
<PAGE>
the Operating Partnership's loss and (B) the amount of cash distributed to
IRET, including constructive cash distributions resulting from a reduction in
IRET's share of indebtedness of the Operating Partnership.
If the allocation of IRET's distributive share of the Operating Partnership's
loss would reduce the adjusted tax basis of IRET's partnership interest in
the Operating Partnership below zero, the recognition of such loss will be
deferred until such time as the recognition of such loss would not reduce
IRET's adjusted tax basis below zero. To the extent that the Operating
Partnership's distributions, or any decrease in IRET's share of the
indebtedness of the Operating Partnership (such decrease being considered a
constructive cash distribution to the partners), would reduce IRET's adjusted
tax basis below zero, such distributions (including such constructive
distributions) will constitute taxable income to IRET. Such distributions
and constructive distributions normally will be characterized as capital
gain, and, if IRET's partnership interest in the Operating Partnership has
been held for longer than the long-term capital gain holding period, the
distributions and constructive distributions will constitute long-term
capital gain.
SALE OF THE OPERATING PARTNERSHIP'S PROPERTY. Generally, any gain realized
by the Operating Partnership on the sale of property held for more than one
year will be long-term capital gain, except for any portion of such gain that
is treated as depreciation or cost recovery recapture. Any gain recognized
by the Operating Partnership on the disposition of the Properties contributed
by a partner (including IRET) in exchange for Units will be allocated first
to such contributing partner under section 704(c) of the Code to the extent
of such contributing partner's "built-in gain" on those Properties for
federal income tax purposes. The Limited Partners' "built-in gain" on the
Properties sold will equal the excess of the Limited Partners' proportionate
share of the book value of those Properties over the Limited Partners' tax
basis allocable to those Properties at the time of the sale. Any remaining
gain recognized by the Operating Partnership on the disposition of
contributed Properties, and any gain recognized upon the disposition of the
Properties acquired by the Operating Partnership for cash, will be allocated
among the partners in accordance with their respective percentage interests
in the Operating Partnership. IRET's Declaration of Trust provides that any
decision to sell any real estate asset in which a trustee, or officer of
IRET, the Advisor, or any Affiliate of the foregoing, has a direct or
indirect interest, will be made by a majority of the trustees including a
majority of the Independent Trustees. See "Policies with Respect to Certain
Activities - Conflict of Interest Policies."
IRET's share of any gain realized by the Operating Partnership on the sale of
any property held by the Operating Partnership as inventory or other property
held primarily for sale to customers in the ordinary course of the Operating
Partnership's trade or business will be treated as income form a prohibited
transaction that is subject to a 100% penalty tax. Such prohibited
transaction income also may have an adverse effect upon IRET's ability to
satisfy the income tests for REIT status. See "Federal Income Tax
Considerations" above. IRET, however, does not presently intend to allow the
Operating Partnership to acquire or hold any property that represents
inventory or other property held primarily for sale to customers in the
ordinary course of IRET's or the Operating Partnership's trade or business.
53
<PAGE>
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
the prohibited transaction provisions of section 4975 of the Code that may be
relevant to a prospective purchaser. The discussion does not purport to deal
with all aspects of ERISA or section 4975 of the Code that may be relevant to
particular shareholders (including plans subject to Title I of ERISA, other
retirement plans and IRAs subject to the prohibited transaction provisions of
section 4975 of the Code, and governmental plans or church plans that are
exempt from ERISA and section 4975 of the Code but that may be subject to
state law requirements) in light of their particular circumstances.
The discussion is based on current provisions of ERISA and the Code, existing
and currently proposed regulations under ERISA and the Code, the legislative
history of ERISA and the Code, existing administrative rulings of the
Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial, or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE SHARES OF BENEFICIAL
INTEREST ON BEHALF OF A PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT
PLAN, A TAX-QUALIFIED RETIREMENT PLAN, OR AN IRA IS ADVISED TO CONSULT ITS
OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA,
SECTION 4975 OF THE CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE,
OWNERSHIP, OR SALE OF THE SHARES BY SUCH PLAN OR IRA.
EMPLOYEE BENEFIT PLAN, TAX-QUALIFIED RETIREMENT PLANS, AND IRAS. Each
fiduciary of a pension, profit-sharing, or other employee benefit plan (an
"ERISA Plan") subject to Title I of ERISA should consider carefully whether
an investment in the Shares of Beneficial Interest is consistent with his
fiduciary responsibilities under ERISA. In particular, the fiduciary
requirements of Part 4 of Title I of ERISA require an ERISA Plan's
investments to be (i) prudent and in the best interests of the ERISA Plan,
its participants, and its beneficiaries, (ii) diversified in order to
minimize the risk of large losses, unless it is clearly prudent not to do so,
and (iii) authorized under the terms of the ERISA Plan's governing documents
(provided the documents are consistent with ERISA). In determining whether
an investment in the Shares is prudent for purposes of ERISA, the appropriate
fiduciary of a ERISA Plan should consider all of the facts and circumstances,
including whether the investment is reasonably designed, as a part of the
ERISA Plan's portfolio for which the fiduciary has investment responsibility,
to meet the objectives of the ERISA Plan, taking into consideration the risk
of loss and opportunity for gain (or other return) from the investment, the
diversification, cash flow, and funding requirements of the ERISA Plan's
portfolio. A fiduciary also should take into account the nature of IRET's
business, the management of IRET, the length of IRET's operating history, the
fact that certain investment properties may not have been identified yet, and
the possibility of the recognition of UBTI.
The fiduciary of an IRA or of a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or because it
does not cover common law employees (a "Non-ERISA Plan") should consider that
such an IRA or Non-
54
<PAGE>
ERISA Plan may only make investments that are authorized by the appropriate
governing documents and under applicable state law.
Fiduciaries of ERISA Plans and persons making the investment decision for an
IRA or other Non-ERISA Plan should consider the application of the prohibited
transaction provisions of ERISA and the Code in making their investment
decision. A "party in interest" or "disqualified person" with respect to an
ERISA Plan or with respect to a Non-ERISA Plan or IRA subject to Code section
4975 is subject to (i) an initial 5% excise tax on the amount involved in any
prohibited transaction involving the assets of the plan or IRA and (ii) an
excise tax equal to 100% of the amount involved if any prohibited transaction
is not corrected. If the disqualified person who engages in the transaction
is the individual on behalf of whom an IRA is maintained (or his
beneficiary), the IRA will lose its tax-exempt status and its assets will be
deemed to have been distributed to such individual in a taxable distribution
(and no excise tax will be imposed) on account of the prohibited transaction.
In addition, a fiduciary who permits an ERISA Plan to engage in a
transaction that the fiduciary knows or should know is a prohibited
transaction may be liable to the ERISA Plan for any loss the ERISA Plan
incurs as a result of the transaction or for any profits earned by the
fiduciary in the transaction.
STATUS OF IRET AND THE OPERATING PARTNERSHIP UNDER ERISA. The following
section discusses certain principles that apply in determining whether the
fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and the Code apply to an entity because one or more investors in the
equity interests in the entity is an ERISA Plan or is a Non-ERISA Plan or IRA
subject to section 4975 of the Code. An ERISA Plan fiduciary also should
consider the relevance of those principles to ERISA's prohibition on improper
delegation of control over or responsibility for "plan assets" and ERISA's
imposition of co-fiduciary liability on a fiduciary who participates in,
permits (by action or inaction) the occurrence of, or fails to remedy a known
breach by another fiduciary.
If the assets of IRET are deemed to be "plan assets" under ERISA, (i) the
prudence standards and other provisions of Part 4 of Title I of ERISA would
be applicable to any transactions involving IRET's assets, (ii) persons who
exercise any authority over IRET's assets, or who provide investment advise
to IRET, would (for purposes of fiduciary responsibility provisions of ERISA)
be fiduciaries of each ERISA Plan that acquires Shares, and transactions
involving IRET's assets undertaken at their direction or pursuant to their
advise might violate their fiduciary responsibilities under ERISA, especially
with regard to conflicts of interest, (iii) a fiduciary exercising his
investment discretion over the assets of an ERISA Plan to cause it to acquire
or hold the Shares could be liable under Part 4 of Title I of ERISA for
transactions entered into by IRET that do not conform to ERISA standards of
prudence and fiduciary responsibility, and (iv) certain transactions that
IRET might enter into in the ordinary course of its business and operations
might constitute "prohibited transactions" under ERISA and the Code.
Regulations of the Department of Labor (DOL) defining "plan assets" (the
"Plan Asset Regulations") generally provide that when an ERISA Plan or
Non-ERISA Plan or IRA acquires a security that is an equity interest in an
entity and the security is neither a "publicly-offered security" nor a
security issued by an investment company registered under the Investment
Company Act of 1940, the ERISA or Non-ERISA Plan's
55
<PAGE>
or IRA's assets include both the equity interest and an undivided interest in
each of the underlying assets of the issuer of such equity interest, unless
one or more exceptions specified in the Plan Asset Regulations are satisfied.
The Plan Asset Regulations define a publicly-offered security as a security
that is "widely-held," "freely transferable," and either part of a class of
securities registered under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or sold pursuant to an effective registration statement
under the Securities Act (provided the securities are registered under the
Exchange Act within 120 days after the end of the fiscal year of the issuer
during which the offering occurred). The Shares are being sold in an
offering registered under the Securities Act and are registered under the
Exchange Act. The plan Asset Regulations provide that a security is
"widely-held" only if it is part of a class of securities that is owned by
100 or more investors independent of the issuer and of one another. A
security will not fail to be widely held because the number of independent
investors falls below 100 subsequent to the initial public offering as a
result of events beyond the issuer's control. IRET currently has in excess
of 3,500 shareholders and is of the opinion that the Shares are now and will
be "widely held."
The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment
is $10,000 or less (as is the case with this Offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. The restrictions on transfer enumerated
in the Plan Asset Regulations as not affecting that finding include: (i) any
restriction on or prohibition against any transfer or assignment that would
result in the termination or reclassification of an entity for federal or
state tax purposes, or that otherwise would violate any federal or state law
or court order, (ii) any requirement that advance notice of a transfer or
assignment be given to the issuer, (iii) any administrative procedure that
establishes an effective date, or an event (such as completion of an
offering), prior to which a transfer or assignment will not be effective, and
(iv) any limitation or restriction on transfer or assignment that is not
imposed by the issuer or a person acting on behalf of the issuer. IRET
believes that the restrictions imposed under the Declaration of Trust on the
transfer of IRET's Shares of Beneficial Interest will not result in the
failure of the Shares to be "freely transferable." IRET also is not aware of
any other facts or circumstances limiting the transferability of the Shares
that are not enumerated in the Plan Asset Regulations as those not affecting
free transferability, and IRET does not intend to impose in the future (or to
permit any person to impose on its behalf) any limitations or restrictions on
transfer that would not be among the enumerated permissible limitations or
restrictions. The Plan Asset Regulations only establish a presumption in
favor of a finding of free transferability, and no assurance can be given
that the DOL or the Treasury Department will not reach a contrary conclusion.
Assuming that the Shares will be "widely held" and that no other facts and
circumstances other than those referred to in the preceding paragraph exist
that restrict transferability of the Shares, the Shares should be publicly
offered securities and the assets of IRET should not be deemed to be "plan
assets" of any ERISA Plan, IRA, or Non-ERISA Plan that invests in the Shares.
56
<PAGE>
The Plan Asset Regulations also will apply in determining whether the assets
of the Operating Partnership will be deemed to be "plan assets." The
partnership interests in the Operating Partnership will not be
publicly-offered securities. Nevertheless, if the Shares constitute
publicly-offered securities, the indirect investment in the Partnership and
the Subsidiary Partnerships by ERISA Plans, IRAs, or Non-ERISA Plans subject
to section 4975 of the Code through their ownership of Shares will not cause
the assets of the Operating Partnership or the subsidiary Partnerships to be
treated as "plan assets" of such shareholders.
MARKET PRICE OF AND DIVIDENDS ON IRET'S
SHARES OF BENEFICIAL INTEREST
MARKET FOR IRET SHARES OF BENEFICIAL INTEREST. Since October 17, 1997, IRET
shares of Beneficial Interest have traded on the NASDAQ Small-Cap market
under the symbol "IRETS." The following sets forth high and low closing sale
prices for the fiscal periods indicated as well as the total volume and total
number of trades during such periods:
<TABLE>
<CAPTION>
Fiscal Quarter Ended High Low Total Volume Total Trades
- -------------------- ------ ------ ------------ ------------
<S> <C> <C> <C> <C>
10-31-97* $7.125 $6.563 35,154 45
1-31-98 7.313 6.625 339,857 204
4-30-98 7.344 7.031 437,487 196
7-31-98 7.250 7.000 359,835 118
</TABLE>
*FROM 10-20-97 - FIRST TRADING DAY
IRET also offered primary Shares of Beneficial Interest for sale to the
public under Best Efforts offerings through various brokers registered with
the National Association of Securities Dealers. Primary shares were sold at
$7.20 per share from 5-01-97 to 12-31-97 and at $7.45 per share from 1-05-98
to 11-20-98. IRET also repurchased its shares during this period. Following
is a summary, by quarter-year, of the sale of primary shares and repurchase
of shares by IRET:
<TABLE>
<CAPTION>
Shares Dollars
---------- -----------
<S> <C> <C>
5-01-97 Beginning Balance 14,940,513 $65,073,951
Quarter Ended 7-31-97
- Shares sold 356,722 $ 2,920,162
- Commissions paid (163,102)
- Shares repurchased (20,393) (386,062)
15,276,842 $67,444,949
Quarter Ended 10-31-97
- Shares sold 630,937 $ 4,422,125
- Commissions paid (243,432)
- Shares repurchased (101,548) (807,573)
15,806,231 $70,816,070
Quarter Ended 1-31-98
- Shares sold 340,640 $ 2,415,531
- Commissions paid (99,850)
- Shares repurchased (108,903) (777,871)
16,037,969 $72,353,880
</TABLE>
57
<PAGE>
<TABLE>
<S> <C> <C>
Quarter Ended 4-30-98
- Shares sold 505,062 $ 3,656,419
- Commissions paid (195,456)
- Shares repurchased (151,618) (1,106,285)
16,391,412 $74,708,559
Quarter Ended 7-31-98
- Shares sold 573,081 $ 4,075,505
- Commissions paid (148,902)
- Shares repurchased (197,124) (1,389,936)
16,767,369 $77,245,225
</TABLE>
As of May 31, 1998, IRET had 3,615 shareholder accounts, compared to 3,075 on
the same date in 1997. No shareholder held 5% or more of the 16,391,412
Shares of Beneficial Interest outstanding on 4-30-98. IRET has no other
classes of stock and there were no warrants, stock options or other
contractual arrangements requiring the issuance of its stock.
IRET has paid quarterly dividends since July 1, 1971. Dividends paid during
the past two fiscal years and the current fiscal year to date were as follows:
<TABLE>
<CAPTION>
Fiscal Year
---------------------------------
1997 1998 1999
------ ------- -----
<S> <C> <C> <C>
July 1st $.0925 $.10125 $.11
October 1st .0950 .10300 .115
January 5th .0975 .10500
April 1st .1000 .10700
------ -------
Total $.385 $.41625
</TABLE>
DIVIDEND AND SHARE PRICE HISTORY. The following is the history of cash
dividends declared and paid by IRET and the share price on each dividend payment
date from the organization of IRET on July 31, 1970, to the date of this
Prospectus:
<TABLE>
<CAPTION>
Dividend/ Dividend/ Dividend/
Date Share Price(1) Date Share Price(1) Date Share Price(1)
- -------- --------- -------- ------- -------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
6/30/71 $.0125 $1.00 1/1/80 $.03 $1.70 7/1/88 $.075 $3.74
10/30/71 $.015 $1.00 4/1/80 $.0325 $1.70 10/1/88 $.071 $3.83
1/1/72 $.015 $1.00 7/1/80 $.035 $1.70 1/1/89 $.072 $3.92
4/1/72 $.015 $1.10 10/1/80 $.035 $1.80 4/1/89 $.0725 $4.01
7/1/72 $.016 $1.10 1/1/81 $.035 $1.80 7/1/89 $.073 $4.10
10/1/73 $.016 $1.10 4/1/81 $.035 $1.80 10/1/89 $.0735 $4.19
1/1/73 $.016 $1.10 7/1/81 $.035(2) $1.70 1/1/90 $.074 $4.28
4/1/73 $.0165 $1.30 10/1/81 $.035(2) $1.70 4/1/90 $.0745 $4.28
7/1/73 $.0165 $1.30 1/1/82 $.035(2) $1.70 7/1/90 $.075 $4.37
10/1/73 $.0165 $1.30 4/1/82 $.035(2) $1.70 10/1/90 $.0755 $4.50
1/1/74 $.0175 $1.30 7/1/82 $.0375 $1.70 1/5/91 $.076 $4.50
4/1/74 $.0175 $1.40 10/1/82 $.04 $1.70 4/1/91 $.0765 $4.59
7/1/74 $.0175 $1.40 1/1/83 $.0425 $1.90 7/1/91 $.077 $4.68
10/1/74 $.0185 $1.40 4/1/83 $.045 $2.07 10/1/91 $.0775 $4.77
1/1/75 $.02 $1.40 7/1/83 $.0475 $2.20 1/5/92 $.078 $4.86
4/1/75 $.02 $1.50 10/1/83 $.05 $2.61 4/1/92 $.0785 $4.95
7/1/75 $.02 $1.50 1/1/84 $.0525 $2.66 7/1/92 $.079 $4.95
10/1/75 $.02 $1.50 4/1/84 $.055 $2.75 10/1/92 $.0795 $5.04
1/1/76 $.021 $1.50 7/1/84 $.05625 $2.75 1/5/93 $.08 $5.13
4/1/76 $.021 $1.60 10/1/84 $.0575 $2.79 4/1/93 $.0805 $5.22
7/1/76 $.0225 $1.60 1/1/85 $.05875 $2.84 7/1/93 $.081 $5.31
10/1/76 $.0225 $1.70 4/1/85 $.06 $2.88 10/1/93 $.0815 $5.31
</TABLE>
58
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1/1/77 $.0225 $1.70 7/1/85 $.06125 $2.97 1/5/94 $.082 $5.40
4/1/77 $.0225 $1.80 10/1/85 $.0625 $3.11 4/1/94 $.0825 $5.49
7/1/77 $.025 $1.80 1/1/86 $.06375 $3.15 7/1/94 $.088 $5.49
10/1/77 $.025 $1.80 4/1/86 $.065 $3.20 10/1/94 $.084 $5.63
1/1/78 $.025 $1.80 7/1/86 $.066 $3.29 1/1/95 $.085 $5.89
4/1/78 $.025 $1.80 10/1/86 $.067 $3.38 4/1/95 $.08625 $5.89
7/1/78 $.0275 $1.90 1/1/87 $.068 $3.47 7/1/95 $.0925 $6.03
10/1/78 $.0275 $1.90 4/1/87 $.069 $3.56 10/1/95 $.08875 $6.16
1/1/79 $.0275 $2.00 7/1/87 $.0695 $3.56 1/5/96 $.09 $6.16
4/1/79 $.0275 $2.10 10/1/87 $.07 $3.65 4/1/96 $.09125 $6.30
7/1/79 $.0275 $2.00 1/1/88 $.07 $3.65 7/1/96 $.0975 $6.30
10/1/79 $.03 $2.00 4/1/88 $.071 $3.74 10/1/96 $.095 $6.44
1/5/97 $.0975 $6.44 4/1/97 $.10 $6.62 7/1/97 $.10125 $6.62
10/1/97 $.103 $6.62 1/16/98 $.105 $6.85 4/1/98 $.107 $6.85
7/1/98 $.11 $6.85 10/1/98 $.115 $6.85
</TABLE>
(1) The stock prices shown are the prices at which Trust Shares of
Beneficial Interest were available for purchase on the date shown by then
shareholders under IRET's Dividend Reinvestment Plan (after 1/1/80) or from
IRET (prior to 1/1/80).
(2) In addition to the cash dividend shown, a stock dividend of .0175 share
for each share then owned.
DIVIDEND REINVESTMENT PLAN
IRET will separately register its shares of Beneficial Interest for sale to
its shareholders who elect to participate in its Dividend Reinvestment Plan.
Pursuant to its Dividend Reinvestment Plan, IRET may, from time to time,
repurchase shares of Beneficial Interest in the open market for purposes of
fulfilling its obligations under the Plan or, if sufficient shares are not
available on the open market, will issue additional shares of Beneficial
Interest.
Each shareholder shall have the option to use cash dividends to purchase
additional shares. In order to participate in the Dividend Reinvestment Plan,
the shareholder must affirmatively elect to do so by notifying the Transfer
Agent and Registrar, Odell-Wentz & Associates, L.L.C., 12 South Main, Minot,
ND 58701, (701) 852-1756. The shareholder may terminate participation at any
time by notifying the Transfer Agent.
The Shares are traded on the NASDAQ Small Cap Market. The price at which the
Shares will be purchased will be the aggregate weighted average price of all
shares purchased with the total amount of reinvested dividends. Since the
agent responsible for purchasing the shares is also able to purchase newly
issued shares directly from IRET under this Registration without payment of
any commission, it is unlikely that the price of shares purchased under the
Plan will exceed the $7.25 registration price. If the reinvestment price
involves a fraction, it will be expressed in one-eighth of a point, with a
rounding out to the next higher one-eighth of a point.
The dividend is taxable to the shareholders whether received in cash or
shares.
DESCRIPTION OF IRET'S SECURITIES
DESCRIPTION OF SHARES. The shares of beneficial interest of IRET are of one
class without par value. There is no limit on the number of shares that may
be issued.
59
<PAGE>
All shares participate equally in dividends and distributions when and as
declared by the trustees and in net assets upon liquidation. The shares of
beneficial interests offered hereby will be fully paid and non-assessable by
IRET upon issuance and will have no preference, conversion, exchange,
pre-emptive or redemption rights. Annual meetings of shareholders are held
on the second Wednesday of August and special meetings may be called by the
Chairman of the trustees or by a majority of the trustees or upon written
request of shareholders holding not less than 10% of the issued and
outstanding shares. At any meeting a shareholder is entitled to one vote for
each share of beneficial interest owned.
The shares of beneficial interests are transferable in the same manner as are
shares of a North Dakota business corporation, subject to certain
restrictions. See "Shares Available for Future Sale".
With respect to the election of trustees, the shares have cumulative voting
rights which allow each shareholder one vote in person or by written proxy
for each share registered in his name for as many persons as there are
trustees to be elected.
RESTRICTIONS ON TRANSFER. Section 7 of Article 2 of the Declaration of Trust
provides: "To insure compliance with the Internal Revenue Code provision
that no more than 50% of the outstanding Shares may be owned by five or fewer
individuals, the Trustees may at any time redeem Shares from any Shareholder
at the fair market value thereof (as determined in good faith by the Trustees
based on an independent appraisal of Trust assets made within six months of
the redemption date). Also, the Trustee may refuse to transfer Shares to any
Person who acquisition of additional Shares might, in the opinion of the
Trustees, violate the above requirement."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of date of this prospectus, no persons, or any Trustee or officer
individually was known by IRET to own beneficially more than 5% of the
outstanding shares of Beneficial Interest.
Collectively, the Trustees owned 8.23% of such shares on May 31, 1998.
<TABLE>
<CAPTION>
Name and Position Principal Occupations Trustee Shares Beneficially
With Trust During Past 5 Years Since Owned As Of 5-31-98
<S> <C> <C> <C>
C. Morris Anderson President of North Hill
Trustee, Age 69 Bowl, Inc.; Director of
Dakota Boys Ranch (25
years); Director of
International Inn, Inc.,
and Norwest Bank - Minot,
N.A. and a Partner in
Magic City Realty, Ltd. 1970 14,209(1)
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Ralph A. Christensen Retired Rancher; Former
Trustee and Chairman Director of First Bank
Age 69 - Minot, N.A.; Chairman
of IRET 1970 42,314(2)
John F. Decker Investment Advisor and
Trustee, Age 56 Managing Director, Piper
Jaffray, Inc. 1998 7,210
Mike F. Dolan
Trustee and Vice Investor;
Chairman, Age 87 Vice-Chairman of IRET 1978 225,559
J. Norman Ellison, Jr. Businessman; Managing
Trustee, Age 75 Partner of Ellison Realty
Co.; Former Director of
First Bank - Minot, N.A. 1970 18,636(3)
Daniel L. Feist Realtor, Broker, Real Estate
Trustee, Age 66 Developer, Builder, General
Contractor; President-Owner
of Feist Construction &
Realty, Inc.; Investor;
Businessman; Former Director
of First Bank System -
Minot, N.A.; Director N.D.
Holdings, Inc., Minot, ND 1985 501,110(4)
Patrick G. Jones Investor 1986 85,251(5)
Trustee, Age 50
Jeff L. Miller Investor; Businessman;
Trustee and Vice President of M & S
Chairman, Age 54 Concessions, Inc., and
former president of
Coca-Cola Bottling Co.
of Minot; Former Director
of First Bank - Minot 1985 146,095(6)
Roger R. Odell Realtor; President of IRET;
Trustee and Partner in Odell-Wentz &
President, Age 72 Associates (Advisor of IRET);
Director of Investors Manage-
ment & Marketing, Inc. and
Inland Securities, Inc. 1970 135,804(7)
Thomas A. Wentz, Jr. Attorney, Pringle & Herigstad,
Trustee, Age 31 P.C.; Sole General Partner
of WENCO, Ltd. 1996 170,841(8)
</TABLE>
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<PAGE>
(1) 10,807 shares are owned by Mr. Anderson and his wife as Joint Tenants.
3,402 shares are owned by Mr. Anderson's wife; he disclaims beneficial
ownership of these shares.
(2) Includes shares held in Mr. Christensen's IRA, and also his wife's IRA,
which is comprised of 641 shares; the balance is owned by Mr. Christensen and
his wife as Joint Tenants.
(3) Includes 4,985 shares held by Mr. Ellison's wife. Mr. Ellison disclaims
beneficial ownership of such shares.
(4) Includes 130,409 shares held in Mrs. Feist's name and in her IRA of which
Mr. Feist disclaims beneficial ownership. Also includes shares held in Mr.
Feist's IRA's.
(5) Includes 42,531 shares held by Mrs. Jones and in her IRA. Mr. Jones
disclaims beneficial ownership of such shares. Also includes shares held in
Mr. Jones' IRA.
(6) 48,281 of such shares are owned by Mr. Miller's wife. Mr. Miller
disclaims beneficial ownership of such shares. Also includes shares held in
Mr. Miller's IRA.
(7) Includes 23,133 shares owned by Investors Management & Marketing, Inc.
Also includes 67,897 shares owned by Mr. Odell's wife, as to which shares Mr.
Odell disclaims beneficial ownership.
(8) Includes 168,387 shares owned by WENCO, Ltd., of which Mr. Wentz, Jr., is
Sole General Partner. Also includes 957 shares owned by his minor daughter,
with Mr. Wentz as custodian.
As of May 31, 1998, all of the above trustees as a group owned or held voting
control of 1,347,029 shares of Beneficial Interest of IRET, representing
8.23% of the 16,359,568 shares then outstanding.
During the fiscal year ending April 30, 1998, there were twelve regular
meetings of the Board of Trustees. All of the Trustees attended 75% or more
of the meetings held during said fiscal year.
The Audit Committee consists of Ralph A. Christensen, Mike F. Dolan and Jeff
L. Miller, all of whom are independent trustees and are appointed by the
Board of Trustees.
There are no separate nominating or compensation committees of the Board of
Trustees, which duties are performed by the Board as a whole.
The last shareholder meeting at which Trustees were elected was held on
August 18, 1998, at which meeting shareholders owning 60.8% of the shares of
IRET entitled to vote were present in person, or by proxy. The ten nominees
received 100% of the total shares voted at such meeting.
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<PAGE>
EXECUTIVE COMPENSATION AND CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
IRET has no employees and has contracted with Odell-Wentz & Associates,
L.L.C., to provide management services for it. See "Advisory Agreement." In
addition to the advisory fee paid for these managements services, IRET also
incurs administrative expenses for trustees' fees, accountants' fees,
printing and postage, filing fees and other related expenses incurred in
connection with administering IRET assets and its communications with its
shareholders and regulatory authorities. During the past five fiscal years,
the following is a summary of the administrative expenses of IRET paid to the
Advisor, the trustees and the other administrative expenses:
<TABLE>
<CAPTION>
FISCAL YEARS ENDING APRIL 30
----------------------------------------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Advisor's and Trustees'
Compensation $304,898 $336,142 $458,019 $559,149 $ 745,907
Other Administrative
Expenses 46,557 79,974 162,588 158,627 271,738
-------- -------- -------- -------- ----------
TOTAL $351,455 $416,116 $620,607 $717,776 $1,017,645
</TABLE>
The Advisor also received fees from IRET for investigating and recommending
investments. See "Advisory Agreement." These fees are considered as part of
the cost of such investments and are capitalized and added to the cost of the
investment property and, thus, are not included in the above described
administrative expenses.
For the Fiscal Years 1994-1998, the amount of these acquisition fees were
$89,514, $49,836, $117,506, $177,834 and $141,468, respectively.
The following tabulation shows the cash compensation paid by IRET to its
trustees and officers during its fiscal year ending April 30, 1998. IRET has
no retirement, bonus, or deferred compensation plan and no other compensation
will accrue, directly or indirectly, to any of the Trustees except as noted
below.
<TABLE>
<CAPTION>
Cash Compensation
Capacity in for Year Ending
Name Which Served April 30, 1998
- ---- ------------ ------------------
<S> <C> <C>
C. Morris Anderson Trustee $ 9,880.50
Ralph A. Christensen Trustee & Chairman 12,349.75
John D. Decker Trustee 9,980.50
Mike F. Dolan Trustee & Vice Chairman 11,166.25
J. Norman Ellison, Jr. Trustee 9,980.50
Daniel L. Feist Trustee 9,980.50
Jeff L. Miller Trustee & Vice Chairman 11,166.25
Patrick G. Jones Trustee 9,880.50
Thomas A. Wentz, Jr. Trustee (2)
Roger R. Odell Trustee & President (1)
Thomas A. Wentz, Sr. Vice President (1 & 2)
Timothy P. Mihalick Vice President
Diane K. Bryantt Secretary
</TABLE>
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<PAGE>
(1) Mr. Odell and Mr. Wentz, Sr., are members of Odell-Wentz & Associates,
L.L.C., the Advisor to IRET. Mr. Mihalick is Vice-President and Principal
Operating Officer of the Advisor. Diane Bryantt is Secretary to IRET and
Controller of the Advisor. Under the Advisory Contract between IRET and
Odell-Wentz & Associates, L.L.C., IRET pays an Advisor's fee based on the net
assets of IRET and, in addition, a percentage fee for investigating and
negotiating the acquisition of new investments. For the year ending April
30, 1998, Odell-Wentz & Associates received compensation and reimbursement of
disbursements under said Agreement of $740,393. The terms of said Advisory
Agreement are explained below. Investors Management & Marketing, Inc., a
firm in which Mr. Odell is a minority shareholder also furnishes real estate
management services to IRET and receives as compensation four percent (4%) of
rents received from such real estate. For the fiscal year ending April 30,
1998, Investors Management & Marketing, Inc., received $530,678 as real
estate management commissions. In addition, Inland National Securities,
Inc., a corporation in which Mr. Odell and members of his family are
shareholders, acts as a broker-dealer for the sale of Trust securities.
During the fiscal year ending April 30, 1998, IRET paid Inland National
Securities, Inc. $171,755 as security sales fees.
(2) Mr. Wentz, Jr., is a member of the law firm of Pringle & Herigstad,
P.C., counsel for IRET. During the fiscal year ending April 30, 1998, IRET
paid Pringle & Herigstad, P.C., the sum of $62,293 for legal services
rendered and disbursements made on behalf of IRET. Until August 1, 1998, Mr.
Wentz, Sr., was also a member of the law firm of Pringle & Herigstad, P.C.,
counsel for IRET.
ADVISORY AGREEMENT
Roger R. Odell has served as advisor to IRET since its formation in 1970. As
of January 1, 1986, a revised Advisory Agreement was entered into between
IRET and Odell-Wentz & Associates, a partnership of Roger R. Odell and Thomas
A. Wentz, Sr., and on January 1, 1994, with Odell-Wentz & Associates, L.L.C.,
a North Dakota Limited Liability Company. Mr. Odell serves as president and
Mr. Wentz serves as vice president of IRET. Mr. Wentz has also served as
attorney for IRET since its formation as a member of the law firm of Pringle
& Herigstad, P.C.
Under the Advisory Agreement, the advisor has the following duties and
responsibilities:
Advisor, at its expense, shall provide suitable office facilities for IRET in
Minot, North Dakota, and shall provide sufficient staff and other equipment
to conduct the day-to-day operations of IRET. Advisor shall furnish a
computer and all other office equipment necessary to conduct the operations
of IRET and shall pay for all routine supplies, postage, and other costs of
operating said office. IRET shall be billed by the Advisor for stationery and
other forms and documents printed especially for IRET, the printing of the
annual report and quarterly reports and other communications to shareholders,
and also for the postage for mailing reports, checks and other documents to
shareholders.
The Advisor, under the direction of Trustees, shall be responsible to conduct
all operations of IRET, including:
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<PAGE>
Collection of rent, contract and mortgage payments and depositing the same in
IRET bank accounts;
Payment of bills;
Disbursement of dividends;
Preparing monthly reports to the Trustees;
Preparing quarterly and annual reports to shareholders;
Preparing notices of shareholders' meetings and proxies and proxy statements;
and
Advising the Trustees as to investment decisions, including acquisition and
disposition of real estate and other permissible investments.
For providing the above services, the Advisor is compensated as follows:
BASIC COMPENSATION. Advisor shall receive monthly as its basic compensation
for the above described services a percentage of "net invested assets" of
IRET held on the last day of the month for which the payment is made as
follows:
1/12th of .9% of net invested assets up to $10,000,000; and,
1/12th of .8% of net invested assets over $10,000,000, but less than
$20,000,000; and,
1/12th of .7% of net invested assets in excess of $20,000,000.
For the purpose of this agreement, "net invested assets" shall be determined
as follows:
Add: +total assets at cost
+depreciation reserve
+unearned contract receivable discount
+deferred gain account
Subtract: -cash
-marketable securities, less margin accounts
-total liabilities
ADDITIONAL COMPENSATION. For its services in investigating and negotiating
the acquisition of real estate equities, mortgages or contracts for deed by
IRET, the Advisor shall receive a fee of 1/2 of 1 percent of the first
$2,500,000 of value of any such asset which is recommended to and acquired by
IRET, except on new construction projects for which the fee is 1/2 of 1
percent of the total cost.
LIMITATION. Notwithstanding the foregoing, the total compensation received
by the Advisor set forth above during any one fiscal year of IRET when added
to trustees' fees and other administrative costs of IRET shall not exceed the
lesser of the
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<PAGE>
following: 2 percent of net invested assets (as set forth above) or 25
percent of the net taxable income of IRET for such fiscal year.
Said Advisory Agreement is for a term of one year to continue for successive
terms on the same conditions until terminated by written notice of either
party and is also subject to a 60 day termination by either party and by the
shareholders holding a majority interest in IRET. The Agreement is renewable
annually and was last renewed for the calendar year 1997 by action of the
Board of Trustees at its December, 1996 regular meeting.
ROGER R. ODELL. Mr. Odell's address is 1445 SW 15th St., Minot, North Dakota
58701, (701) 839-4631. Mr. Odell is a graduate of the University of Texas,
receiving his B.A. degree in 1947. He has been a resident of Minot, North
Dakota, since 1947. From 1947 to 1954, he was employed by Minot Federal
Savings & Loan Association, serving as Secretary of the Association from 1952
to 1954. Since 1954, Mr. Odell has been a realtor in Minot, serving as an
officer and stockholder of Watne Realty Trust from 1954 to January 1, 1970,
and since that time as the owner of his own realty firm.
Mr. Odell is President and a member of Odell-Wentz & Associates, L.L.C., the
Advisor to IRET. Under the Advisory Contract between IRET and Odell-Wentz &
Associates, L.L.C., IRET pays an Advisor's fee based on the net assets of
IRET and, in addition, a percentage fee for investigating and negotiating the
acquisition of new investments. For the year ending April 30, 1998,
Odell-Wentz & Associates, L.L.C., received compensation and reimbursement of
disbursements under said Agreement of $740,393. The terms of said Advisory
Agreement are explained above. Investors Management & Marketing, Inc., a
firm in which Mr. Odell is a minority shareholder also furnishes real estate
management services to IRET and receives as compensation four percent (4%) of
rents received from such real estate. For the fiscal year ending April 30,
1998, Investors Management & Marketing, Inc., received $530,678 as real
estate management commissions. In addition, Inland National Securities,
Inc., a corporation in which Mr. Odell and members of his family are
shareholders, acts as the broker-dealer for the sale of Trust securities.
During the fiscal year ending April 30, 1998, IRET paid Inland National
Securities, Inc., $171,755 as security sales fees.
THOMAS A. WENTZ, SR.. Mr. Wentz's address is 505 8th Ave. SE, Minot, North
Dakota 58701, (701) 838-0811. Mr. Wentz is a graduate of Harvard College and
Harvard Law School, receiving his A.B. degree in 1957 and his L.L.B. degree
in 1960. He has been a resident of Minot, North Dakota, since 1962.
Mr. Wentz is Vice-President and a member of Odell-Wentz & Associates, L.L.C.,
the Advisor to IRET. Under the Advisory Contract between IRET and
Odell-Wentz & Associates, L.L.C., IRET pays an Advisor's fee based on the net
assets of IRET and, in addition, a percentage fee for investigating and
negotiating the acquisition of new investments. For the year ending April
30, 1998, Odell-Wentz & Associates, L.L.C., received compensation and
reimbursement of disbursements under said Agreement of $740,393. The terms
of said Advisory Agreement are explained above.
Until August 1, 1998, Mr. Wentz was also a member of the law firm of Pringle
& Herigstad, P.C., counsel for IRET. During the fiscal year ending April 30,
1998,
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<PAGE>
IRET paid Pringle & Herigstad, P.C., the sum of $62,293 for legal services
rendered and disbursements made on behalf of IRET.
SELECTION, MANAGEMENT AND CUSTODY OF TRUST'S INVESTMENTS
MANAGEMENT OF TRUST'S INVESTMENTS. IRET contracts with various local
management companies for the sole purpose of leasing, maintaining and
monitoring IRET's interests. All other management is the responsibility of
the Advisor.
POLICIES WITH RESPECT TO CERTAIN TRANSACTIONS
No trustee, officer or advisor of IRET, or any person affiliated with any
such persons, shall sell any property or assets to IRET or purchase any
property or assets from IRET, directly or indirectly, nor shall any such
person receive any commission or other remuneration, directly or indirectly,
in connection with the purchase or sale of Trust assets, except pursuant to
transactions that are fair and reasonable to the Shareholders and that relate
to:
a. the acquisition of property or assets at the formation
of IRET or shortly thereafter and fully disclosed
in the prospectus filed with the North Dakota State
Securities Commissioner;
b. The acquisition of federally insured or guaranteed
mortgages at prices not exceeding the currently quoted
prices at which the Federal National Mortgage
Association is purchasing comparable mortgages;
c. The acquisition of other mortgages on terms not less
favorable to IRET than similar transactions
involving unaffiliated parties; or,
d. The acquisition by IRET of other property at prices
not exceeding, or disposition of other property at
prices not less than, the fair value thereof as
determined by independent appraisal.
All such transactions and all other transactions in which any such persons have
any direct or indirect interest shall be approved by a majority of the trustees,
including a majority of the independent trustees. All brokerage commissions or
remuneration received by any such person from IRET in connection with any such
transactions shall be deemed a part of the fee payable under any management or
advisory contract.
No trustee or affiliate of the trustee shall receive a brokerage commission or
other such remuneration in connection with the acquisition or disposition of
Trust assets.
LIMITATIONS OF LIABILITY
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant
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<PAGE>
pursuant to the foregoing provisions, the registrant has been informed that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is therefore
unenforceable.
The governing instrument of IRET provides as follows:
SECTION 12. LIABILITY AND INDEMNIFICATION.
A. NON LIABILITY OF TRUSTEES, ADVISORS OR AFFILIATES.
No TRUSTEE, ADVISOR or AFFILIATE shall be liable individually for any act
or omission of any other TRUSTEE or agent or representative of IRET, or for
negligence, error in judgment, or any act or omission except his own
willful misfeasance, bad faith, or gross negligence in the conduct of his
duties. Every act or thing done or omitted, and every power exercised or
obligation incurred by the TRUSTEES, ADVISOR or AFFILIATE or any of them in
the administration of IRET or in connection with any business or property
of IRET whether ostensibly in their own names or in their trust or agency
capacity, shall be deemed done, omitted, exercised, or incurred by them as
TRUSTEES or agents and not as individuals; and upon any debt, claim,
demand, judgment, decree, or obligation of any nature whatsoever against or
incurred by the TRUSTEES, ADVISOR or AFFILIATE in their capacities as such,
whether founded upon contract, tort or otherwise, resort shall be had
solely to the property of IRET.
B. INDEMNIFICATION OF TRUSTEES.
1. IRET shall indemnify and hold harmless each TRUSTEE, ADVISOR or
AFFILIATE from and against all claims and liabilities, whether they
proceed to judgment or are settled, to which such TRUSTEE, ADVISOR or
AFFILIATE may become subject by reason of his being or having been a
TRUSTEE, ADVISOR or AFFILIATE, or by reason of any action alleged to
have been taken or omitted by him as TRUSTEE, ADVISOR or AFFILIATE,
and shall reimburse him for all legal and other expenses reasonably
incurred by him in connection with any such claim or liability. IRET
shall not provide for indemnification of the TRUSTEES, ADVISORS or
AFFILIATES for any liability or loss suffered by the TRUSTEES,
ADVISORS or AFFILIATES, nor shall it provide that the TRUSTEES,
ADVISORS or AFFILIATES be held harmless for any loss or liability
suffered by IRET, unless all of the following condition are met:
a. The TRUSTEES, ADVISORS or AFFILIATES have determined, in good
faith, that the course of conduct which caused the loss or
liability was in the best interests of IRET.
b. The TRUSTEES, ADVISORS or AFFILIATES were acting on behalf of or
performing services for IRET.
c. Such liability or loss was not the result of:
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<PAGE>
i. negligence or misconduct by the TRUSTEES, excluding the
INDEPENDENT TRUSTEES, ADVISORS or AFFILIATES; or
ii. gross negligence or willful misconduct by the INDEPENDENT
TRUSTEES.
d. Such indemnification or agreement to hold harmless is recoverable
only out of IRET NET ASSETS and not from SHAREHOLDERS.
2. Notwithstanding anything to the contrary contained in this document or
elsewhere, the TRUSTEES, ADVISORS or AFFILIATES and any PERSONS acting
as a broker-dealer shall not be indemnified by IRET for any losses,
liabilities or expenses arising from or out of an alleged violation of
federal or state securities laws by such party unless one or more of
the following conditions are met:
a. There has been a successful adjudication on the merits of each
count involving alleged securities law violations as to the particular
indemnitee.
b. Such claims have been dismissed with prejudice on the merits by a
court of competent jurisdiction as to the particular indemnitee.
c. A court of competent jurisdiction approves a settlement of the
claims against a particular indemnitee and finds that indemnification
of the settlement and the related costs should be made, and the court
considering the request for indemnification has been advised of the
position of the Securities and Exchange Commission and of the
published position of any state securities regulatory authority in
which securities of IRET were offered or sold as to indemnification
for violations of securities laws.
3. The advancement of IRET funds to the TRUSTEES, ADVISORS or AFFILIATES
for legal expenses and other costs incurred for which indemnification
is being sought is permissible only if all of the following conditions
are satisfied:
a. The legal action relates to acts or omissions with respect to the
performance of duties or services on behalf of IRET.
b. The legal action is initiated by a third party who is not a
SHAREHOLDER or the legal action is initiated by a SHAREHOLDER acting
in his or her capacity as such and a court of competent jurisdiction
specifically approves such advancement.
c. The TRUSTEES, ADVISORS or AFFILIATES undertake to repay the
advanced funds to IRET, together with the applicable legal rate of
interest thereon, in cases in which such TRUSTEES, ADVISORS or
AFFILIATES are found not to be entitled to indemnification.
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<PAGE>
LEGAL MATTERS
The validity of the Shares of Beneficial Interest offered under the
Prospectus, the federal and state tax aspects of the organization and
operation of IRET and the Operating Partnership and other legal matters will
be passed upon for IRET by Pringle & Herigstad, P.C., Minot, North Dakota.
Thomas A. Wentz, Jr., is a shareholder of said law firm (he also serves as a
Trustee of IRET). See "Conflicts of Interest."
EXPERTS
The balance sheets of IRET as of April 30, 1997, and April 30, 1998, the
statements of income, shareholders' equity, and cash flows for each of the
three years in the period ended April 30, 1998, as listed on the Index to
Financial Statements on page F-1, included in this Prospectus, have been
included herein in reliance on the reports of Brady-Martz & Associates, P.C.,
Minot, North Dakota, independent accountants, given on the authority of that
firm as experts in accounting and auditing.
GLOSSARY OF TERMS
Unless a different definition is provided immediately following a term used
in this documents, the following definitions shall apply:
ADMINISTRATOR: The official or agency administering the Securities laws of a
jurisdiction.
ACQUISITION EXPENSES: Expenses including but not limited to legal fees and
expenses, travel and communications expenses, costs of appraisals,
nonrefundable option payments on property not acquired, accounting fees and
expenses, title insurance, and miscellaneous expenses related to selection
and acquisition of properties, whether or not acquired.
ACQUISITION FEE: The total of all fees and commissions paid by any party to
any party in connection with making or investing in mortgage loans or the
purchase, development or construction of property by IRET. Included in the
computation of such fees or commissions shall be any real estate commission,
selection fee, DEVELOPMENT FEE, CONSTRUCTION FEE, nonrecurring management
fee, loan fees or points or any fee of a similar nature, however designated.
Excluded shall be DEVELOPMENT FEES and CONSTRUCTION FEES paid to PERSONS not
affiliated with the ADVISOR in connection with the actual development and
construction of a project.
ADVISOR: Odell-Wentz & Associates, L.L.C., a North Dakota Limited Liability
Company, 12 South Main, Minot, North Dakota, the entity responsible for
directing and performing the day-to-day business affairs of IRET.
ADVISORY AGREEMENT: The contract between IRET and the ADVISOR which is
summarized in this Prospectus. See "Advisory Agreement."
AFFILIATE: An AFFILIATE of another PERSON includes any of the following:
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<PAGE>
a. any PERSON directly or indirectly owning, controlling, or holding,
with power to vote ten percent or more of the outstanding voting
securities of such other PERSON.
b. any PERSON ten percent or more of whose outstanding voting securities
are directly or indirectly owned, controlled, or held, with power to
vote, by such other PERSON.
c. any PERSON directly or indirectly controlling, controlled by, or under
common control with such other PERSON.
d. any executive officer, director, trustee or general partner of such
other PERSON.
e. any legal entity for which such PERSON acts as an executive officer,
director, trustee or general partner.
AVERAGE INVESTED ASSETS: For any period the average of the aggregate book
value of the assets of IRET invested, directly or indirectly, in equity
interests in and loans secured by real estate, before reserves for
depreciation or bad debts or other similar non-cash reserves computed by
taking the average of such values at the end of each month during such period.
BOARD OF TRUSTEES: The ten member BOARD OF TRUSTEES of IRET.
COMPETITIVE REAL ESTATE COMMISSION: Real estate or brokerage commission paid
for the purchase or sale of a property which is reasonable, customary and
competitive in light of the size, type and location of such property.
CONTRACT PRICE FOR THE PROPERTY: The amount actually paid or allocated to
the purchase, development, construction or improvement of a property
exclusive of ACQUISITION FEES and ACQUISITION EXPENSES.
CONSTRUCTION FEE: A fee or other remuneration for acting as general
contractor and/or construction manager to construct improvements, supervise
and coordinate projects or to provide MAJOR REPAIRS OR REHABILITATION to
IRET's property.
DECLARATION OF TRUST: The Restated Declaration of Trust dated October 24,
1996, for IRET.
DEVELOPMENT FEE: A fee for the development of IRET's property, including
negotiating and approving plans, and undertaking to assist in obtaining
zoning and necessary variances and necessary financing for the specific
property, either initially or at a later date.
ERISA: The Employee Retirement Income Security Act of 1974, as amended.
EXCHANGE RIGHT: The right of limited partners in the OPERATING PARTNERSHIP
to exchange their limited partnership UNITS on a one-for-one basis for SHARES
of IRET.
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<PAGE>
FUNDS FROM OPERATIONS: Net income (computed in accordance with Generally
Accepted Accounting Principles), excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures
calculated on the same basis.
GAAP: Generally Accepted Accounting Principles.
INDEPENDENT EXPERT: A PERSON with no material current or prior business or
personal relationship with the ADVISOR or TRUSTEES who is engaged to a
substantial extent in the business of rendering opinions regarding the value
of assets of the type held by IRET.
INDEPENDENT TRUSTEE(S): The TRUSTEE(S) of IRET who are not associated and
have not been associated within the last two years, directly or indirectly,
with the ADVISOR of IRET, or AFFILIATES of the ADVISOR.
a. A TRUSTEE shall be deemed to be associated with the ADVISOR if he or
she:
- is employed by the ADVISOR or any of its AFFILIATES; or
- is an officer or director of the ADVISOR or any of its AFFILIATES;
or
- performs services, other than as a TRUSTEE, for IRET; or
- is a TRUSTEE for more than three REITS organized by or advised by
the ADVISOR; or
- has any material business or professional relationship with the
ADVISOR, or any of its AFFILIATES.
b. For purposes of determining whether or not the business or
professional relationship is material, the gross revenue derived by
the prospective INDEPENDENT TRUSTEE from the ADVISOR and AFFILIATES
shall be deemed material per se if it exceeds 5% of the prospective
INDEPENDENT TRUSTEE'S:
i. annual gross revenue, derived from all sources, during either of
the last two years; or
ii. net worth, on a fair market value basis.
c. An indirect relationship shall include circumstances in which a
TRUSTEE'S spouse, parents, children, siblings, mothers-or fathers-in-
laws, sons-or daughters-in-laws, or brothers-or sisters-in-law is or
has been associated with the ADVISOR, any of its AFFILIATES, or the
TRUST.
IRET: Investors Real Estate Trust, a North Dakota Real Estate Investment Trust.
72
<PAGE>
IRET, INC.: The general partner of the OPERATING PARTNERSHIP.
IRET, PROPERTIES: The OPERATING PARTNERSHIP.
IRS: The United States Internal Revenue Service.
LEVERAGE: The aggregate amount of indebtedness of IRET for money borrowed
(including purchase money mortgage loans) outstanding at any time, both
secured and unsecured.
LIMITED PARTNERS: The limited partners of the OPERATING PARTNERSHIP.
NET ASSETS: The total assets (other than intangibles) at cost before
deducting depreciation or other non-cash reserves less total liabilities,
calculated at least quarterly on a basis consistently applied.
NET INCOME: For any period total revenues applicable to such period, less
the expenses applicable to such period other than additions to reserves for
depreciation or bad debts or other similar non-cash reserves. If the ADVISOR
receives an incentive fee, NET INCOME, for purposes of calculation TOTAL
OPERATING EXPENSES in Section IV.D shall exclude the gain from the sale of
the REIT'S assets.
NET OPERATING INCOME: The total gross income from a real estate property,
less all operating expenses attributable to that property but excluding
interest expense, depreciation and any other non-cash deductions.
OFFERING: The offering of SHARES of beneficial interest of IRET to the
public pursuant to this PROSPECTUS.
OFFERING EXPENSES: All expenses incurred by and to be paid from the assets
of IRET in connection with registration and offering and distributing its
shares to the public, including, but not limited to, total underwriting and
brokerage discounts and commissions (including fees of the underwriters'
attorneys), expenses for printing, engraving, mailing, salaries of employees
while engaged in sales activity, charges of transfer agents, registrars,
trustees, escrow holders, depositories, experts, expenses of qualification of
the sale of the securities under Federal and State laws, including taxes and
fees, accountants' and attorneys' fees.
OPERATING PARTNERSHIP: IRET Properties, a North Dakota Limited Partnership.
OPERATING PARTNERSHIP AGREEMENT: The agreement of limited partnership for
IRET Properties, a North Dakota Limited Partnership.
PERSON: Any natural persons, partnership, corporation, association, trust,
limited liability company or other legal entity.
PROSPECTUS: Shall have the meaning given to that term by Section 2(10) of
the Securities Act of 1933, including a preliminary Prospectus; provided
however, that such term as used herein shall also include an offering
circular as described in Rule 256 of the General Rules and Regulations under
the Securities Act of 1933 or,
73
<PAGE>
in the case of an intrastate offering, any document by whatever name known,
utilized for the purpose of offering and selling securities to the public.
REAL ESTATE INVESTMENT TRUST ("REIT"): A corporation, trust, association or
other legal entity (other than a real estate syndication) which is engaged
primarily in investing in equity interests in real estate (including fee
ownership and leasehold interests) or in loans secured by real estate or both.
SHARES: The shares of beneficial interest of IRET being offered under this
PROSPECTUS.
SHAREHOLDERS: The registered holders of IRET's SHARES.
TOTAL OPERATING EXPENSES: Aggregate expenses of every character paid or
incurred by IRET as determined under Generally Accepted Accounting
Principles, including ADVISORS' fees, but excluding:
a. The expenses of raising capital such as ORGANIZATION AND OFFERING
EXPENSES, legal, audit, accounting, underwriting, brokerage, listing,
registration and other fees, printing and other such expenses, and tax
incurred in connection with the issuance, distribution, transfer,
registration, and stock exchange listing of IRET's SHARES;
b. interest payments;
c. non-real estate taxes;
d. non-cash expenditures such as depreciation, amortization and bad debt
reserves;
e. ACQUISITION FEES, ACQUISITION EXPENSES, real estate commissions on
resale of property and other expenses connection with the acquisition,
disposition, and ownership of real estate interests, mortgage loans,
or other property, (such as the costs of foreclosure, insurance
premiums, legal services, maintenance, repair, and improvement of
property).
TRUSTEE(S): The members of the BOARD OF TRUSTEES which manages IRET.
UNIMPROVED REAL PROPERTY: The real property of IRET which has the following
three characteristics:
a. an equity interest in real property which was not acquired for the
purpose of producing rental or other operating income;
b. has no development or construction in process on such land;
c. and no development or construction on such land is planned in good
faith to commence on such land within one year.
UNITS: The limited partnership units of the OPERATING PARTNERSHIP.
74
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
MINOT, NORTH DAKOTA
CONSOLIDATED FINANCIAL STATEMENTS
AS OF
APRIL 30, 1998 AND 1997
AND
INDEPENDENT AUDITOR'S REPORT
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Trustees
Investors Real Estate Trust and Subsidiaries
Minot, North Dakota
We have audited the accompanying consolidated balance sheets of Investors
Real Estate Trust and Subsidiaries as of April 30, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years ended April 30, 1998, 1997 and 1996. These consolidated
financial statements are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Investors Real Estate Trust and Subsidiaries as of April 30, 1998 and
1997, and the consolidated results of its operations and cash flows for the
years ended April 30, 1998, 1997 and 1996, in conformity with generally
accepted accounting principles.
Brady, Martz & Associates, P.C.
May 27, 1998
F-2
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
Consolidated Balance Sheets
April 30,1998 and 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REAL ESTATE INVESTMENTS
Property owned $231,416,322 $191,884,509
Less accumulated depreciation (21,516,129) (16,948,156)
------------ ------------
$209,900,193 $174,936,353
Mortgage loans receivable 3,438,308 3,108,933
Less discounts and allowances (127,132) (154,118)
------------ ------------
Total real estate investments $213,211,369 $177,891,168
------------ ------------
OTHER ASSETS
Cash $ 2,132,220 $ 1,718,257
Marketable securities - held-to-maturity 3,536,538 4,055,459
Marketable securities - available-for-sale 720,688 683,466
Accounts receivable 55,326 332,814
Real estate deposits 2,493,713 100,000
Investment in partnership 6,705 78,469
Prepaid insurance 219,871 248,377
Tax and insurance escrow 1,254,068 1,250,469
Deferred charges 1,088,016 635,464
------------ ------------
TOTAL ASSETS $224,718,514 $186,993,943
------------ ------------
------------ ------------
</TABLE>
F-3
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
LIABILITIES
Accounts payable and accrued expenses $ 2,847,080 $ 3,073,071
Notes payable 1,000,000 0
Mortgages payable 134,059,974 115,734,946
Investment certificates issued 10,369,561 8,187,305
------------ ------------
Total liabilities $148,276,615 $126,995,322
------------ ------------
MINORITY INTEREST OF UNITHOLDERS IN
OPERATING PARTNERSHIP $ 8,289,273 $ 1,002
------------ ------------
SHAREHOLDERS' EQUITY
Shares of beneficial interest (unlimited
authorization, no par value, 16,391,412
shares outstanding in 1998 and
14,940,513 shares outstanding in 1997) $ 74,708,559 $ 65,073,951
Accumulated distributions in excess of
net income (6,666,555) (5,162,837)
Unrealized gain on securities
available-for-sale 110,622 86,505
------------ ------------
Total shareholders' equity $ 68,152,626 $ 59,997,619
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $224,718,514 $186,993,943
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
Consolidated Statements of Operations
for the Years Ended April 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUE
Real estate rentals $ 31,694,586 $ 22,972,368 $ 17,635,297
Interest, discounts and fees 712,959 861,613 1,024,368
------------ ------------ ------------
Total revenue $ 32,407,545 $ 23,833,981 $ 18,659,665
------------ ------------ ------------
EXPENSES
Interest $ 10,479,104 $ 7,638,776 $ 5,547,739
Depreciation 4,791,907 3,584,591 2,261,724
Utilities and maintenance 5,142,459 3,741,877 3,167,560
Taxes and insurance 3,536,147 2,720,495 2,065,017
Property management expenses 2,642,977 1,870,435 1,281,311
Advisory and trustee services 745,907 559,149 458,019
Operating expenses 271,738 158,627 162,588
Amortization 106,108 60,588 97,900
------------ ------------ ------------
Total expenses $ 27,716,347 $ 20,334,538 $ 15,041,858
------------ ------------ ------------
OPERATING INCOME $ 4,691,198 $ 3,499,443 $ 3,617,807
GAIN ON SALE OF PROPERTIES 465,499 398,424 994,163
MINORITY INTEREST PORTION OF
OPERATING PARTNERSHIP INCOME (141,788) (18) 0
------------ ------------ ------------
NET INCOME $ 5,014,909 $ 3,897,849 $ 4,611,970
------------ ------------ ------------
------------ ------------ ------------
Net income per share:
Operating income $0.29 $0.25 $0.30
Gain on sale of properties 0.03 0.03 0.08
----- ----- -----
Net income $0.32 $0.28 $0.38
----- ----- -----
----- ----- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
for the Years Ended April 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Unrealized
Accumulated Gain on
Shares of Distributions Securities Total
Number of Beneficial in excess of Available- Shareholders'
Shares Interest Net Income for-Sale Equity
----------- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE MAY 1, 1995 11,187,786 $ 41,560,587 $ (3,724,933) $0 $ 37,835,654
Net income 0 0 4,611,970 0 4,611,970
Dividends distributed 0 0 (4,439,034) 0 (4,439,034)
Dividends reinvested 502,599 3,100,988 0 0 3,100,988
Sale of shares 1,603,159 9,820,470 0 0 9,820,470
Shares repurchased (34,636) (218,128) 0 0 (218,128)
----------- ------------ ------------ ---------- -------------
BALANCE APRIL 30, 1996 13,258,908 $ 54,263,917 $ (3,551,997) $0 $ 50,711,920
Net income 0 0 3,897,849 0 3,897,849
Dividends distributed 0 0 (5,508,689) 0 (5,508,689)
Dividends reinvested 554,681 3,579,744 0 0 3,579,744
Sale of shares 1,403,776 9,025,706 0 0 9,025,706
Shares repurchased (276,852) (1,795,416) 0 0 (1,795,416)
Increase in unrealized gain
on securities available-
for-sale 0 0 0 86,505 86,505
----------- ------------ ------------ ---------- -------------
BALANCE APRIL 30, 1997 14,940,513 $ 65,073,951 $ (5,162,837) $ 86,505 $ 59,997,619
Net income 0 0 5,014,909 0 5,014,909
Dividends distributed 0 0 (6,518,627) 0 (6,518,627)
Dividends reinvested 636,799 4,290,541 0 0 4,290,541
Sale of shares 1,196,562 8,421,858 0 0 8,421,858
Shares repurchased (382,462) (3,077,791) 0 0 (3,077,791)
Increase in unrealized gain
on securities available-
for-sale 0 0 0 24,117 24,117
----------- ------------ ------------ ---------- -------------
BALANCE APRIL 30, 1998 16,391,412 $ 74,708,559 $ (6,666,555) $110,622 $68,152,626
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the Years Ended April 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,014,909 $3,897,849 $4,611,970
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 4,898,015 3,645,179 2,359,624
Minority interest portion of
operating partnership income 141,788 18 0
Accretion of discount on contracts (5,706) (7,698) (16,570)
Gain on sale of properties (465,499) (398,424) (994,163)
Interest reinvested in investment certificates 349,791 288,517 161,813
Changes in other assets and liabilities:
Increase in real estate deposits (350,000) (100,000) 0
(Increase) decrease in other assets 377,758 (415,274) (15,645)
Increase in tax and insurance escrow (3,599) (98,942) (834,007)
Increase in deferred charges (558,660) (180,779) (257,991)
Increase (decrease) in accounts payable
and accrued expenses (225,991) (69,119) 1,219,771
------------ ----------- -----------
Net cash provided from operating
activities $ 9,172,806 $ 6,561,327 $ 6,234,802
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of marketable
securities held-to-maturity $ 518,921 $ 356,398 $ 417,952
Principal payments on mortgage loans
receivable 565,359 1,706,202 2,642,346
Proceeds from sale of property 1,482,046 0 389,784
Payments for acquisition and improvement
of properties (22,894,602) (38,046,177) (32,462,846)
Purchase of marketable securities
available-for-sale 0 (596,961) 0
Investment in mortgage loans receivable (2,061,179) (2,835,212) (1,784,981)
------------ ----------- -----------
Net cash used for investing activities $(22,389,455) $(39,415,750) $(30,797,745)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of shares $ 8,421,858 $ 9,025,706 $ 9,820,470
Proceeds from investment certificates
issued 3,283,248 4,225,004 1,695,924
Proceeds from mortgages payable 10,612,652 27,094,270 29,025,001
Proceeds from short-term lines of credit 12,900,000 8,450,000 0
Proceeds from sale of minority interest 0 1,000 0
Repurchase of shares (3,077,791) (1,795,416) (218,128)
Dividends paid (2,228,086) (1,930,439) (1,338,046)
Distributions paid to minority interest
unit holders (179,185) (16) 0
Redemption of investment certificates (1,450,783) (2,128,686) (917,732)
</TABLE>
F-7
<PAGE>
<TABLE>
<S> <C> <C> <C>
Principal payments on mortgage loans (2,751,301) (2,634,017) (15,554,717)
Payments on short-term lines of credit (11,900,000) (8,450,000) 0
------------ ----------- -----------
Net cash provided from financing
activities $ 13,630,612 $ 31,857,406 $22,512,772
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH $ 413,963 $ (997,017) $(2,050,171)
CASH AT BEGINNING OF YEAR 1,718,257 2,715,274 4,765,445
------------ ----------- -----------
CASH AT END OF YEAR $ 2,132,220 $ 1,718,257 $ 2,715,274
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
F-8
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTARY SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Dividends reinvested $ 4,290,541 $ 3,579,744 $3,100,988
Real estate investment and mortgage loans
receivable acquired through assumption
of mortgage loans payable and accrual
of costs 10,463,677 19,575,635 8,232,568
Mortgage loan receivable transferred to
property owned 1,161,878 2,810,000 0
Proceeds from sale of properties deposited
directly with escrow agent 2,870,387 455,329 426,352
Properties acquired through the issuance of
minority interest units in the operating
partnership 8,325,652 0 0
Interest reinvested directly in investment
certificates 349,791 288,517 161,813
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest paid on mortgages $ 9,613,154 $ 6,773,978 $4,661,065
Interest paid on investment
certificates 657,966 508,686 292,660
----------- ----------- ----------
$10,271,120 $ 7,282,664 $4,953,725
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
Notes to Consolidated Financing Statements
April 30, 1998, 1997 and 1996
Note 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of operations - Investors Real Estate Trust qualifies under
Section 856 of the Internal Revenue Code as a real estate investment trust.
The Trust has properties located throughout the Upper Midwest, with principal
offices located in Minot, North Dakota. The Company invests in commercial and
residential real estate, real estate contracts, real estate related
governmental backed securities (GNMA), and equity securities in other real
estate investment trusts.
Effective February 1, 1997, the Trust reorganized its structure in order
to convert to Umbrella Partnership Real Estate Investment Trust (UPREIT)
status. The Trust established an operating partnership (IRET Properties, a
North Dakota Limited Partnership) with a wholly owned corporate subsidiary
acting as its sole general partner (IRET, Inc., a North Dakota Corporation).
At that date, the Trust transferred all of its assets and liabilities to the
operating partnership in exchange for general partnership units.
The general partner has full and exclusive management responsibility for
the real estate investment portfolio owned by the operating partnership. The
partnership is operated in a manner that allows IRET to continue its
qualification as a real estate investment trust under the Internal Revenue
Code.
All limited partners of the operating partnership have "exchange rights"
allowing them, at their option, to exchange their limited partnership units
for shares of the Trust on a one for one basis. The exchange rights are
subject to certain restrictions including no exchanges for at least one year
following the acquisition of the limited partnership units. The operating
partnership distributes cash on a quarterly basis in the amounts determined
by the Trust which results in each limited partner receiving the same
dividends as a Trust shareholder.
BASIS OF PRESENTATION - The consolidated financial statements include
the accounts of Investors Real Estate Trust and all of its subsidiaries in
which it maintains a controlling interest. The Trust is the sole shareholder
of IRET, Inc., which is the general partner of the operating partnership,
IRET Properties. IRET Properties is a general partner in six limited
partnerships, and due to the immaterial involvement of the limited partners,
has substantial influence over their operations. These limited partnerships
are as follows:
Eastgate Properties, Ltd.
Bison Properties, Ltd
First Avenue Building, Ltd.
Sweetwater Properties, Ltd.
Hill Park Properties, Ltd.
Colton Heights, Ltd.
F-10
<PAGE>
Note 1 (CONTINUED)
All material intercompany transactions and balances have been eliminated
in the consolidated financial statements.
ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
PROPERTY OWNED - Real estate is stated at cost. Expenditures for
renewals and improvements that significantly add to the productive capacity
or extend the useful life of an asset are capitalized. Expenditures for
maintenance and repairs which do not add to the value or extend the useful
life are charged to expense as incurred.
DEPRECIATION is provided to amortize the cost of individual assets over
their estimated useful lives using principally the straight-line method.
Useful lives range from 12 years for furniture and fixtures to 20 - 40 years
for buildings and improvements.
MORTGAGE LOANS RECEIVABLE are shown at cost less unearned discount.
Discounts on contracts are accreted using the straight-line method over the
term of the contract which approximates the effective interest method.
Deferred gain is recognized as income on the installment method when
principal payments are received. Interest income is accrued and reflected in
the related balance.
ALLOWANCE FOR LOAN LOSSES - The Trust evaluates the need for an
allowance for loan losses periodically. In performing its evaluation,
management assesses the recoverability of individual real estate loans by a
comparison of their carrying amount with their estimated net realizable value.
MARKETABLE SECURITIES - The Trust's investments in securities are
classified as securities "held-to-maturity" and securities
"available-for-sale." The securities classified as held-to-maturity consist
of Government National Mortgage Association securities for which the Trust
has the positive intent and ability to hold to maturity. They are reported at
cost, adjusted by amortization of premiums and accretion of discounts which
are recognized in interest income using the straight- line method over the
period to maturity which approximates the effective interest method.
The securities classified as "available-for-sale" consist of equity
shares in other real estate investment trusts and are stated at fair value.
Unrealized gains and losses on securities available-for-sale are recognized
as direct increases or decreases in shareholders' equity. Cost of securities
sold are recognized on the basis of specific identification.
F-11
<PAGE>
Note 1 - (CONTINUED)
REAL ESTATE DEPOSITS consist of funds held by an escrow agent to be
applied toward the purchase of real estate qualifying for gain deferral as a
like-kind exchange of property under Section 1031 of the Internal Revenue
Code. It also consists of earnest money, or "good faith deposits," to be used
by the Trust toward the purchase of property or the payment of loan costs
associated with loan refinancing.
INVESTMENT IN PARTNERSHIP - The Trust accounted for its investment in
Chateau Properties, Ltd. under the equity method of accounting, wherein the
appropriate portion of the earnings or loss is recognized currently. The
Operating Partnership had a general partnership interest in the limited
partnership. Chateau Properties, Ltd. had invested in real estate properties.
During 1998, the real estate in Chateau Properties, Ltd. was acquired through
the issuance of operating partnership units. The remaining balance at April
30, 1998 represents interests in several partnerships.
MINORITY INTEREST - Capital contributions, distributions and profits and
losses are allocated to minority interests in accordance with the terms of
the operating partnership agreement.
NET INCOME PER SHARE - The Trust adopted Statement of Financial
Accounting Standard No. 128, Earnings Per Share in 1998. Restating the prior
years net income per share to conform to the provisions of this statement
resulted in no changes to previous amounts reported as the number of
outstanding shares used to calculate basic net income per share are
substantially identical to those used in the prior years. Basic net income
per share is computed using the weighted average number of shares
outstanding. The aggregate weighted average shares outstanding used in
computing net income per share was 15,636,214 in 1998, 14,044,467 in 1997 and
12,137,123 in 1996. There is no potential for dilution of net income per
share as no dilutive shares have been authorized. For this reason, a separate
diluted net income per share has not been disclosed.
INCOME TAXES - The Trust intends to continue to qualify as a real estate
investment trust as defined by the Internal Revenue Code and, as such, will
not be taxed on the portion of the income that is distributed to the
shareholders, provided at least 95% of its real estate investment trust
taxable income is distributed and other requirements are met. The Trust
intends to distribute all of its taxable income and realized capital gains
from property dispositions within the prescribed time limits and,
accordingly, there is no provision or liability for income taxes shown on the
financial statements.
UPREIT status allows non-recognition of gain by an owner of appreciated
real estate if that owner contributes the real estate to a partnership in
exchange for a partnership interest. The UPREIT concept was born when the
non-recognition provisions of Section 721 of the Internal Revenue Code were
combined with "Exchange Rights" which allow the contributing partner to
exchange the limited partnership interest received in exchange for the
appreciated real estate for the Trust stock. Upon conversion of the
partnership units to Trust shares, a taxable event occurs for that limited
partner. Income or loss of the operating partnership shall be allocated among
its partners in compliance with the provisions of Internal Revenue Code
Sections 701 (b) and 704 (c).
REVENUE RECOGNITION - Residential rental properties are leased under
operating leases with terms generally of one year or less. Commercial
properties are leased to tenants for various terms exceeding one year. Lease
terms often include renewal options. In addition, a number of the commercial
leases provide for a base rent plus a percentage rent based on gross sales in
excess of a stipulated amount. Rental income is
F-12
<PAGE>
Note 1 - (CONTINUED)
recognized as it is earned, which is not materially different than on a
straight-line basis.
Profit on sales of real estate shall be recognized in full when real
estate is sold, provided:
The profit is determinable, that is, the collectibility of
the sales price is reasonably assured or the amount that
will be collectible can be estimated.
The earnings process is virtually complete, that is, the
seller is not obliged to perform significant activities
after the sale to earn the profit.
Based on the economic climate and the terms of many contracts, the
collectibility of the sales price was not reasonably assured as required by
generally accepted accounting principles. Consequently, the Trust uses the
installment method of accounting for profits on several property sales as it
more fairly reflects earned revenue.
Interest on mortgage loans receivable is recognized in income as it
accrues during the period the loan is outstanding. In the case of
non-performing loans, income is recognized as discussed in Note 4.
INTEREST CAPITALIZATION - Interest is capitalized on accumulated
expenditures relating to the acquisition and development of certain
qualifying properties.
RECLASSIFICATIONS - Certain previously reported amounts have been
reclassified to conform with the current financial statement presentation.
Note 2 - OFF-BALANCE-SHEET RISK
The Trust had deposits at Norwest Bank, North Dakota, N.A., and First
American Bank which exceeded Federal Deposit Insurance Corporation limits by
$349,802 and $449,907, respectively, at April 30, 1998.
Note 3 - PROPERTY OWNED UNDER LEASE
Property consisting principally of real estate owned under lease is
stated at cost less accumulated depreciation and is summarized as follows:
<TABLE>
<CAPTION>
April 30, 1998 April 30, 1997
<S> <C> <C>
Residential $ 180,986,906 $ 149,643,413
Less accumulated depreciation (15,449,736) (11,845,692)
------------- -------------
$ 165,537,170 $ 137,797,721
------------- -------------
Commercial $ 50,429,416 $ 42,241,096
Less accumulated depreciation (6,066,393) (5,102,464)
------------- -------------
$ 44,363,023 $ 37,138,632
------------- -------------
Remaining cost $ 209,900,193 $ 174,936,353
------------- -------------
------------- -------------
</TABLE>
F-13
<PAGE>
Note 3 - (CONTINUED)
There were no repossessions during the years ended April 30, 1998 and
1997.
The above cost of residential real estate owned included construction in
progress of $753,680 and $2,482,849 as of April 30, 1998 and 1997,
respectively.
Construction period interest of $220,573, $269,513, and $690,665 has
been capitalized for the years ended April 30, 1998, 1997 and 1996,
respectively.
Residential apartment units are rented to individual tenants with lease
terms up to one year. Gross revenues from residential rentals totaled
$27,231,714, $18,935,111, and $12,286,492 for the years ended April 30, 1998,
1997 and 1996, respectively.
Gross revenues from commercial property rentals totaled $4,462,872,
$4,037,258, and $5,348,805 for the years ended April 30, 1998, 1997 and 1996,
respectively. Commercial properties are leased to tenants under terms of
leases expiring at various dates through 2013. Lease terms often include
renewal options. In addition, a number of the commercial leases provide for a
base rent plus a percentage rent based on gross sales in excess of a
stipulated amount. Rents based on a percentage of sales totaled $28,316,
$16,517, and $25,054 for the years ended April 30, 1998, 1997 and 1996,
respectively.
The future minimum lease payments to be received under these operating
leases for the commercial properties as of April 30, 1998, are as follows:
<TABLE>
<S> <C>
Year ending April 30,
1999 $ 6,667,483
2000 6,658,627
2001 6,570,453
2002 5,724,100
2003 5,662,960
Thereafter 54,585,504
-----------
$85,869,127
-----------
-----------
</TABLE>
Note 4 - MORTGAGE LOANS RECEIVABLE
Mortgage loans receivable consists of fourteen contracts which are
collateralized by real estate. Contract terms call for monthly payments of
principal and interest. Interest rates range from 7 to 10.25%. Mortgage loans
receivable have been evaluated for possible losses considering repayment
history, market value of underlying collateral, deferred gains and economic
conditions.
F-14
<PAGE>
Note 4 - (CONTINUED)
Future principal payments due under the mortgage loan contracts as of April
30, 1998 are as follows:
<TABLE>
<S> <C>
Year ending April 30,
1999 $2,088,754
2000 88,858
2001 85,035
2002 92,040
2003 203,390
Later years 880,231
----------
$3,438,308
----------
----------
</TABLE>
Details concerning mortgage loans receivable from related parties can be
found in Note 10.
Non-performing mortgage loans receivable were $0 at April 30, 1998 and
$174,911 at April 30, 1997. These loans are recognized as impaired in
conformity with FASB Statement No. 114, Accounting by Creditors for
Impairment of a Loan. The total allowance for credit losses related to those
loans was approximately $0 and $30,000, respectively. The average balance of
impaired loans for the year ended April 30, 1998 was approximately $50,000.
For impairment recognized in conformity with FASB Statement No. 114, the
entire change in present value of expected cash flows is reported as bad debt
expense in the same manner in which impairment initially was recognized or as
a reduction in the amount of bad debt expense that otherwise would be
reported. Additional interest income that have been earned on these loans if
they had not been non-performing amounted to approximately $6,000 in 1998 and
$33,000 in 1997. There was no interest income on non-performing loans
recognized on a cash basis for 1998 or 1997.
Note 5 - MARKETABLE SECURITIES
The amortized cost and estimated market values of marketable securities
held-to-maturity at April 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 Gross Gross
---- Amortized Unrealized Unrealized Fair
Issuer Cost Gains Losses Value
------ ---- ----- ------ -----
<S> <C> <C> <C> <C>
GNMA $3,536,538 $ 22,757 $ - $3,559,295
---------- ---------- --------- ----------
---------- ---------- --------- ----------
1997
-----
GNMA $4,055,459 $ - $166,031 $3,889,428
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
F-15
<PAGE>
Note 5 - (CONTINUED)
The amortized cost and estimated market values of marketable securities
available-for-sale at April 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998
---- Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Equity Shares in
other REIT's $ 610,066 $ 110,622 $ - $720,688
---------- ---------- -------- --------
---------- ---------- -------- --------
1997
----
Equity Shares in
other REIT's $ 596,961 $ 90,015 $ 3,510 $683,466
---------- ---------- -------- --------
---------- ---------- -------- --------
</TABLE>
There were no realized gains or losses on sales of securities for the
years ended April 30, 1998, 1997 and 1996.
Marketable securities held-to-maturity consist of Governmental National
Mortgage Association (GNMA) securities bearing interest from 6.5% to 9.5%
with maturity dates ranging from May 15, 2016 to June 15, 2023. The following
is a summary of the maturities of securities held-to-maturity at April 30,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due after 10 years $3,536,538 $3,559,295 $4,055,459 $3,889,428
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Note 6 - NOTES PAYABLE
As of April 30, 1998, the Trust had lines of credit available from two
financial institutions. An unsecured line of credit was issued by First
Western Bank & Trust in the amount of $4,000,000 carrying an interest rate
equal to prime and maturing December 1, 1998. A second unsecured line of
credit from First International Bank & Trust was issued in the amount of
$2,500,000 carrying an interest rate equal to prime and maturing September
12, 1998. Interest payments are due monthly on both notes. As of April 30,
1998 the Trust had an unpaid balance of $1,000,000 on the First Western Bank
& Trust line of credit and no unpaid balance on the First International Bank
& Trust line of credit. As of April 30, 1997, the Trust had no unpaid
balances on either line of credit.
F-16
<PAGE>
Note 7 - MORTGAGES PAYABLE
Mortgages payable as of April 30, 1998, included mortgages on properties
owned totaling $134,012,050, and mortgages of $47,924 on property sold on
contract. The carrying value of the related real estate owned was
$190,827,346 and the carrying value of the related mortgage loans receivable
was $209,260 as of April 30, 1998.
Mortgages payable as of April 30, 1997, included mortgages on properties
owned totaling $115,608,689, and mortgages of $126,257 on property sold on
contract. The carrying value of the related real estate owned was
$165,399,893 and the carrying value of the related mortgage loans receivable
was $353,480 as of April 30, 1997.
Monthly installments are due on the mortgages with interest rates
ranging from 6.80% to 9.75% and with varying maturity dates through November
30, 2034.
The aggregate amount of required future principal payments on mortgages
payable is as follows:
<TABLE>
<S> <C>
Years ending April 30,
1999 $ 3,319,048
2000 6,533,758
2001 3,671,496
2002 3,954,021
2003 4,221,911
Later years 112,359,740
------------
Total payments $134,059,974
------------
------------
</TABLE>
Note 8 - INVESTMENT CERTIFICATES ISSUED
The Trust has placed investment certificates with the public. The
interest rates vary from 6.5% to 11% per annum, depending on the term of the
security. Total securities maturing within fiscal years ending April 30 are
shown below. Interest is paid annually, semiannually, or quarterly on the
anniversary date of the security.
<TABLE>
<S> <C>
Due in years ending April 30,
1999 $ 6,444,209
2000 2,322,910
2001 690,822
2002 305,273
2003 67,747
Thereafter 38,600
-----------
$10,369,561
-----------
-----------
</TABLE>
F-17
<PAGE>
Note 9 - DEFERRED GAIN FROM PROPERTY DISPOSITIONS
Deferred gain represents gain from property dispositions that have been
reported on the installment method. With the installment method of reporting,
the proportionate share of the gain is recognized at the point cash is
received. Deferred gain recognized on the installment basis was $16,713,
$146,361, and $476,913 for the years ended April 30, 1998, 1997 and 1996,
respectively.
Note 10 - TRANSACTIONS WITH RELATED PARTIES
Mr. Roger R. Odell and Mr. Thomas A. Wentz, Sr., officers and
shareholders of the Trust, are partners in Odell-Wentz & Associates, the
advisor to the Trust. Under the Advisory Contract between the Trust and
Odell-Wentz & Associates, the Trust pays an advisor's fee based on the net
assets of the Trust and a percentage fee for investigating and negotiating
the acquisition of new investments. For the year ended April 30, 1998,
Odell-Wentz & Associates received total fees under said agreement of
$740,393. The fees for April 30, 1997 were $667,367, and for April 30, 1996
were $484,086.
For the years ended April 30, 1998, 1997 and 1996, the Trust has
capitalized $141,468, $177,834, and $115,993, respectively, of these fees,
with the remainder of $598,925, $489,533, and $368,093, respectively,
expensed as advisory and trustee fees on the statement of operations. The
advisor is obligated to provide office space, staff, office equipment,
computer services and other services necessary to conduct the business
affairs of the Trust.
Investors Management and Marketing (IMM) provides property management
services to the Trust. Roger R. Odell is a shareholder in IMM. IMM received
$530,678, $408,904, and $281,717 for services rendered for years ended April
30, 1998, 1997 and 1996, respectively.
Inland National Securities is a corporation that provides underwriting
services in the sale of additional shares for the Trust. Roger R. Odell is
also a shareholder in Inland National Securities. Fees for services totaled
$171,755 for the year ended April 30, 1998, $291,143 for the year ended April
30, 1997, and $269,656 for the year ended April 30, 1996.
The Trust paid fees and expense reimbursements to the law firm in which
Thomas A. Wentz, Sr. is a partner totaling $62,293, $36,045, and $23,488 for
the years ended April 30, 1998, 1997 and 1996, respectively.
Investment certificates issued by the Trust to officers and trustees
totaled $1,219,457 and $519,528, at April 30, 1998 and 1997, respectively.
The Trust issued 334,172 limited partnership units at $7.20/unit to
Roger R. Odell and C. Morris Anderson upon the completion of the UPREIT
transaction with Magic City Realty. Mr. Odell and Mr. Anderson owned all of
Magic City Realty. Mr. Anderson is also a trustee of the Trust.
F-18
<PAGE>
Note 11 - MARKET PRICE RANGE OF SHARES
Since October 17, 1997, Investors Real Estate Trust traded shares on the
NASDAQ Small Capital Market. During the period October 17, 1997 through April
30, 1998, a total of 812,498 shares were traded in 445 separate trades. The
high trade price during the period was 7.406, low was 6.563, and the closing
price on April 30, 1998 was 7.1888.
Prior to October 17, 1998, Investors Real Estate Trust shares were
traded on the Over-the-Counter Market. The price range is as follows:
<TABLE>
<CAPTION>
Bid Ask
--- ---
Low High Low High
--- ---- --- ----
<S> <C> <C> <C> <C>
1996 $ 5.89 $6.30 $ 6.40 $6.85
1997 6.44 6.62 7.00 7.20
1998 6.62 6.85 7.20 7.45
</TABLE>
Note 12 - SUBSEQUENT EVENT
The owners of the six limited partnerships, that are consolidated
in the financial statements (as described in Note 1), exchanged properties
for limited partnership units in the operating partnership, effective May 1,
1998. The following summarizes the units exchanged and the dollar amount
attributed to each partnership's property:
<TABLE>
<CAPTION>
Number of
Limited Partnership Dollar Amount
Units Issued of Units Issued
<S> <C> <C>
Eastgate Properties, Ltd. 12,450 $ 92,753
Bison Properties, Ltd. 11,400 84,930
First Avenue Building, Ltd. 4,200 31,290
Sweetwater Properties, Ltd. 10,500 78,225
Hill Park Properties, Ltd. 19,200 143,040
Colton Heights, Ltd. 6,750 50,288
</TABLE>
Note 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Mortgage loans receivable - Fair values are based on the discounted
value of future cash flows expected to be received for a loan using
current rates at which similar loans would be made to borrowers with
similar credit risk and the same remaining maturities.
Cash - The carrying amount approximates fair value because of the
short maturity of those instruments.
Marketable securities - The fair values of these instruments are
estimated based on quoted market prices for these instruments.
F-19
<PAGE>
Note 13 - (CONTINUED)
Notes payable - The carrying amount approximates fair value because of
the short maturity of those notes.
Mortgages payable - For variable rate loans that reprice frequently,
fair values are based on carrying values. The fair value of fixed-rate loans
is estimated based on the discounted cash flows of the loans using current
market rates.
Investment certificates issued - The fair value is estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on deposits with similar remaining maturities.
Accrued interest payable - The carrying amount approximates fair value
because of the short-term nature of when interest will be paid.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial Assets
- -----------------
Mortgage loan receivable $ 3,438,308 $ 3,438,308 $ 3,108,933 $ 3,108,938
Cash 2,132,220 2,132,220 1,718,257 1,718,257
Marketable securities
held-to-maturity 3,536,538 3,559,295 4,055,459 3,889,428
Marketable securities
available-for-sale 720,688 720,688 683,466 683,466
Financial Liabilities
- ---------------------
Notes payable $ 1,000,000 $ 1,000,000 $ 0 $ 0
Mortgages payable 135,059,974 129,354,699 115,734,946 113,007,861
Investment certificates
issued 10,369,561 10,202,603 8,187,305 8,136,971
Accrued interest payable 1,220,177 1,220,177 1,012,193 1,012,193
</TABLE>
F-20
<PAGE>
ADDITONAL INFORMATION
F-21
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON ADDITIONAL INFORMATION
Board of Trustees
Investors Real Estate Trust
and Subsidiaries
Minot, North Dakota
Our report on our audit of the basic consolidated financial statements of
Investors Real Estate Trust and Subsidiaries for the years ended April 30,
1998, 1997 and 1996, appears on page 1. Those audits were made for the
purpose of forming an opinion on such consolidated financial statements taken
as a whole. The information on pages 20 through 35 related to the 1998, 1997
and 1996 consolidated financial statements is presented for purposes of
additional anaylsis and is not a required part of the basic consolidated
financial statements. Such information, except for information on page 35
that is marked "unaudited" on which we express no opinion, has been subjected
to the auditing procedures applied in the audits of the basic consolidated
financial statements, and, in our opinion, the information is fairly stated
in all material respects in relation to the basic consolidated financial
statements for the years ended April 30, 1998, 1997 and 1996, taken as a
whole.
We have also previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheets of Investors Real Estate
Trust and Subsidiaries as of April 30, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the two years ended April 30, 1995 and 1994, none of which is
presented herein, and we expressed unqualified opinions on those consolidated
financial statements. In our opinion, the information on page 30 relating to
the 1995 and 1994 consolidated financial statements is fairly stated in all
material respects in relation to the basic consolidated financial statements
from which it has been derived.
BRADY, MARTZ & ASSOCIATES, P.C.
May 27, 1998
F-22
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
April 30, 1998 and 1997
Schedule I
MARKETABLE SECURITIES
<TABLE>
<CAPTION>
April 30, 1998 April 30, 1997
Principal Principal
Amount Market Amount Market
------ ------ ------ ------
<S> <C> <C> <C> <C>
GNMA Pools $ 3,536,538 $ 3,559,295 $ 4,055,459 $ 3,889,428
------------ --------------- ------------ ------------
------------ --------------- ------------ ------------
Cost Market Cost Market
---- ------ ---- ------
Equity shares in
other REIT's $ 610,066 $ 720,688 $ 596,961 $ 683,466
------------ --------------- ------------ ------------
------------ --------------- ------------ ------------
</TABLE>
F-23
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
For the Years Ended April 30, 1998, 1997 and 1996
Schedule X
SUPPLEMENTAL INCOME STATEMENT INFORMATION
Charged to Costs and Expenses
-----------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
ITEM
Maintenance and repairs $ 2,832,772 $ 1,812,496 $ 1,702,365
Taxes, other than payroll and
income taxes
Property taxes 3,162,656 2,515,631 1,873,720
Royalties * * *
Advertising costs * * *
</TABLE>
* Less than 1 percent of total revenues
F-24
<PAGE>
INVESTORS REAL ESTATE TRUST
AND AFFILIATED PARTNERSHIPS
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
COST CAPITALIZATION
INITIAL COST TO TRUST SUBSEQUENT TO ACQUISITION
--------------------- --------------------------
BUILDINGS & CARRYING
APARTMENTS ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COSTS
- ---------- ------------ ---- ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
1112 32ND AVE SW MINOT $ 376,788 $ 50,000 $ 543,147 $ 8,691 -
177 10TH AVE E DICKINSON 226,229 40,000 318,109 27,669 -
405 GRANT AVE HARVEY ND - 13,584 157,211 52,551 -
4301-4313 9TH AVE SW ND 463,021 52,870 908,727 49,404 -
BEULAH CONDOS ND - 6,360 336,589 122,830 -
BISON PROPERTIES ND 71,327 100,210 1,348,127 179,024 -
CANDLELIGHT APTS, FARGO, ND 498,299 80,040 757,977 22,767 -
CENTURY APTS DICKINSON 1,522,794 100,000 1,564,598 212,192 -
CENTURY APTS WILLISTON ND 2,577,896 200,000 3,166,750 407,084 -
CHATEAU APTS, MINOT, ND 1,670,895 122,000 2,242,090 654 -
COUNTRY MEADOWS, BILLINGS, MT 2,647,777 491,247 3,701,540 184,284 120,821
COLUMBIA PARK, GRAND FORKS, ND - 725,277 - - -
COLTON HEIGHTS PROPERTIES 338,464 80,000 734,286 50,514 -
COTTONWOOD LAKE, BISMARCK - 1,055,862 5,077,785 0 114,353
CRESTVIEW APTS, BISMARCK 2,609,063 235,000 4,290,031 235,518 -
EASTGATE PROPERTIES - 23,917 1,490,181 264,530 -
FAIRFIELD APTS, MARSHALL MN 96,292 35,000 275,000 111,052 -
FOREST PARK ESTS, G FORKS 3,990,430 810,000 5,579,164 564,335 -
HILL PARK PROPERTIES, ND 1,403,790 224,750 2,562,296 63,376 -
JENNER PROPERTIES ND 1,357,209 220,000 2,077,500 125,696 -
KIRKWOOD APTS, BISMARCK ND 2,270,000 449,290 2,729,745 80,916 -
LEGACY APTS GRAND FORKS 3,927,506 700,000 5,843,203 46,922 177,986
LEGACY PHASE II, GRAND FORKS, ND - 661,855 3,015,222 - 46,194
MAGIC CITY APTS, MINOT, ND 2,728,417 532,000 4,738,000 77,982 -
MANDAN APTS, MANDAN ND 16,566 20,000 236,750 19,758 -
MIRAMONT APT, FT COLLINS CO 11,525,814 1,470,000 12,765,460 35,501 -
NEIGHBORHOOD APT, CO SPRINGS 7,400,220 1,033,592 9,811,600 134,270 -
NORTH POINTE, BISMARCK 1,695,893 143,500 2,120,413 13,628 123,687
OAK MANOR APTS, DICKINSON 232,111 25,000 225,000 50,812 -
OAKWOOD ESTATES, S FALLS, SD 2,148,247 342,800 2,783,950 355,918 -
OXBOW, SIOUX FALLS 3,403,778 404,072 4,494,441 67,504 -
PARK EAST APTS, FARGO ND 3,500,000 83,000 4,082,665 752,546 -
PARK MEADOWS, WAITE PARK, MN 7,894,811 1,143,450 9,099,297 466,750 -
PARK PLACE, WASECA, MN - 40,000 634,737 174,640 -
PARKWAY APTS, BEULAH, ND - 7,000 40,738 70,364 -
PINE CONE APTS, FT COLLINS 10,534,209 904,545 12,167,093 98,812 -
POINTE WEST APTS, MINOT 2,170,254 240,000 3,537,775 82,951 -
PRAIRIE WINDS APTS, S FALLS 1,336,552 144,097 1,816,011 13,726 -
ROCKY MEADOWS 96, BILLINGS 2,876,562 655,985 5,588,113 293,640 103,378
ROSEWOOD/OAKWOOD, SIOUX FALLS 1,276,702 200,000 1,738,245 2,190 -
SCOTTSBLUFF, NE - - - - -
SOUTH POINTE, MINOT 6,484,298 550,000 9,150,975 154,007 402,872
SOUTHVIEW APTS, MINOT - 185,000 468,585 37,308 -
SOUTHWIND APTS, GRAND FORKS 4,090,096 400,000 5,033,683 161,977 -
SWEETWATER PROPERTIES, ND 194,812 90,767 1,208,847 363,241 -
VIRGINIA APARTMENTS, MINOT - 37,600 163,036 23,460 -
WEST STONEHILL, ST CLOUD, MN 7,912,344 939,000 10,167,355 250,110 -
WOODRIDGE APTS, ROCHESTER, MN 4,282,154 370,000 6,028,096 82,155 -
------------ ----------- ------------ ----------- ----------
$107,751,620 $16,438,670 $151,742,358 $11,381,483 $1,089,291
------------ ----------- ------------ ----------- ----------
</TABLE>
F-25
<PAGE>
<TABLE>
<CAPTION>
LIFE ON WHICH
BUILDINGS LATEST INCOME
AND ACCUMULATED DATE STATEMENT
APARTMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED IS COMPUTED
---- ------------ ----- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
1112 32ND AVE SW, Minot $ 50,000 $ 551,838 $ 601,838 $ 34,521 1996 24-40 years
177 10TH AVE E, DICKINSON 40,278 345,501 385,778 69,977 1989 24-40 years
405 GRANT AVE, HARVEY ND 14,674 208,672 223,346 31,467 1991 24-40 years
4301-4313 9TH AVE SW, FARGO 68,868 942,133 1,011,001 227,730 1988 5-40 years
BEULAH CONDOS, ND 78,339 387,441 465,780 313,947 1983 15-40 years
BISON PROPERTIES, ND 100,210 1,527,151 1,627,361 1,124,807 1972 25-40 years
CANDLELIGHT APTS, FARGO ND 80,040 780,744 860,800 106,039 1993 24-40 years
CENTURY APTS DICKINSON 126,738 1,750,052 1,876,790 548,710 1986 35-40 years
CENTURY APTS, WILLISTON ND 274,971 3,498,864 3,773,834 1,158,993 1986 35-40 years
CHATEAU APTS, MINOT ND 122,000 2,242,744 2,364,744 2,368 1997 12-40 years
COLTON HEIGHTS PROPERTIES 80,095 784,705 864,800 341,639 1984 33-40 years
COLUMBIA PARK PHASE II,
GRAND FORKS 725,277 0 725,277 - 1996 40 years
COUNTRY MEADOWS, BILLINGS,MT 491,247 4,006,646 4,497,893 35,249 1996 40 years
COTTONWOOD LAKE, BISMARCK 1,055,862 5,192,134 6,247,996 12,850 1997 40 years
CRESTVIEW APTS, BISMARCK 235,000 4,525,549 4,760,549 492,494 1994 24-40 years
EASTGATE PROPERTIES 28,639 1,749,989 1,778,628 1,317,117 1970 33-40 years
FAIRFIELD APTS, MARSHALL, MN 35,360 385,692 421,052 77,315 1988 24-40 years
FOREST PARK ESTS, G FORKS 811,954 6,141,545 6,953,499 800,318 1993 24-40 years
HILL PARK PROPERTIES, ND 245,653 2,604,769 2,850,422 1,129,069 1985 33-40 years
JENNER PROP. - UPREIT 1,357,209 1,065,987 2,423,196 38,925 1996 40 years
KIRKWOOD APTS, BISMARCK,ND 449,290 2,810,661 3,259,951 50,263 1997 12-40 years
LEGACY APTS, GRAND FORKS 700,000 6,068,111 6,768,111 236,404 1996 24-40 years
LEGACY PHASE II, GRAND FORKS 661,855 3,061,416 3,723,271 17,767 1997 12-40 years
MAGIC CITY APTS, MINOT ND 532,000 4,815,982 5,347,982 57,746 1997 12-40 years
MANDAN APTS, MANDAN, ND 20,000 256,508 276,508 51,204 1989 24-40 years
MIRAMONT APTS, FT COLLINS,
CO 1,470,000 12,800,961 14,270,961 479,779 1996 40 years
NEIGHBORHOOD APT, CO
SPRINGS 1,033,592 9,945,870 10,979,462 375,371 1996 40 years
NORTH POINTE 49, BISMARCK 143,500 2,257,728 2,401,228 139,188 1995 24-40 years
OAK MANOR APTS, DICKINSON 29,012 271,800 300,812 54,642 1989 24-40 years
OAKWOOD ESTATES, S FALLS SD 342,800 3,139,868 3,482,668 410,452 1993 24-40 years
OXBOW, SIOUX FALLS SD 404,073 4,561,944 4,966,017 397,138 1994 24-40 years
PARK EAST APTS, FARGO ND 83,000 4,835,211 4,918,211 38,327 1997 12-40 years
PARK MEADOWS,WAITE PARK MN 1,143,450 9,566,047 10,709,497 362,425 1997 40 years
PARK PLACE, WASECA MN 40,000 809,377 849,377 297,433 1988 5-40 years
PARKWAY APTS, BEULAH ND 11,816 106,286 118,102 13,845 1988 5-40 years
PINE CONE APTS, FT COLLINS 904,545 12,265,905 13,170,450 915,217 1994 40 years
POINTE WEST APTS, MINOT 240,000 3,620,726 3,860,726 401,904 1994 24-40 years
PRAIRIE WINDS APTS, S FALLS 144,097 1,829,737 1,973,834 250,359 1993 24-40 years
ROCKY MEADOWS 96, BILLINGS 655,985 5,985,131 6,641,116 222,118 1996 40 years
ROSEWOOD/OAKWOOD, S FALLS 200,000 1,740,435 1,940,435 65,223 1996 40 years
SOUTH POINTE, MINOT ND 275,000 9,982,854 10,257,854 473,332 1995 24-40 years
SOUTHVIEW APTS, MINOT 185,000 505,893 690,893 45,301 1994 24-40 years
SOUTHWIND APTS, GRAND FORKS 409,892 5,185,768 5,595,660 321,280 1996 24-40 years
SWEETWATER PROPERTIES 94,270 1,568,585 1,662,855 969,529 1972 5-40 years
VIRGINIA APARTMENTS, MINOT 37,600 186,496 224,096 63,017 1987 27 1/2-40 years
WEST STONEHILL, ST CLOUD MN 939,000 10,417,465 11,356,465 646,889 1995 40 years
WOODRIDGE APTS, ROCHESTER 370,000 6,110,251 6,480,251 230,048 1996 40 years
----------- ------------ ------------ -----------
$17,542,191 $163,399,172 $180,941,363 $15,449,736
----------- ------------ ------------ -----------
</TABLE>
F-26
<PAGE>
<TABLE>
<CAPTION>
COST CAPITALIZATION
INITIAL COST TO TRUST SUBSEQUENT TO ACQUISITION
------------------------- -------------------------
BUILDING & CARRYING
OFFICE BUILDINGS ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMSNTS COSTS
- ---------------- ------------ ---- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
1ST AVENUE BUILDING $ - $ 30,000 $ 219,496 $ 552,126 $ -
401 SOUTH MAIN, MINOT - 70,600 334,308 188,767 -
408 1ST STREET SE, MINOT - 10,000 34,836 2,071 -
CREEKSIDE OFF BLD, BILLINGS 876,346 311,310 1,088,149 257,377 -
LESTER CHIROPRACTIC CLINIC - 25,000 243,916 1 -
WALTERS 214 S MAIN, MINOT 773 27,055 76,076 8,784 -
------------ ------------ ----------- ------------ ----------
$ 877,119 $ 473,965 $ 1,996,781 $ 1,009,126 $ -
------------ ------------ ----------- ------------ ----------
COMMERCIAL
ARROWHEAD SHOPPING CENTER $ - $ 100,359 $ 1,063,925 $ 1,528,268 $ -
BARNES & NOBLE, FARGO 2,135,006 540,000 2,752,012 0 -
BARNES & NOBLE OMAHA, NE 2,312,924 600,000 3,099,101 - 0
CARMICKE THEATRE, GRAND FORKS 1,989,425 183,515 2,292,653 2,501 67,068
COMPUTER CITY, KENTWOOD MI 1,497,191 225,000 1,888,574 - 0
EDGWOOD VISTA, EAST GRAND FORKS 630,608 25,000 874,821 - -
EDGEWOOD VISTA, MINOT ND 3,617,668 260,000 1,835,335 4,180,596 -
EDGEWOOD VISTA, MISSOULA MT 629,178 108,900 853,528 0 -
HUTCHINSON TECH, S FALLS SD 2,221,843 244,800 4,029,426 154,800 -
LINDBERG BLDG, EDEN PRAIRIE 1,195,951 198,000 1,154,404 103,385 -
MINOT PLAZA, MINOT ND - 50,000 452,898 5,898 -
PET FOOD WAREHOUSE, FARGO 770,318 324,148 900,325 27,216 27,245
PIONEER SEED MOORHEAD, MN 303,622 56,925 548,075 48,876 -
RETAIL WAREHOUSE BOISE ID 3,518,783 765,000 4,874,576 6,909 -
STONE CONTAINER FARGO 3,024,316 440,251 4,409,079 59,999 89,156
SUPERPUMPER CROOKSTON MN - 13,125 214,153 201,499 -
SUPERPUMPER EMERADO ND - 25,000 225,564 46,500 -
SUPERPUMPER GRAND FORKS, ND - 80,000 405,007 - -
SUPERPUMPER, LANGDON ND - 59,674 151,500 28,038 -
SUPERPUMPER, SIDNEY MT - 12,000 108,600 - -
WEDGEWOOD, SWEETWATER GA 1,536,479 334,346 3,637,534 - -
------------ ----------- ------------ ----------- ----------
25,383,312 4,646,043 35,771,090 6,394,485 183,469
------------ ----------- ------------ ----------- ----------
$134,012,051 $21,558,678 $194,588,014 $13,996,870 $1,272,760
------------ ----------- ------------ ----------- ----------
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
LIFE ON WHICH
BUILDINGS LATEST INCOME
AND ACCUMULATED DATE STATEMENT
OFFICE BUILDINGS LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED IS COMPUTED
- ---------------- ---- ------------ ----- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
1ST AVENUE BUILDING, Minot $ 67,710 $ 733,912 $ 801,622 $ 318,171 1981 33-40 years
401 SOUTH MAIN MINOT 70,722 522,953 593,675 125,147 1987 24-40 years
408 1ST STREET SE MINOT 10,016 36,892 46,907 22,030 1986 19-40 years
CREEKSIDE OFF BLD, BILLINGS 311,310 1,345,526 1,656,836 196,251 1992 40 years
LESTER CHIROPRACTIC CLINIC 25,000 243,917 268,917 58,108 1988 40 years
WALTERS 214 SO MAIN, MINOT 27,829 84,086 111,915 76,233 1978 20-40 years
--------- ------------ ----------- -----------
$ 512,587 $ 2,967,285 $ 3,479,872 $ 795,940
--------- ------------ ----------- -----------
COMMERCIAL
- ----------
ARROWHEAD SHOPPING CENTER $ 100,411 $ 2,592,141 $ 2,692,552 $ 2,118,570 1973 15 1/2-40 yrs
BARNES & NOBLE, FARGO 540,000 2,752,012 3,292,012 240,801 1994 40 years
BARNES & NOBLE, OMAHA NE 600,000 3,099,101 3,699,101 193,694 1995 40 years
CARMICKE THEATRE,GRAND FORKS 183,516 2,362,221 2,545,737 206,632 1994 40 years
COMPUTER CITY, KENTWOOD MI 225,000 1,888,574 2,113,574 70,822 1996 40 years
EDGWOOD VISTA, EAST GRAND
FORKS, MN 630,608 269,213 899,821 17,305 1997 40 years
EDGWOOD VISTA, MINOT, ND 260,000 6,015,931 6,275,931 77,509 1997 40 years
EDGEWOOD VISTA MISSOULA MT 108,900 853,528 962,428 32,007 1997 40 years
HUTCHINSON TECH, S FALLS SD 244,800 4,184,226 4,429,026 567,618 1993 40 years
LINDBERG BLDG, EDEN PRAIRIE 198,000 1,257,789 1,455,789 195,003 1992 40 years
MINOT PLAZA, MINOT ND 50,000 458,796 508,796 62,494 1993 40 years
PET FOOD WAREHOUSE FARGO 324,148 954,786 1,278,934 82,809 1994 40 years
PIONEER SEED, MOORHEAD MN 56,925 596,951 653,876 92,183 1992 40 years
RETAIL WAREHOUSE, BOISE ID 765,000 4,881,485 5,646,485 548,445 1994 40 years
STONE CONTAINER, FARGO 440,251 4,558,235 4,998,485 282,275 1995 40 years
SUPERPUMPER, CROOKSTON MN 13,125 415,652 428,777 79,856 1988 40 years
SUPERPUMPER, EMERADO ND 25,000 272,064 297,064 147,396 1986 19-40 years
SUPERPUMPER GRAND FORKS ND 80,000 405,007 485,007 75,939 1991 40 years
SUPERPUMPER, LANGDON ND 59,674 179,538 239,212 56,553 1987 31 1/2-40 yrs
SUPERPUMPER, SIDNEY MT 12,000 108,600 120,600 14,933 1993 40 years
WEDGEWOOD, SWEETWATER GA 334,346 3,637,533 3,971,878 108,571 1996 40 years
--------- ------------ ----------- -----------
$5,251,704 $ 41,743,382 $ 46,995,087 $ 5,270,453
----------- ------------- ------------ -----------
$23,258,039 $ 207,868,722 $231,126,761 $21,516,129
----------- ------------- ------------ -----------
----------- ------------- ------------ -----------
</TABLE>
F-28
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
Schedule XI (Continued)
Reconciliations of total real estate carrying value for the three years ended
April 30, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Balance at beginning of year $ 191,884,509 $ 131,447,734 $ 90,892,662
Additions during year
- acquisitions 39,014,223 59,377,674 40,660,975
- improvements 1,788,339 1,463,878 635,791
------------- ------------- ------------
$ 232,687,071 $ 192,289,286 $132,189,428
Deductions during year
- cost of real estate sold (1,270,749) (404,777) (741,694)
------------- ------------- ------------
Balance at close of year $ 231,416,322 $ 191,884,509 $131,447,734
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
Reconciliations of accumulated depreciation for the three years ended April
30, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ 16,948,156 $ 13,551,571 $ 11,732,655
Additions during year
- provisions for depreciation 4,791,907 3,584,591 2,261,724
Deduction during year
- accumulated depreciation
on real estate sold (223,934) (188,006) (442,808)
--------------- --------------- ---------------
Balance at close of year $ 21,516,129 $ 16,948,156 $ 13,551,571
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
F-29
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
April 30, 1998
Schedule XII
INVESTMENTS IN MORTGAGE LOANS ON REAL ESTATE
<TABLE>
<CAPTION>
Final Face Carrying of Loans
Interest Maturity Payment Prior Amounts of Amounts of Delinquent
Rate Date Terms Liens Mortgages Mortgages or Interest
<S> <C> <C> <C> <C> <C> <C> <C>
Residential
Higley Heights, Phoenix, AZ 8% 3-31-04 Quarterly - $ 809,786 $ 678,700 $ 678,700
Great Plains Software, Fargo,
ND 9.50% 1-1-99 Balloon Pmt - 15,000,000 1,701,308 -
Melanie Bentsinger 8% 6-1-25 Monthly - 217,761 210,298 -
Rolland Hausman 9% 2-1-16 Monthly - 315,659 302,147 -
Other - over $100,000 7-9% 5-1-03 to
2-1-16 Monthly - 517,325 425,751 -
- from $20,000-49,999 8-9% 9-1-98 to
1-1-00 Monthly - 1,610,983 78,474 -
- less than $20,000 7-9% 2-1-99 to
1-1-02 Monthly - 1,481,559 41,630 -
----------- ---------- ----------
Total $19,953,073 $3,438,308 $ 678,700
----------- ---------- ----------
----------- ---------- ----------
Less - Unearned discounts (4,818)
- Deferred gain from property dispositions (2,000)
- Allowance for loan losses (120,314)
--------
$3,311,176
</TABLE>
F-30
<PAGE>
Schedule XII (Continued)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
MORTGAGE LOANS RECEIVABLE,
BEGINNING OF YEAR $ 3,108,933 $ 4,932,138
New participations in and advances
on mortgage loans 2,061,179 2,835,212
----------- -----------
$ 5,170,112 $ 7,767,350
Collections (1,727,237) (4,516,202)
Write-off through allowance (4,567) (142,215)
----------- -----------
MORTGAGE LOANS RECEIVABLE,
END OF YEAR $ 3,438,308 $ 3,108,933
------------------ ---------------
------------------ ---------------
</TABLE>
F-31
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
Selected Financial Data
<TABLE>
<CAPTION>
Year Ended April 30
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Consolidated Income Statement Data
Revenue $ 32,407,545 $ 23,833,981 $ 18,659,665 $ 13,801,123 $ 11,583,008
Operating income 4,691,198 3,499,443 3,617,807 3,560,318 3,135,426
Gain on repossession/sale of
properties 465,499 398,424 994,163 407,512 64,962
Minority interest of portion of
operating partnership income (141,788) (18) - - -
Net income 5,014,909 3,897,849 4,611,970 3,967,830 3,200,388
Consolidated Balance Sheet Data
Total real estate investments $213,211,369 $177,891,168 $122,377,909 $ 84,005,635 $ 63,972,042
Total assets 224,718,514 186,993,943 131,355,638 94,616,744 72,391,548
Shareholders' equity 68,152,626 59,997,619 50,711,920 37,835,654 29,997,189
Consolidated Per Share Data
Operating income $ .29 $ .25 $ .30 $ .34 $ .35
Gain on sale of properties .03 .03 .08 .04 .01
Dividends .42 .39 .37 .34 .33
Tax status of dividend
Capital gain 2.9% 21.0% 1.6% 11.0% 7.4%
Ordinary income 97.1% 79.0% 98.4% 89.0% 92.6%
Return of capital 0.0% 0.0% 0.0% 0.0% 0.0%
</TABLE>
F-32
<PAGE>
INVESTORS REAL ESTATE TRUST
AND AFFILIATED PARTNERSHIPS
April 30, 1998, 1997 and 1996
GAIN FROM PROPERTY DISPOSITIONS
<TABLE>
<CAPTION>
Total
Original Unrealized Realized Realized Realized
PROPERTY GAIN 4/30/98 4/30/98 4/30/97 4/30/96
-------- --------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Brooklyn Addition * $ 25,000 $ 2,000 $ 1,000 $ 1,000 $ 1,000
1411 South 20th * 34,696 - - - 1,177
1302 South 19 1/2 * 87,669 - 15,713 6,732 6,215
600 Maple * 60,025 - - - 41,253
406 17th Street - Mandan * 233,522 - - 138,629 5,143
Chateau * 684,914 - - - 422,125
108 4th Avenue SE - Minot 173,244 - - - 173,244
Mobridge, SD 293,035 - - - 293,035
Lantern Court 50,971 - - - 50,971
Scottsbluff Estates 326,138 - 326,138
Superpumper - Bottineau 83,579 - 83,579
Superpumper - New Town 25,417 - 25,417
Other gains 13,652 - 13,652
Hutchinson, MN 252,063 - - 252,063 -
--------- --------- --------- ---------
$ 2,000 $ 465,499 $ 398,424 $ 994,163
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The gain from the sale of these properties is being realized based on the
Installment method. The amount of deferred gain realized was $16,713,
$146,361, and $476,913 for the years ended April 30, 1998, 1997 and 1996,
respectively.
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
April 30, 1998
MORTGAGE LOANS PAYABLE
<TABLE>
<CAPTION>
Final Periodic Carrying Delinquent
Interest Maturity Payment Face Amount Amount of Principal or
Rate Date Terms Of Mortgage Mortgage Interest
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1112 32nd Ave SW Minot 8.50% 7/20/10 Monthly $ 425,000 $ 376,788 $ 0
177 10th Ave E, Dickinson ND 8.50% 11/1/18 Monthly 250,963 226,229 0
214 South Main 9.00% 5/1/98 Monthly 45,000 773 0
4301 9th Ave Sunchase I 9.04% 9/1/02 Monthly 364,765 153,085 0
4313 9th Ave Sunchase II 9.04% 2/1/14 Monthly 370,000 309,936 0
Barnes & Noble Stores 7.98% 11/1/10 Monthly 4,900,000 4,447,930 0
Candelight Apts 8.50% 12/1/99 Monthly 578,000 498,299 0
Carmike -Grand Forks 7.75% 6/5/14 Monthly 1,750,000 1,989,425 0
Century Apts - Dickinson 8.00625% 3/1/06 Monthly 1,595,000 1,522,794 0
Century Apts - Williston 8.00625% 3/1/06 Monthly 2,700,000 2,577,896 0
Chateau - Minot 8.00625% 3/1/06 Monthly 1,674,350 1,670,895 0
Country Meadows - Billings 7.51000% 1/1/08 Monthly 2,660,000 2,647,777 0
Creekside - Billings 8.35% 5/1/13 Monthly 1,023,750 876,346 0
Crestview Apts. - Bismarck 8.69% 1/1/04 Monthly 3,150,000 2,609,063 0
Computer City 7.75% 2/1/01 Monthly 1,565,361 1,497,191 0
Edgewood Vista - East Grand Forks 8.35% 7/5/12 Monthly 650,000 630,608 0
Edgewood Vista - Minot 8.27% 9/20/12 Monthly 3,710,000 3,617,668 0
Edgewood Vista - Missoula 9.75% 4/15/12 Monthly 647,500 629,178 0
Fairfield - Marshall 9.00% 1/1/98 Monthly 275,000 96,292 0
Forest Park Estates IDS 7.625% 5/1/03 Monthly 4,500,000 3,990,430 0
Hutchinson Technology 8.75% 8/1/08 Monthly 2,800,000 2,221,843 0
Jenner Properties, ND 9.50% 11/1/99 Monthly 1,391,585 1,357,209 0
Kirkwood Manor - Bismarck 7.07% 10/01/98 Bond -semiannual 2,330,000 2,270,000 0
Legacy Apts - Grand Forks 7.070% 1/1/04 Monthly 4,000,000 3,927,506 0
Lindberg Bldg, Eden Prairie 7.63% 12/1/08 Monthly 950,000 1,195,951 0
Magic City Apts, Minot 8.50% 10/10/10 Monthly 2,794,192 2,728,417 0
Mandan Apts - 312 12th 8.75% 8/1/99 Monthly 134,767 16,566 0
Miramont Apts, 8.25% 8/1/36 Monthly 11,582,472 11,525,814 0
Neighborhood Apts - Roch 7.98% 12/20/06 Monthly 7,525,000 7,400,220 0
North Pointe - Bismarck 7.12% 8/1/15 Monthly 1,400,000 1,695,893 0
Oak Manor Apts 27 Plex-
Dickinson 8.75% 2/1/99 Monthly 250,000 232,111 0
Oakwood Estates Sioux Falls 8.00625% 3/1/06 Monthly 2,250,000 2,148,247 0
Oxbow Sioux Falls 8.00625% 3/1/06 Monthly 3,565,000 3,403,778 0
Park East, Fargo 6.82000% 4/6/08 Monthly 3,500,000 3,500,000 0
Park Meadows Phase I 8.50% 01/10/07 Monthly 2,600,000 2,529,016 0
Park Meadows Phase II 7.8990% 01/10/07 Monthly 2,214,851 2,170,795 0
Park Meadows Phase III 3.84% 30 yr bond Monthly 3,235,000 3,195,000 0
Pet Food Warehouse 8.50% 12/1/10 Monthly 840,000 770,318 0
Pinecone, Ft Collins 7.125% 12/1/34 Monthly 10,685,215 10,534,209 0
Pioneer Building - Fargo 8.375% 12/1/06 Monthly 425,000 303,622 0
Pointe West Apts 8.97% 1/1/04 Monthly 2,625,000 2,170,254 0
Prairie Winds Apts - Sioux
Falls 7.67% 5/1/18 Monthly 1,470,000 1,336,552 0
Retail Warehouse, Boise ID 9.75% 3/29/03 Monthly 3,750,000 3,518,783 0
Rocky Meadows- Billings 7.75% 8/1/16 Monthly 3,000,000 2,876,562 0
RoseWood Ct - Sioux Falls 7.975% 9/1/96 Monthly 1,323,000 1,276,702 0
South Pointe, Minot ND 7.12% 6/5/16 Monthly 6,500,000 6,484,298 0
Southwind Apts 7.12% 4/28/10 Monthly 3,780,000 4,090,096 0
Stone Container 8.25% 12/1/10 Monthly 3,300,000 3,024,316 0
Wedgewood Retirement 7.975% 4/23/17 Monthly 1,566,720 1,536,479 0
West Stonehill 7.93% 2/1/98 Monthly 8,232,569 7,912,344 0
Woodridge- Rochester 7.85% 12/1/16 Monthly 4,410,000 4,282,154 0
Colton Heights 8.75% 6/1/07 Monthly 730,000 338,464 0
F-34
<PAGE>
Grafton 24 Plex 9.75% 3/20/03 Monthly 270,000 82,412 0
Grafton 18 Plex 9.75% 3/20/03 Monthly 198,000 112,399 0
Hill Park Properties 8.00625% 3/1/06 Monthly 1,470,000 1,403,790 0
Jamestown 610 10.00% 6/1/99 Monthly 250,000 30,856 0
Jamestown 611 10.00% 1/1/00 Monthly 230,000 40,471 0
Melton/Olson/Thompson 8.50% 12/1/98 Monthly 400,000 22,196 0
1516 N Bismarck 8.00% 8/1/99 Monthly 246,000 25,728 0
------- ------ -------
TOTALS $141,059,060 $134,059,974 0
------------ ------------ -------
------------ ------------ -------
</TABLE>
F-35
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
April 30, 1998
SIGNIFICANT PROPERTY ACQUISITIONS
Acquisition for cash and assumptions of mortgages
<TABLE>
<S> <C>
Commercial:
Edgewood Vista, East Grand Forks, MN $ 892,500
Edgewood Vista, Minot, ND 4,900,000
Edgewood Vista Alzheimers, Minot, ND 491,410
Edgewood Vista Phase II, Minot, ND 800,000
-----------------
$ 7,083,910
-----------------
Apartments:
Jenner Properties, ND $ 2,350,000
Kirkwood Manor, Bismarck, ND 3,175,000
Magic City Apartments, Minot, ND 5,270,000
Country Meadows, Billings, MT*** 4,496,134
Park East Apartments, Fargo, ND 4,900,000
Legacy Phase II, Grand Forks, ND* 3,489,937
Cottonwood Phase I, Bismarck, ND*** 4,522,347
Chateau Apartments, Minot, ND 2,364,090
Cottonwood Phase II, Bismarck, ND** 1,362,805
-----------------
$ 31,930,313
-----------------
TOTAL $ 39,014,223
-----------------
-----------------
</TABLE>
* Property is placed in service at April 30, 1998. Additional costs are
still to be incurred.
** Property not placed in service at April 30, 1998. Additional costs are
still to be incurred.
*** Represents costs to complete a project started in year ending April 30,
1997.
F-36
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
Quarterly Results of Consolidated Operations (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------
7-31-97 10-31-97 1-31-98 4-30-98
------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenues $7,183,761 $7,996,262 $8,440,393 $8,787,129
Income before gains on sale
of properties 894,045 1,233,451 1,358,752 1,204,950
Net gain on sale of properties 39,069 83,579 326,138 16,713
Minority interest of unit
holders in operating partnership (9) (9,423) (64,006) (68,350)
Net income 933,105 1,307,607 1,620,884 1,153,313
Per share
Income before gains on sale
of properties .06 .08 .08 .07
Net gain on sale of properties - .01 .02 -
Quarter Ended
-------------------------------------------------------
7-31-96 10-31-96 1-31-97 4-30-97
------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenues $4,966,475 $5,474,027 $ 6,383,030 $7,010,450
Income before gains on sale
of properties 978,107 1,048,154 1,027,117 446,065
Net gain on sale of properties 252,062 - 138,629 7,733
Minority interest of unit
holders in operating partnership - - - (18)
Net income 1,230,169 1,048,154 1,165,746 453,780
Per share
Income before gains on sale
of properties .07 .08 .07 .03
Net gain on sale of properties .02 - .01 -
Quarter Ended
-------------------------------------------------------
7-31-95 10-31-95 1-31-96 4-30-96
------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenues $3,782,061 $4,715,186 $5,104,409 $5,058,009
Income before gains on sale
of properties 1,009,468 1,058,136 1,082,506 467,697
Net gain on sale of properties - - 522,001 472,162
Net income 1,009,468 1,058,136 1,604,507 939,859
Per share
Income before gains on sale
of properties .09 .09 .09 .04
Net gain on sale of properties - - .04 .04
</TABLE>
The above financial information is unaudited. In the opinion of management,
all adjustments (which are of a normal recurring nature) have been included
for a fair presentation.
F-37
<PAGE>
INVESTORS REAL ESTATE TRUST
UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD
ENDED JULY 31, 1998
The following financial statements have been prepared from the records of
Investors Real Estate Trust and its six affiliated limited partnerships and have
not been audited or reviewed by the Trust's independent certified public
accountants. Accordingly, these statements are subject to adjustments upon
audit, which audit will be conducted for the Fiscal Year ending April 30, 1999.
Reference is made to the footnotes to the Statements prepared by the Trust's
auditors for the Fiscal Year ended April 30, 1998, contained in the Annual
Report for Fiscal 1998. In the opinion of the Trust, there have been no
developments requiring footnote disclosure for the periods covered by the
Financial Statements set forth below that are not adequately disclosed in the
footnotes to the April 30, 1998, statements.
F-38
<PAGE>
INVESTORS REAL ESTATE TRUST
BALANCE SHEETS
FOR THE PERIODS ENDED JULY 31, 1998, AND APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS: 07-31-98 04-30-98
-------- ---------
<S> <C> <C>
Cash $ 3,086,972 $ 2,132,220
Marketable Securities
- GNMA's 3,453,882 3,536,538
- Other REIT's 646,708 720,688
Accounts Receivable 10,808 55,326
Tax & Insurance Escrow 1,697,758 1,254,068
Deferred Charges 1,210,551 1,088,016
Prepaid Insurance 141,967 219,871
Real Estate Deposits 2,683,861 2,493,713
General Partnerships 0 6,705
------------------------------------------------------------------------------------------
$ 12,932,502 $ 11,507,145
------------------------------------------------------------------------------------------
Real Estate Investments
Real Estate Owned $ 240,046,889 $ 231,416,322
Less Accumulated Depreciation (22,575,451) (21,516,129)
------------------------------------------------------------------------------------------
Net Real Estate Owned 217,471,438 209,900,193
------------------------------------------------------------------------------------------
Real Estate Mortgages 1,698,861 3,438,308
Less Unearned Discounts & Allowances (126,212) (127,132)
------------------------------------------------------------------------------------------
Net Mortgages & Contracts 1,572,649 3,311,176
------------------------------------------------------------------------------------------
Total Real Estate Investments $ 219,044,087 $ 213,211,369
------------------------------------------------------------------------------------------
TOTAL ASSETS $ 231,976,590 $ 224,718,514
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
LIABILITIES:
Accounts Payable & Accrued Expenses $ 2,822,462 $ 2,847,080
Due on Credit Line 0 1,000,000
Mortgages Payable 137,324,811 134,059,974
Investment Certificates Payable 10,869,391 10,369,561
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 151,016,663 $ 148,276,615
- -----------------------------------------------------------------------------------------------
Minority Interest in Operating Partnership $ 10,590,410 $ 8,289,273
- -----------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Shares of Beneficial Interest
Outstanding Shares of 07-31-98 04-30-98
-------- --------
16,767,369 on 07/31/98
16,391,412 on 04/30/98 $ 77,245,225 $ 74,708,559
Undistributed Net Income (6,912,349) (6,666,555)
Unrealized Gain REIT Stock 36,642 110,622
------------------------------------------------------------------------------------------
F-39
<PAGE>
Total Shareholders' Equity $ 70,369,518 $ 68,152,626
------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 231,976,590 $ 224,718,514
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
(The balance of this page was left blank intentionally.)
F-40
<PAGE>
INVESTORS REAL ESTATE TRUST
STATEMENT OF OPERATIONS (UNAUDITED)
3 Months Ended July 31
<TABLE>
<CAPTION>
OPERATING INCOME: 1998 1997
---- ----
<S> <C> <C>
Real Estate Rentals $ 8,866,408 $ 7,007,297
Interest Income 212,150 162,705
Mortgage Discount & Fees 23,720 13,759
-----------------------------------------------------------------------
$ 9,102,278 $ 7,183,761
-----------------------------------------------------------------------
OPERATING EXPENSE:
Interest $ 2,816,108 $ 2,441,788
Utilities & Maintenance 1,505,146 1,118,751
Property Management 779,825 625,147
Taxes & Insurance 1,005,570 800,886
Advisory & Trustees Fees 195,178 150,648
Operating Expenses 63,358 53,466
-----------------------------------------------------------------------
$ 6,365,186 $ 5,190,686
-----------------------------------------------------------------------
OPERATING INCOME:
(before reserves) $ 2,737,092 $ 1,993,075
- ----------------------------------------------------------------------------
DEPRECIATION/AMORTIZATION (1,409,241) (1,099,031)
- ----------------------------------------------------------------------------
OPERATING INCOME (after reserves) 1,327,851 $ 894,044
GAIN ON SALE OF INVESTMENTS 366,017 39,069
MINORITY INTEREST PORTION OF
OPERATING PARTNERSHIP NET INCOME (133,863) (7)
- ----------------------------------------------------------------------------
NET TAXABLE INCOME $ 1,560,005 $ 933,106
- ----------------------------------------------------------------------------
FUNDS FROM OPERATIONS: *
Operating Income $ 1,327,851 $ 894,044
Plus Depreciation and Amortization 1,409,241 1,099,031
Minus Minority Interest - Operating
Partnership (133,863) (7)
- ----------------------------------------------------------------------------
F-41
<PAGE>
FUNDS FROM OPERATIONS $ 2,603,229 $ 1,993,082
- -----------------------------------------------------------------------------------------------
PER SHARE:
Operating Income
(after reserves) .08 .06
Gain on Sale of Investments .02 .00
- -----------------------------------------------------------------------------------------------
Total Taxable Income/Share .10 .06
- -----------------------------------------------------------------------------------------------
FUNDS FROM OPERATIONS * .16 .13
- -----------------------------------------------------------------------------------------------
DIVIDENDS PAID PER SHARE .11 .10125
- -----------------------------------------------------------------------------------------------
Average Number of Shares
Outstanding 16,579,390 15,081,101
- -----------------------------------------------------------------------------------------------
</TABLE>
* Funds from Operations is defined as income before gains (losses) on
sales of investments, less minority interest of unitholders in
operating partnership and extraordinary items, plus depreciation and
amortization.
F-42
<PAGE>
INVESTORS REAL ESTATE TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED JULY 31, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997
<S> <C> <C>
Net Income $ 1,560,006 $ 933,106
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,409,241 1,099,030
Minority interest portion of operating
partnership income 133,863 7
Accretion of discount on contracts (667) (1,427)
Gain on Sale of Properties (366,017) (39,069)
Interest reinvested in investment certificates 97,029 32,173
Changes in other assets and liabilities:
(Increase) decrease in real estate deposits (71,250) 0
(Increase) decrease in other assets 122,428 (60,002)
(Increase) decrease in tax and insurance escrow (443,690) 275,536
(Increase) decrease in deferred charges (122,535) 116,598
Increase (decrease) in accounts payable and
accrued expenses 264,943 113,750
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM OPERATING
ACTIVITIES $ 2,583,351 $ 2,469,702
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of marketable
securities held to maturity $ 82,656 $ 130,816
Principle payments on mortgage loans
receivable 64,672 257,634
Proceeds from sale of property 892,349 250,000
Payments for acquisition and improvements
of properties (7,422,457) (3,975,628)
Purchase of marketable securities available
for sale 0 (13,105)
Investment in mortgage loans receivable 0 (75,959)
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES $ (6,382,780) $ (3,426,242)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of shares $ 2,721,085 $ 1,746,029
Proceeds from investment certificates issued 979,085 1,471,889
Proceeds from mortgages payable 3,769,936 650,000
Proceeds from short-term lines of credit 3,000,000 400,000
Proceeds from sale of minority interest 1,848,249 0
Repurchase of shares (1,389,936) (386,062)
Dividends Paid (600,283) (531,683)
F-43
<PAGE>
Distribution paid to Minority Unitholders (161,502) 0
Redemption of investment certificates (644,627) (182,517)
Principal payments on mortgage loans (767,828) (766,873)
Payments on short-term lines of credit (4,000,000) (400,000)
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM FINANCING
ACTIVITIES $ 4,754,181 $ 2,000,783
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH $ 954,752 $ 1,044,243
CASH AT APRIL 30 $ 2,132,220 $ 1,718,257
- ---------------------------------------------------------------------------------------------------------------
CASH AT JULY 31 $ 3,086,972 $ 2,762,500
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
F-44
<PAGE>
INVESTORS REAL ESTATE TRUST
SUPPLEMENTARY SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Dividends reinvested $ 1,205,517 $ 995,407
Real estate investment and mortgage loans
receivable acquired through assumption
of mortgage loans payable and accrual
of costs 0 650,000
Mortgage loan receivable transferred to
property owned 1,701,308 0
Proceeds from sale of properties deposited
directly with escrow agent 0 0
Properties acquired through the issuance of
minority interest units in the operating
partnership 480,525 0
Interest reinvested directly in investment
certificates 97,029 32,173
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest paid on mortgages $ 2,511,296 $ 2,310,449
Interest paid on margin account and other 15,486 373
Interest paid on investment certificates 86,742 53,744
- -----------------------------------------------------------------------------------------------------
$ 2,613,524 $ 2,364,566
- -----------------------------------------------------------------------------------------------------
</TABLE>
(The balance of this page was left blank intentionally.)
F-45
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of the anticipated cost to the Trust in
connection with the issuance and distribution of the securities to be
registered.
<TABLE>
<S> <C>
Legal: $15,000
Advertising, Printing & Promotion Expenses: 15,000 to 162,000
Accounting: 1,000
Registration Fees: 10,000
------------------
$41,000 to 188,000
</TABLE>
ITEM 31. SALES TO SPECIAL PARTIES
There is no person or class of persons to whom any securities have been sold
within the past six months, or are to be sold, by the registrant or any
security holder for whose account any of the securities being registered are
to be offered, at a price varying from that at which securities of the same
class are to be offered to the general public pursuant to this registration,
except as follows:
The Trust has a policy allowing its Trustees and employees of its Advisor
- -Odell-Wentz & Associates, L.L.C. - and their spouses to purchase its shares
of beneficial interest at a price equal to the net price then received by
IRET for its shares, after payment of the brokerage commission, when sold to
the public. During the three-year period ended July 31, 1998, 485,072 shares
were purchased by eligible individuals. No commissions or other discounts
were paid or given in connection with such sales. The Trust claims exemption
from the registration of said shares under Section 4(2) of the Securities Act
of 1933.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
Until July 9, 1996, the shares of Beneficial Interest of IRET were sold in
the over-the-counter market only within the State of North Dakota by Inland
National Securities, Inc., 21 South Main, Minot, ND 58701, and Financial
Advantage Brokerage Services, Inc., 17 South Main, Minot, ND 58701. Set
forth below, by quarter-year, are the total number of IRET shares sold and
repurchased and the high and low reported sales prices for the period
beginning July 1, 1995:
<TABLE>
<CAPTION>
Shares Repurchased New Shares Sold
Calendar No. of From Shareholders by IRET
Year Months Shares Sold Low High Low High
-------- ------ ----------- --- ---- --- ----
<S> <C> <C> <C> <C> <C> <C>
1995 July -September 452,665 5.89 6.03 6.40 6.55
1995 October-December 466,447 5.89 6.16 6.40 6.70
1996 January-March 516,179 5.89 6.30 6.40 6.85
1996 April-July 9 394,234 6.30 6.30 6.85 6.85
</TABLE>
During said period, IRET shares were sold on the primary market only for cash
to bona-fide residents of the State of North Dakota by Inland National
Securities, Inc., and Financial Advantage Brokerage Services, Inc., which
were securities dealers registered with the State of North Dakota. IRET
claims exemption from the registration of its shares of Beneficial Interest
under the Securities Act of 1933 under Section 3(a)(11) of said Act. All of
said securities were offered and sold only to persons resident within the
State of North Dakota.
III
<PAGE>
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The governing provisions of the Trust provide nonliability of and
indemnification to the Board of Trustees and officers except for willful
misfeasance, bad faith, gross negligence, or any liability imposed by the
Securities Act of 1933. The Trust currently provides no insurance coverage
for the errors or omissions of Board members, officers or the Advisor.
The Advisor currently maintains no insurance coverage for its errors or
omissions as Advisor to the Trust.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
No portion of the consideration to be received by the registrant for such
shares is to be credited to an account other than the appropriate capital
share account.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
a) List of all financial statements filed as part of this
registration statement
<TABLE>
<CAPTION>
Financial Statement Filed Included in Prospectus
------------------------- ----------------------
<S> <C>
Financial Statement by Investors Real See F-1 through F-39
Estate Trust for the period ended
April 30, 1998, prepared by Brady
Martz & Associates, P.C., Certified
Public Accountants
Interim Financial Statement by
Investors Real Estate Trust for the
three-month period ended July 31,
1998 (unaudited) See F-40 through F-45
b) Exhibit Index
Description of Exhibit Location in Form S-11 Filing
---------------------- ----------------------------
(1) Security Sales Agreement Ex-1(i), Pages 135-136
(2) Plan of acquisition, Not Applicable
reorganization, arrangement,
liquidation or succession
(3) (i) Restated Declaration of Restated Declaration of Trust
Trust dated October 24, dated October 10, 1996, filed
1996 as Ex-3(i)to Form S-11 of the
Registrant on November 28, 1997,
(File No. 0-14851) and incorporated
herein by reference
(ii) IRET Properties IRET Properties Partnership
Partnership Agreement Agreement dated January 31, 1997,
filed as Ex-3(ii) to Form S-11
</TABLE>
IV
<PAGE>
<TABLE>
<S> <C>
filed by the Registrant on November
28, 1997, (File No. 0-14851) and
Incorporated herein by reference
(4) Instruments defining the See #3
rights of security holders,
including indentures
(5) Opinion re legality Ex-5, Pages 137-138
(6) Opinion re discount on Not Applicable
capital shares
(7) Opinion re liquidation Not Applicable
preference
(8) Opinion re tax matters Ex-8, Page 139
(9) Voting trust agreement Not Applicable
(10) Material Contracts Advisory Agreement with
the Registrant and
Odell-Wentz &
Associates, filed as
Exhibit 10 to said Form
S-11 and incorporated
herein by reference
(File No. 0-14851)
(11) Statement re computation Not Applicable
of per share earnings
(12) Statement re computation Not Applicable
of ratios
(15) Letter re unaudited Not Applicable
interim financial information
(16) Letter re change in Not Applicable
certifying accountant
(21) Subsidiaries of the List of affiliated
Registrant partnerships filed as
Item 7 of Form S-11 filed
for the Registrant
(File No. 0-14851) and
incorporated herein by
reference
(23) Consent of experts and counsel
(i) Pringle & Herigstad, P.C. Ex-23(i), Page 140
(ii) Brady Martz & Associates, Ex-23(ii), Page 141
P.C.
</TABLE>
V
<PAGE>
<TABLE>
<S> <C>
(24) Power of Attorney Not Applicable
(25) Statement of eligibility Not Applicable
of trustee
(27) Financial Data Schedule Ex-27, Page 142
(99) Additional Exhibits Ex-99, Page 143-144
Marketing Agreement dated
October 1, 1997, between
IRET and Roger Domres filed as
Exhibit 99 to Form S-11 for the
Registrant on November 28, 1997
(File No. 0-14851) and
incorporated herein by reference.
</TABLE>
UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
VI
<PAGE>
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) of (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certified that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this registration to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Minot, State of North Dakota.
INVESTORS REAL ESTATE TRUST
BY
--------------------------------
Roger R. Odell
Its President
VII
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on
the dated indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Trustee and Chairman November 12, 1998
- -------------------------
Ralph A. Christensen
Trustee and Vice Chairman November 12, 1998
- -------------------------
Mike F. Dolan
Trustee November 12, 1998
- -------------------------
John F. Decker
Trustee November 12, 1998
- -------------------------
Patrick G. Jones
Trustee November 12, 1998
- -------------------------
J. Norman Ellison
Trustee November 12, 1998
- -------------------------
Daniel L. Feist
Trustee November 12, 1998
- -------------------------
Thomas A. Wentz, Jr.
Trustee and Vice-Chairman November 12, 1998
- -------------------------
Jeff Miller
President November 12, 1998
- -------------------------
Roger R. Odell
Vice-President November 12, 1998
- -------------------------
Thomas A. Wentz
Vice-President November 12, 1998
- -------------------------
Timothy P. Mihalick
Secretary November 12, 1998
- -------------------------
Diane K. Bryantt
Trustee November 12, 1998
- -------------------------
C. Morris Anerson
</TABLE>
VIII
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Description of Exhibit Location in Form S-11 Filing
---------------------- ----------------------------
<S> <C>
(1) Security Sales Agreements Ex-1(i), Pages 135-136
(2) Plan of acquisition, Not Applicable
reorganization, arrangement,
liquidation or succession
(3) (i) Restated Declaration of Restated Declaration of Trust
Trust dated October 24, dated October 10, 1996, filed
1996 as Ex-3(i)to Form S-11 filed by
the Registrant on November 28,
1997, (File No. 0-14851) and
incorporated herein by reference
(ii) IRET Properties IRET Properties Partnership
Partnership Agreement Agreement dated January 31, 1997,
filed as Ex-3(ii) to Form S-11
filed by the Registrant on
November 28, 1997, (File No.
0-14851) and Incorporated herein
by reference
(4) Instruments defining the See #3
rights of security holders,
including indentures
(5) Opinion re legality Ex-5, Pages 137-138
(6) Opinion re discount on Not Applicable
capital shares
(7) Opinion re liquidation Not Applicable
preference
(8) Opinion re tax matters Ex-8, Page 139
(9) Voting trust agreement Not Applicable
(10) Material Contracts Advisory Agreement with
the Registrant and
Odell-Wentz &
Associates, filed as
Exhibit 10 to said Form
S-11 and incorporated
herein by reference
(File No. 0-14851)
(11) Statement re computation Not Applicable
of per share earnings
(12) Statement re computation Not Applicable
of ratios
IX
<PAGE>
(15) Letter re unaudited Not Applicable
interim financial information
(16) Letter re change in Not Applicable
certifying accountant
(21) Subsidiaries of the List of affiliated
Registrant partnerships filed as
Item 7 of Form S-11 filed
for the Registrant
(File No. 0-14851) and
incorporated herein by
reference
(23) Consent of experts and counsel
(i) Pringle & Herigstad, P.C. Ex-23(i), Page 140
(ii) Brady Martz & Associates, Ex-23(ii), Page 141
P.C.
(24) Power of Attorney Not Applicable
(25) Statement of eligibility Not Applicable
of trustee
(27) Financial Data Schedule Ex-27, Page 142
(99) Additional Exhibits Ex-99, Page 143-144
Marketing Agreement dated
October 1, 1997, between
IRET and Roger Domres filed
as Exhibit 99 to Form S-11
for the Registrant on November
28, 1997 (File No. 0-14851)
and incorporated herein by
reference
</TABLE>
X
<PAGE>
EX-1(I) FORM S-11 INVESTORS REAL ESTATE TRUST
SECURITY SALES AGREEMENT
THIS AGREEMENT, made this _____ day of November, 1998, between INVESTORS REAL
ESTATE TRUST, A North Dakota Business Trust, 12 South Main, Minot, North
Dakota 58701 (hereinafter ("IRET"), and NAME AND ADDRESS OF
BROKER,(hereinafter "BROKER").
WHEREAS, IRET intends to file a Form S-11 with the Securities and Exchange
Commission to register for sale to the public 1,000,000 shares of its shares
of Beneficial Interest; and,
WHEREAS, BROKER is a broker registered with the National Association of
Securities Dealers and is also registered in states in which said shares of
Beneficial Interest will also be registered for sale by IRET;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, it
is agreed as follows:
1. IRET hereby employs BROKER as a Broker to offer said shares of
Beneficial Interest for sale for $7.85 per share with a minimum purchase of
100 shares. BROKER agrees to use its best efforts to conduct the sales
effort necessary to market said securities subject to the terms and
conditions of this agreement. This agreement shall become effective only
upon the effectiveness of the registration of said securities by the
Securities and Exchange Commission and the applicable state Securities
Commissioners and shall terminate contemporaneously with the termination or
completion of said registration.
2. IRET shall be responsible for paying all costs and expenses relating
to the registration of said securities, including the preparation, printing
and filing of the Prospectus and Registration Statements and all amendments
and exhibits, all filing and registration fees and costs, and all legal,
accounting, printing and filing fee expenses in connection therewith.
3. All solicitation expenses including travel, telephone and other
expenses incurred by BROKER and its salesmen shall be the responsibility of
BROKER and its salesmen. In the event the offering is terminated, BROKER
will NOT be reimbursed for any out-of-pocket expenses.
4. As compensation for its services hereunder, BROKER shall receive 8%
of the proceeds of all of the securities sold by it and paid for.
5. IRET represents and warrants to BROKER as follows:
- IRET is a North Dakota Business Trust duly organized and in good
standing under the laws of the State of North Dakota and duly
authorized to conduct its business in the states in which it
operates.
- The shares of Beneficial Interest described in the Prospectus
filed in connection with the above described Offering have the
characteristics set forth in said Prospectus and IRET is
<PAGE>
authorized to issue an unlimited number of its shares of
Beneficial Interest under its trust powers.
- The Financial Statements contained in the Prospectus and by
reference incorporated herein are true, correct and complete, and
no material, adverse changes have occurred since the issuance of
such statement.
IRET hereby indemnifies and will hold BROKER harmless from all claims,
demands, liabilities and expenses (including legal expenses) arising out of
or based on any of the representations or warranties made by IRET herein.
This agreement shall be binding upon and shall inure to the benefit of the
parties, their successors and assigns.
INVESTORS REAL ESTATE TRUST
BY /s/ THOMAS A. WENTZ, SR.
--------------------------------------
Thomas A. Wentz, Sr., Vice President
BROKER
BY (NAME OF BROKER)
--------------------------------
Its
---------------------------
<PAGE>
November 12, 1998
EXHIBIT EX-5
OPINION RE LEGALITY
Securities and Exchange Commission
Washington, D.C. 20549
INVESTORS REAL ESTATE TRUST - FORM S-11 DATED NOVEMBER 12, 1998
In connection with the filing of Form S-11 by Investors Real Estate Trust, we
advise you that we have examined and are familiar with the originals of all
documents, trust records and other instruments relating to the organization
of Investors Real Estate Trust, the authorization and issuance of the shares
of Beneficial Interest described in said application, including the following:
1. Restated Declaration of Trust of Investors Real Estate Trust dated
October 24, 1996.
2. Registration Statement (Form S-11).
From our examination of said documents and records, it is our opinion:
1. Investors Real Estate Trust has been duly organized and is a
validly existing business trust under the laws of the State of
North Dakota.
2. Investors Real Estate Trust has the power under North Dakota law to
conduct the business activities described in the Trust Agreement
and said Prospectus.
3. Investors Real Estate Trust is authorized to issue an unlimited
number of its shares of Beneficial Interest as set forth in its
Trust Agreement and such shares conform to the statements made
about them in said Form S-11 and Prospectus.
4. Said shares of Beneficial Interest have been duly and validly
authorized and issued.
5. We are not aware, and Investors Real Estate Trust has advised us
that it is not aware of any legal or governmental proceedings
<PAGE>
pending or threatened to which Investors Real Estate Trust is a
party or which the property thereof is the subject; and it and we
do not know of any contracts of a character to be disclosed on said
application or prospectus which are not disclosed, filed and
properly summarized therein.
6. Said Form S-11 and the Prospectus and other exhibits attached
thereto are in the form required and have been examined by us; we
have no reason to believe that any of said documents contain any
untrue statement of material fact or omits to state any material
fact the statements therein not misleading. We have reviewed said
documents and to the best of our knowledge, information and belief,
the statements contained therein are correct.
PRINGLE & HERIGSTAD, P.C.
By /s/ THOMAS A. WENTZ, JR.
-----------------------------
Thomas A. Wentz, Jr.
kak
<PAGE>
November 12, 1998
EXHIBIT EX-8
OPINION RE TAX MATTERS
Securities and Exchange Commission
Washington, D.C. 20549
INVESTORS REAL ESTATE TRUST - FORM S-11 DATED NOVEMBER 12, 1998 - TAX MATTERS
In connection with the filing of the above described Form S-11 by Investors
Real Estate Trust, we advise you that we have prepared the section of the
Prospectus entitled "Tax Treatments of the Trust and Its Security Holders",
including the following subcategories: Federal Income Tax, North Dakota
Income Tax, Taxation of the Trust's Shareholders, Taxation of Tex-Exempt
Shareholders, Tax Considerations for Foreign Investors, Backup Withholding,
State and Local Taxes, Other Tax Considerations, Tax Aspects of the Operating
Partnership, Classification as a Partnership and Income Taxation of the
operating Partnership and Its Partners.
In connection with the preparation of said portion of the filing, we have
examined and are familiar with the originals of all documents, trust records
and other instruments relating to the organization and operation of Investors
Real Estate Trust, IRET Properties, a North Dakota Limited Partnership, and
all other related entities described in the filing.
In addition, we have reviewed all applicable provisions of the Internal
Revenue Code, the regulations issued thereunder and, where appropriate,
revenue rulings, federal and state court decisions and such other materials
as we deemed necessary and relevant to the matters being opined upon.
The conclusions and statements made in the above described portions of the
S-11 filing represent our opinions on such matters and have been set forth
with our knowledge and consent. The above portions of the Prospectus are
hereby incorporated by reference.
PRINGLE & HERIGSTAD, P.C.
By /s/ Thomas A. Wentz, Jr.
------------------------------
Thomas A. Wentz, Jr.
<PAGE>
EX-23(i)
November 12, 1998
UNITED STATES SECURITIES AND
EXCHANGE COMMISSIONER
WASHINGTON DC 20549
FORM S-11 REGISTRATION STATEMENT
INVESTORS REAL ESTATE TRUST CIK0000798359
TO WHOM IT MAY CONCERN:
We consent to the incorporation directly or by reference in this Registration
Statement of Investors Real Estate Trust, on Form S-11 of our opinion letter
dated November 12, 1998, concerning the opinion of legality. We also consent
to the reference to us under the heading "Experts" in the Prospectus, which
is also part of this Registration Statement.
PRINGLE & HERIGSTAD, P.C.
/s/ Thomas A. Wentz, Jr.
Thomas A. Wentz, Jr.
kak
<PAGE>
EX-23(ii)
BRADY
MARTZ
- ----------------------------
CERTIFIED PUBLIC ACCOUNTANTS
UNITED STATES SECURITIES AND
EXCHANGE COMMISSIONER
WASHINGTON DC 20549
RE: FORM S-11 REGISTRATION STATEMENT
INVESTORS REAL ESTATE TRUST CIK0000798359
TO WHOM IT MAY CONCERN:
We hereby consent to the incorporation directly or by reference in the
Registration Statement of Investors Real Estate Trust on Form S-11, of the
consolidated financial statements and additional information of Investors
Real Estate Trust and Affiliated Partnerships as of April 30, 1998, as well
as our Independent Auditor's Report dated May 27, 1998. We also consent to
the reference to us under the heading "Experts" in the Prospectus, which is
part of the Registration Statement.
We also acknowledge that we are aware that said Form S-11 Filing includes the
unaudited consolidated financial report of the Registrant for the three-month
period ended July 31, 1998.
BRADY MARTZ & ASSOCIATES, P.C.
November 9, 1998
BRADY, MARTZ & ASSOCIATES, P.C.
24 West Central P.O. Box 848
Minot, ND 58702-0848 (701) 852-0196 Fax (701) 839-5452
OTHER OFFICES: Grand Forks, ND Bismarck, ND
Devils Lake, ND Thief River Falls, MN
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
FINANCIAL STATEMENT ATTACHED HERETO AS EXHIBIT F FOR THE 6-MONTH PERIOD ENDED
jULY 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH EXHIBIT F.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 3,086,972
<SECURITIES> 4,100,590
<RECEIVABLES> 1,709,669
<ALLOWANCES> 126,212
<INVENTORY> 0
<CURRENT-ASSETS> 12,932,502
<PP&E> 240,046,889
<DEPRECIATION> 22,575,451
<TOTAL-ASSETS> 217,471,438
<CURRENT-LIABILITIES> 2,822,462
<BONDS> 137,324,811
10,869,391
0
<COMMON> 74,708,559
<OTHER-SE> (6,555,933)
<TOTAL-LIABILITY-AND-EQUITY> 224,718,514
<SALES> 0
<TOTAL-REVENUES> 9,102,278
<CGS> 0
<TOTAL-COSTS> 6,152,307
<OTHER-EXPENSES> 133,863
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,816,108
<INCOME-PRETAX> 1,193,988
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,193,988
<DISCONTINUED> 0
<EXTRAORDINARY> 366,017
<CHANGES> 0
<NET-INCOME> 1,560,005
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
<PAGE>
EX-99
Investors Real Estate Trust
SUBSCRIPTION AGREEMENT
<TABLE>
<S> <C>
AMOUNT $__________________ NUMBER OF COMMON SHARES ________________
OWNERSHIP Name(s) ______________________________________________________________________
REGISTRATION: (investor(s) names)
Address ______________________________________________________________________
City ____________________________________ State __________ Zip _______________
Social Security Number ____-____-____ or Tax I.D.# ___-_______
Date of Birth ____/____/____
Social Security Number ____-____-____ or Tax I.D.# ___-_______
Date of Birth ____/____/____
Under penalties of perjury, the undersigned certified (1) that the number shown as his taxpayer identification
number is his correct taxpayer identification number and (2) that he is not subject to back up withholding
either because he has not been notified that he is subject to backup withholding as a result of a failure to
report all interest and dividends or because the Internal Revenue Service has notified him that he is no longer
subject to backup withholding.
_______________________________________________________________________________________________________________
MAILING ADDRESS Name(s)_________________________________________________________________________
FOR CORRES- _
PONDENCE AND CASH Address_________________________________________________________________________
DISTRIBUTIONS City ____________________________________ State __________ Zip _______
(If different
from above)
_________________________________________________________________________________________________
TITLE TO _____Individual _____Tenants in Common _____IRA _____Partnership
BE HELD: _____Joint Tenants/ _____Corporation _____Trust _____Pension Plan
Rights of Survivorship _____Marital Property _____Custodian _____Profit Sharing
_________________________________________________________________________________________________
SIGNATURES: I hereby certify as follows: That a copy of the Prospectus, including the Subscription Agreement attached thereto,
as amended and/or supplemented to date, has been delivered to me, and I acknowledge that such Prospectus was
received.
Executed this ___ day of _________, 199___, at _______________(city) ____ (state).
Signature (investor's, otherwise Trustee of IRA, Pension Plan, etc.) ____________________
Additional Signature (if joint tenant) _____________________________________________
_________________________________________________________________________________________________
The undersigned hereby represents that it has reasonable grounds to believe on the basis of information obtained from the
above-named investor concerning his-her investment objectives, other investments, financial situation and needs, and any other
information known by it that:
A. The above-named investor is or will be in a financial position appropriate to enable him-her to realize, to a significant
extent, the benefits discussed in the Prospectus;
B. The above-named investor has a fair market net worth sufficient to sustain the risks inherent in the Shares, including loss of
investment and lack of liquidity; and
C. The Shares are otherwise suitable for the above-named investor. I further represent that prior to executing this purchase
transaction, I informed the above-named investor of all pertinent facts relating to the liquidity of the Shares.
_________________________________________________________________________________________________
SOLICITING Firm ______________________________________________________________________
DEALER
ENDORSEMENT: Registered Representative _______________________________ Phone ___________
Address ___________________________________________________________________
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Dealer Authorized Signature _______________________________________________
NOTE: Checks to be made payable to: INVESTORS REAL ESTATE TRUST, 12 SOUTH MAIN ST., MINOT, ND 58701
_________________________________________________________________________________________________
Accepted by: INVESTORS REAL ESTATE TRUST
By: ODELL-WENTZ & ASSOCIATES Date _________________
(Advisor)
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