<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
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of securities Amount to be Proposed Maximum Proposed Maximum Amount of
to be registered registered offering price aggregate offering registration
per unit price fee
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investors Real 1,000,000 shares $8.25 per share $8,250,000.00 $2,293.50
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 1 of 143
<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....................................................10 to 17
4 Determination of Offering Price..........................................27
5 Dilution.................................................................27
6 Selling Security Holders................................................N/A
7 Plan of Distribution................................................27 & 28
8 Use of Proceeds....................................................28 to 30
9 Selected Financial Data.............................................30 & 31
10 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................31 to 39
11 General Information as to Investors Real Estate Trust..............39 to 41
12 Policy with Respect to Certain Activities..........................41 to 43
13 Investment Policies of Investors Real Estate Trust..................44 & 45
14 Description of Real Estate.........................................45 to 49
15 Tax Treatment of IRET and Its Security Holders.....................55 to 63
16 Market Price Of and Dividends on IRET's Shares of Beneficial
Interest.........................................................66 to 70
17 Description of IRET's Securities.........................................71
18 Legal Proceedings.......................................................N/A
19 Security Ownership of Certain Beneficial Owners
and Management...................................................72 to 73
20 Directors and Executive Officers...................................72 to 73
21 Executive Compensation.............................................73 to 76
22 Certain Relationships and Related Transactions.....................73 to 76
23 Selection, Management and Custody of IRET's Investments..................76
24 Policies with Respect to Certain Transactions.......................76 & 77
25 Limitations of Liability.................................................77
26 Financial Statements and Information..............................86 to 126
27 Interests of Named Experts and Counsel...................................79
28 Disclosure of Commission Position on Indemnification for Securities
Act Liabilities...................................................77 & 79
Part II. Information Not Required in Prospectus
ITEM
- ----
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...............................127
34 Treatment of Proceeds from Stock Being Registered.......................127
II
35 Financial Statements and Exhibits................................128 to 129
36 Undertakings......................................................130 & 131
37 Index of Exhibits.................................................133 & 134
38 Security Sales Agreement..........................................135 & 136
39 Opinion RE Legality...............................................137 & 138
Page 2 of 143
<PAGE>
40 Opinion RE Tax Matters..................................................139
41 Consent Letter from Pringle & Herigstad, P.C., RE Opinion of Legality...140
42 Consent Letter from Brady Martz & Associates, P.C., RE Financial
Information...........................................................141
43 Financial Data Schedule for Investors Real Estate Trust (As Of
April 30, 1999).......................................................142
44 Subscription Agreement - Investors Real Estate Trust....................143
</TABLE>
Page 3 of 143
III
<PAGE>
Effective Date: ____________, 1999 Prospectus
INVESTORS REAL ESTATE TRUST
12 South Main Street
Minot, ND 58701
(701) 852-1756
For 1,000,000 Shares of Beneficial Interest
$8.25 per Share
------------------------
<TABLE>
<CAPTION>
THE OFFERING: PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Price $8.25 $8,250,000
Selling Commission $ .66 660,000
----- ----------
Proceeds to IRET $7.59 $7,590,000
</TABLE>
The offering price may be higher than the market price of our shares on the day
of purchase.
TRADING SYMBOL: NASDAQ SmallCap MarketSM - IRETS
THE COMPANY: The Trust is a Real Estate Investment Trust formed on July 31,
1970. IRET owns approximately 5,750 apartment units and 1,250,000 square feet of
commercial property in North Dakota and nine other states.
USE OF PROCEEDS: The proceeds from this offering will be added to the Trust's
operating capital to be used for the construction of residential apartment
buildings. See "Use of Proceeds."
INVESTMENT IN THE SHARES INVOLVES MATERIAL RISKS AND THERE IS NO GUARANTEE OF
RETURN ON INVESTMENT. SEE "RISK FACTORS." AMONG SUCH RISKS ARE THE FOLLOWING:
- THE ESTIMATED BOOK VALUE OF TRUST SHARES AFTER THIS OFFERING
WILL BE $4.64. A PURCHASER PAYING $8.25 PER SHARE WILL INCUR
AN IMMEDIATE BOOK VALUE DILUTION OF $3.61 PER SHARE.
- ECONOMIC CONDITIONS THAT THE TRUST CANNOT CONTROL MAY HAVE A
NEGATIVE EFFECT ON THE VALUE OF THE TRUST'S INVESTMENTS AND
AMOUNT OF CASH THAT THE TRUST RECEIVES FROM TENANTS.
- THE TRUST INTENDS TO BORROW 70% OF THE COST OF REAL ESTATE
PURCHASED OF CONSTRUCTED.
- THE PUBLIC TRADING MARKET FOR THE SHARES HAS ONLY RECENTLY
DEVELOPED, AND THERE IS NO ASSURANCE THAT IT WILL CONTINUE.
- TAXATION OF THE TRUST AS A CORPORATION IF IT FAILS TO QUALIFY
AS A REIT.
- THE TRUST MUST RELY ON THE ADVISOR WITH RESPECT TO ALL
INVESTMENT DECISIONS, SUBJECT TO APPROVAL BY THE BOARD OF
TRUSTEES.
- THE SHARE PRICE IS ARBITRARILY DETERMINED.
- THE ADVISOR AND ITS AFFILIATES ARE OR MAY BE ENGAGED IN OTHER
ACTIVITIES THAT MAY RESULT IN POTENTIAL CONFLICTS OF INTEREST.
Page 4 of 143
1
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE BALANCE OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.
Page 5 of 143
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS PAGE
---------------
<S> <C>
SUMMARY OF THE OFFERING...................................................7-14
THE COMPANY.................................................................15
BUSINESS OBJECTIVES.........................................................16
Portfolio Mix..........................................................16
Leverage...............................................................16
AVAILABLE INFORMATION CONCERNING IRET.......................................16
Securities and Exchange Commission.....................................16
Reports to Security Holders............................................17
Incorporation by Reference.............................................17
RISK FACTORS................................................................17
Price of Shares Arbitrarily Determined.................................17
High Leverage..........................................................18
Failure to Qualify as a Real Estate Investment Trust...................18
Best Efforts Sale......................................................18
Business Environment...................................................18
Risks Related to Mortgage Lending......................................19
Relationship with Advisor..............................................19
Conflict of Interest...................................................19
Environmental Liability................................................20
Competition............................................................20
Liquidity..............................................................21
Front-End Fees.........................................................21
COMPENSATION TABLE..........................................................21
CONFLICTS OF INTEREST.......................................................22
Transactions with Affiliates and Related Parties.......................23
Compensation to the Advisor and Conflicts of Interest..................23
Competition by the Trust with Affiliates...............................23
Non-Arm's Length Agreements............................................24
Lack of Separate Representation........................................24
DETERMINATION OF OFFERING PRICE.............................................24
DILUTION....................................................................24
PLAN OF DISTRIBUTION........................................................24
WHO MAY INVEST..............................................................25
USE OF PROCEEDS.............................................................25
SELECTED FINANCIAL DATA - ANNUAL............................................27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................28
General................................................................28
Page 6 of 143
3
<PAGE>
Results of Operations..................................................29
Property Acquisitions..................................................30
Property Dispositions..................................................33
Dividends..............................................................34
Funds From Operations..................................................34
Liquidity and Capital Resources........................................35
Impact of Inflation....................................................35
Economic conditions....................................................36
Year 2000 Costs........................................................36
GENERAL INFORMATION AS TO INVESTORS REAL ESTATE TRUST.......................36
Organization of Iret...................................................36
Governing Instruments of IRET..........................................36
Independent Trustees...................................................36
Shareholder Meetings...................................................37
STRUCTURE OF IRET...........................................................38
POLICY WITH RESPECT TO CERTAIN ACTIVITIES...................................38
To Issue Senior Securities.............................................38
To Borrow Money........................................................39
To Make Loans To Other Persons.........................................39
Mortgage Loans Receivable..............................................39
To Invest in the Securities of Other Issuers for the Purpose of
Exercising Control...............................................40
To Underwrite Securities of Other Issuers..............................40
To Engage in the Purchase and Sale (or Turnover) of Investments........40
To Offer Securities in Exchange for Property...........................40
To Repurchase or Otherwise Reacquire Its Shares or Other Securities....40
To Make Annual and Other Reports to Shareholders.......................40
INVESTMENT POLICIES OF IRET.................................................41
Investments in Real Estate or Interests in Real Estate.................41
Investments in Real Estate Mortgages...................................41
Investments in Other Securities........................................41
Investments in Securities Of or Interests In Persons Primarily
Engaged in Real Estate Activities................................42
DESCRIPTION OF REAL ESTATE..................................................42
INVESTMENT PORTFOLIO - INVESTORS REAL ESTATE TRUST
AS OF JULY 31, 1998..............................................42
Real Estate Owned................................................42 to 46
Title..................................................................46
Insurance..............................................................46
Planned Improvements...................................................46
Contracts or Options to Sell...........................................46
Occupancy and Leases...................................................46
SHARES AVAILABLE FOR FUTURE SALE............................................47
OPERATING PARTNERSHIP AGREEMENT.............................................48
Management.............................................................48
Transferability of Interests...........................................48
Capital Contribution...................................................49
Exchange Rights........................................................50
Page 7 of 143
4
<PAGE>
Registration Rights....................................................50
Operations.............................................................50
Distributions..........................................................51
Allocations............................................................51
Term...................................................................51
Fiduciary Duty.........................................................51
Tax Matters............................................................51
TAX TREATMENT OF IRET AND ITS SECURITY HOLDERS..............................52
Federal Income Tax.....................................................52
North Dakota Income Tax................................................53
Taxation of IRET's Shareholders........................................53
Taxation of Tax-Exempt Shareholders....................................54
Tax Considerations for Foreign Investors...............................55
Backup Withholding.....................................................55
State and Local Taxes..................................................55
Other Tax Considerations...............................................56
Tax Aspects of the Operating Partnership...............................56
Classification as a Partnership........................................56
Income Taxation of the Operating Partnership and Its Partners..........58
Partners, Not Partnerships, Subject To Tax.............................58
Partnership Allocations................................................58
Tax Allocations With Respect To Contributed Property...................58
Basis in Operating Partnership Interest................................59
Sale of Operating Partnership's Property...............................59
ERISA CONSIDERATIONS........................................................60
MARKET PRICE OF AND DIVIDENDS ON IRET'S SHARES OF BENEFICIAL INTERESTS......63
Market for the Shares of Beneficial Interest...........................63
Dividend and Share Price History.......................................65
DIVIDEND REINVESTMENT PLAN..................................................67
DESCRIPTION OF IRET'S SECURITIES............................................68
Description of Shares of Beneficial Interest...........................68
Restrictions on Transfer...............................................68
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............69
EXECUTIVE COMPENSATION AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...70
ADVISORY AGREEMENT..........................................................71
Basic Compensation.....................................................72
Additional Compensation................................................72
Limitation.............................................................72
Roger R. Odell.........................................................72
Thomas A. Wentz, Sr....................................................73
SELECTION, MANAGEMENT AND CUSTODY OF IRET'S INVESTMENTS.....................73
Management of IRET's Investments.......................................73
POLICIES WITH RESPECT TO CERTAIN TRANSACTIONS...............................73
LIMITATIONS OF LIABILITY....................................................74
Page 8 of 143
5
<PAGE>
LEGAL MATTERS...............................................................76
EXPERTS.....................................................................76
GLOSSARY OF TERMS...........................................................76
CONSOLIDATED FINANCIAL STATEMENTS - AS OF APRIL 30, 1999 AND 1998
AND INDEPENDENT AUDITOR'S REPORT...........................................F-1 to F-41
</TABLE>
Page 9 of 143
6
<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.
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:
- - BOOK VALUE: The book value of IRET shares of beneficial interest is
substantially less than the purchase price to new shareholders under
this Offering. As of April 30, 1999, the book value of the 19,066,954
shares then outstanding was $4.50. Assuming all of the shares
registered under this Offering are sold, the estimated resulting book
value will be $4.64 per share. Thus, a purchasing shareholder paying
$8.25 per share under this Offering will incur an immediate book value
dilution of $3.61 per share.
- - 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,
Page 10 of 143
7
<PAGE>
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.
- - 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.
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 Maximum Percentage
- ---- ------- --- ------------------
<S> <C> <C> <C>
Selling agent commission
8% of the amount sold -0- $ 660,000 8.00%
Legal Fees $15,000 $ 15,000 .182%
Advertising, Printing and
Promotion Expenses $15,000 $ 180,000 2.18%
Registration Fees $10,000 $ 10,000 .121%
Accounting Fees $ 1,000 $ 1,000 .01%
------- --------- --------
$41,000 $ 866,000 10.493%
</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."
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. Any transactions between
IRET and any trustee, 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.
The Advisor and its affiliates may receive compensation from IRET for
providing various services. See "Compensation Table" and "The Advisory
Agreement."
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.
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
Page 11 of 143
8
<PAGE>
account or for the account of others, of interests in entities engaged
in the real estate business and any other business.
Neither the Advisor nor its affiliates are prohibited from providing
the same services to others, including competitors.
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.
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. See "Conflicts of
Interest."
OUR OFFERING. We are offering to sell to the public 1,000,000 of our shares of
Beneficial Interest at a price of $8.25 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 $8.25 per share of
which approximately $.66 will be paid to the selling brokerage firm and the
balance of approximately $7.59 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, Iowa, Colorado, Tennessee,
Michigan, New Mexico 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
5,750 apartment units and 1,250,000 square feet of commercial property the
total original investment in real estate assets exceeds $300,000,000. See "The
Company."
CAPITALIZATION. The following shows the amount of assets we owned on April 30,
1999, 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.
<TABLE>
<CAPTION>
As of April 30, 1999 After sale of 1,000,000 shares
<S> <C> <C>
Total Assets $280,311,442 $287,695,442
Less Liabilities (191,229,475) (191,229,475)
Less Minority Interest
in Operating
Partnership (14,480,542) (14,480,542)
------------ -------------
Shareholders' Equity $ 85,783,294 $ 81,985,425
</TABLE>
(1) Reflects costs of issue of $866,000 deducted from total sale proceeds of
$8,250,000 resulting in the addition of $7,384,000 to total assets.
Page 12 of 143
9
<PAGE>
FINANCIAL INFORMATION. The following table will give you an overview of our
financial performance during the past five years. See "Financial Statements"
at pages F-1 to F-37.
SELECTED FINANCIAL DATA - ANNUAL
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30
--------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------
Consolidated Income Statement Data (Restated)
<S> <C> <C> <C> <C> <C>
Revenue $ 39,927,262 $ 32,407,545 $ 23,833,982 $ 18,659,665 $ 13,801,123
Operating income 6,401,676 4,691,198 3,499,443 3,617,807 3,560,318
Gain on repossession/
sale of investments 1,947,184 465,499 398,424 994,163 407,512
Minority interest portion
of operating partnership
income (744,725) (141,788) (18) --- ---
Net income 7,604,135 5,014,909 3,897,879 4,611,970 3,967,830
Balance Sheet Data
Total real estate
investments 280,311,442 213,211,369 177,891,168 122,377,909 84,005,635
Total assets 291,493,311 224,718,514 186,993,943 131,355,638 94,616,744
Shareholders' equity 85,783,294 68,152,626 59,997,619 50,711,920 37,835,654
Consolidated Per Share Data
Net income $ .44 $ .32 $ .28 $ .38 $ .38
Gain of repossession/
sale of investments .11 .03 .03 .08 .04
Dividends .47 .42 .39 .37 .34
Tax status of dividend
Capital gain 6.3% 2.9% 21.0% 1.6% 11.0%
Ordinary income 76.0% 97.1% 79.0% 98.4% 89.0%
Return of capital 17.7% 0.0% 0.0% 0.0% 0.0%
</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 the partnership's 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 well as other administrative expenses
incurred during the past five fiscal years. See "Advisory Agreement."
Page 13 of 143
10
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDING APRIL 30
----------------------------
1995 1996 1997 1998 1999
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Advisor's and Trustees'
Compensation $336,142 $458,019 $559,149 $745,907 $927,063
Advisory Investigation
Fee 49,836 117,506 177,834 141,465 195,019
Other Administrative
Expenses 79,974 162,588 158,627 271,738 320,479
-------- -------- -------- ---------- ----------
TOTAL FEES $440,969 $465,952 $895,610 $1,159,110 $1,442,561
Fees as Percent of Net
Invested Assets of the
Trust 0.55% 0.6% 0.5% 0.5% 0.5%
</TABLE>
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 $8.25 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."
DIVIDENDS. We have paid 113 consecutive quarterly dividends beginning June 30,
1971. Dividends are paid in mid-January, April 1st, July 1st and October 1st
of each year. The dividend paid on July 1, 1999, was $.124 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, Jamestown and Grand Forks, North Dakota,
Rochester, Minnesota, and Billings, Montana. See "Use of Proceeds."
SHAREHOLDER DEMOCRACY RIGHTS. The following is a brief summary of the rights
afforded to shareholders pursuant to the Declaration of Trust:
- - SHARES: CERTIFICATES OF BENEFICIAL INTEREST.
The units into which the beneficial interest in IRET will be divided
shall be designated as SHARES. The certificates evidencing ownership of
SHARES in IRET will be designated as Certificates of Beneficial
Interest or SHARES and shall be in such form as the TRUSTEES may from
time to time prescribe.
- - SALE OF SHARES.
The TRUSTEES may from time to time issue and sell by private or public
offering, or exchange SHARES in IRET in such number or for such sums of
money, real estate assets, or other considerations, and on such terms
as they deem proper. The SHAREHOLDERS shall have no preemptive rights.
- - OFFERING OF SHARES.
The TRUSTEES are authorized to cause to be made from time to time
offerings of the SHARES of IRET to the public at public offering prices
deemed appropriate.
- - SHARES PURCHASED BY IRET.
Page 14 of 143
11
<PAGE>
IRET may repurchase or otherwise acquire its own SHARES on such terms
and conditions as the TRUSTEES deem appropriate.
- - TRANSFERABILITY OF SHARES.
SHARES in IRET shall be transferable in accordance with the procedure
prescribed from time to time in the TRUSTEES' Regulations.
- - REDEMPTION AND PROHIBITION ON TRANSFER.
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. Also, the TRUSTEE may
refuse to transfer SHARES to any PERSON whose acquisition of additional
SHARES might, in the opinion of the TRUSTEES, violate the above
requirement.
- - MEETINGS.
1. There shall be an annual meeting of the SHAREHOLDERS of IRET.
2. 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 not less than 10% of the outstanding
SHARES of the IRET entitled to vote at such meeting.
- - VOTING RIGHTS OF SHAREHOLDERS.
1. The voting rights per share of equity securities of IRET
(other than the publicly held equity securities of IRET) sold
in a private offering shall not exceed voting rights which
bear the same relationship to the voting rights of the
publicly held SHARES of IRET as the consideration paid to IRET
for each privately offered IRET share bears to the book value
of each outstanding publicly held share.
2. The majority of the outstanding SHARES may, without the
necessity of concurrence by the TRUSTEES, vote to:
a. amend the DECLARATION OF TRUST;
b. terminate IRET;
c. remove the TRUSTEES.
3. The majority of SHAREHOLDERS present in PERSON or by proxy at
an Annual Meeting at which a quorum is present, may vote to
elect the TRUSTEES. A quorum shall be 50% of the then
outstanding SHARES.
4. Without concurrence of a majority of the outstanding SHARES,
the TRUSTEES may not:
a. amend the DECLARATION OF TRUST, except for amendments
which do not adversely affect the rights, preferences and
privileges of SHAREHOLDERS;
Page 15 of 143
12
<PAGE>
b. sell all or substantially all of the IRET's assets other
than in the ordinary course of the IRET's business or in
connection with liquidation and dissolution;
c. cause the merger or other reorganization of IRET; or
d. dissolve or liquidate IRET.
- - LIABILITY OF SHAREHOLDERS.
The SHARES of IRET shall be non-assessable by IRET.
- - REPORTS.
IRET shall cause to be prepared and mailed or delivered to
each SHAREHOLDER as of a record date after the end of the
fiscal year and each holder of other publicly held securities
of IRET within 120 days after the end of the fiscal year to
which it relates an annual report.
- - ACCESS TO RECORDS.
Any SHAREHOLDER and any designated representative thereof shall be
permitted access to the records of IRET at all reasonable times, and
may inspect and copy any of them.
- - ELECTION OF TRUSTEES.
All TRUSTEES shall be elected annually by the vote of the SHAREHOLDERS.
Each Shareholder shall be entitled to one vote in PERSON or by proxy
for each Share registered in his name for as many PERSONS as there are
TRUSTEES to be elected. The candidates receiving the highest respective
numbers of votes up to the number of trusteeships to be filled in the
election shall be elected.
A PROSPECTIVE PURCHASER SHOULD ALSO REVIEW THE ATTACHED FULL PROSPECTUS.
THIS IS THE END OF THE SUMMARY SECTION.
THE BALANCE OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.
Page 16 of 143
13
<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, real estate equities and real estate 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
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUE FROM OPERATIONS
Real Estate Rentals $38,785,287 $31,694,586 $22,972,368
Interest, Discount &
Fees 1,141,975 712,959 861,613
----------- ----------- -----------
$39,927,262 $32,407,545 $23,833,981
EXPENSE $33,525,586 $27,716,347 $20,334,538
----------- ----------- -----------
NET REAL ESTATE INVESTMENT
INCOME $ 6,401,676 $ 4,691,198 $ 3,499,443
GAIN ON SALE OF INVESTMENTS
(CAPITAL GAIN) 1,947,184 465,499 398,424
MINORITY INTEREST PORTION
OF OPERATING PARTNERSHIP
INCOME (744,725) (141,788) (18)
----------- ----------- -----------
NET INCOME $ 7,604,135 $ 5,014,909 $ 3,897,849
----------- ----------- -----------
----------- ----------- -----------
PER SHARE
Net Income $ .44 $ .32 $ .28
Dividends Paid $ .47 $ .42 $ .39
</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 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
Page 17 of 143
14
<PAGE>
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 has been the
advisor to IRET.
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. From 1962 to August 1, 1998,
Mr. Wentz was a practicing attorney with Pringle & Herigstad, P.C. He has
been a member of Odell-Wentz & Associates since 1985.
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 29 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 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 the above location 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
Page 18 of 143
15
<PAGE>
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. 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 attached is available
free of charge upon request 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.
PRICE EXCEEDS BOOK VALUE: The book value of IRET shares of beneficial
interest is substantially less than the purchase price to new shareholders
under this Offering. As of April 30, 1999, the book value of the 19,066,954
shares then outstanding was $4.50. Assuming all of the shares registered
under this Offering are sold, the estimated resulting book value will be
$4.64 per share. Thus, a purchasing shareholder paying $8.25 per share under
this Offering will incur an immediate book value dilution of $3.61 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.
Page 19 of 143
16
<PAGE>
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 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
Page 20 of 143
17
<PAGE>
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 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
Page 21 of 143
18
<PAGE>
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.
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 MAXIMUM PERCENTAGE
---- ------- --- ------------------
<S> <C> <C> <C>
Selling agent commission
8% of the amount sold -0- $ 660,000 8.0%
Legal Fees $15,000 $ 15,000 .182%
Advertising, Printing and
Promotion Expenses $15,000 $ 180,000 2.18%
Page 22 of 143
19
<PAGE>
Registration Fees $10,000 $ 10,000 .121%
Accounting Fees $ 1,000 $ 1,000 .01%
------- --------- ------
$41,000 $ 866,000 10.493%
</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.
<TABLE>
<CAPTION>
ITEM OF COMPENSATION RECIPIENT AMOUNT/METHOD
- -------------------- --------- -------------
<S> <C> <C>
Advisory Fee Odell-Wentz & Associates The advisor will earn
annually an additional
base fee of $51,688 once
the net sale proceeds of
$7,384,000 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 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 $36,920.
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 $.66
of each share sold) for a
total possible commission of
$660,000.
Advertising and Up to an additional two
Promotional Expenses percent of gross proceeds of
$8,250,000 ($165,000) may be
paid as compensation for
Page 23 of 143
20
<PAGE>
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 another $16,000.
</TABLE>
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, 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.
Page 24 of 143
21
<PAGE>
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.
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 $8.25 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 April
30, 1999, the book value of the 19,066,954 shares then outstanding was $4.50.
Assuming all of the shares registered under this Offering are sold, the
estimated resulting book value will be $4.64 per share. Thus, a purchasing
shareholder paying $8.25 per share under this Offering will incur an
immediate book value dilution of $3.61 per share.
PLAN OF DISTRIBUTION
Page 25 of 143
22
<PAGE>
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 $.66 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.
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,
Washington, Iowa, Tennessee, Michigan, New Mexico, 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:
Tennessee -
Either individually or with a spouse had an annual gross income of at
least $65,000 during the previous calendar year, and be expected to
have during the current calendar year a gross income of at lease
$65,000, and a net worth of at least $250,000 (exclusive of principal
residence and its furnishings and automobile), or, in the alternative,
have a minimum net worth of at least $500,000.
Minnesota, Iowa, New Mexico, and Washington -
1) Either individually or with a spouse has an annual gross
income of at least ($60,000 for Minnesota and New Mexico) and
($45,000 for Washington and Iowa) during the previous calendar
year, have a net worth of at least ($60,000 for Minnesota and
New Mexico) and ($45,000 for Washington and Iowa) (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 New Mexico) and ($150,000
for Washington and Iowa) (exclusive of the principal residence
and its furnishings and automobiles), and are purchasing
shares for only the investors own account or retirement plan.
3) All retirement plan purchases must be for a minimum of
$2,500.00 for Iowa residents.
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.
Page 26 of 143
22
<PAGE>
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 old. 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 8,250,000 100.0%
SELLING COMMISSIONS - 660,000 8.0%
LEGAL FEES - 15,000 Less than 1% (.00182)
ADVERTISING, PRINTING AND
PROMOTION EXPENSES - 180,000 Less than 3% (.0218)
REGISTRATION FEES - 10,000 Less than 1% (.00121)
ACCOUNTING FEES - 1,000 Less than 1% (.0001)
---------
CASH AVAILABLE FOR CONSTRUCTION
OF PROPERTIES $7,384,000 89.5%
</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 a 27-unit
apartment complex in Jamestown, 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 (183 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:
<TABLE>
<CAPTION>
APARTMENTS UNDER CONSTRUCTION
-----------------------------
CITY UNITS ESTIMATED COST
---- ----- --------------
<S> <C> <C>
Billings, MT 67 $ 4,250,000
Bismarck, ND 67 4,250,000
Grand Forks, ND 67 4,700,000
Jamestown, ND 27 2,200,000
PLANNED APARTMENT CONSTRUCTION
------------------------------
CITY UNITS ESTIMATED COST
---- ----- --------------
Rochester, MN 219 $14,500,000
Jamestown, MN 24 2,200,000
-----------
Total - Current and Planned Apartment Construction $32,100,000
</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 - Fiscal Year Ended April
30, 1999", and expects to concentrate its
Page 27 of 143
24
<PAGE>
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, 1999, this
depreciation deduction was $5,966,874. 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 April 30, 1999, the ratio of mortgage
liabilities to total Trust real estate assets was $175,071,069
of mortgage liabilities to $269,713,440 of net real estate
owned or 64.9%. Thus, as much as $45,761,130 could be borrowed
on the existing portfolio before reaching a debt ratio of 70%
(present investment in real estate of $269,713,440, minus
mortgages of $175,071,069 equals $94,642,371 divided by 30% =
$315,474,570, minus present real estate owned of $269,713,440
equals $45,761,130) (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
($2,964,434 as of April 30, 999) 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
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Income Statement Data (Restated)
Revenue $ 39,927,262 $ 32,407,545 $ 23,833,981 $ 18,659,665 $ 13,801,123
Operating income 6,401,676 4,691,198 3,499,443 3,617,807 3,560,318
Gain on repossession/
sale of investments 1,947,184 465,499 398,424 994,163 407,512
Minority interest portion
of operating partnership
income (744,725) (141,788) (18) --- ---
Net income 7,604,135 5,014,909 3,897,849 4,611,970 3,967,830
Balance Sheet Data
Total real estate
investments $280,311,442 $213,211,369 177,891,168 122,377,909 84,005,635
Total assets 291,493,311 224,718,514 186,993,943 131,355,638 94,616,744
Shareholders' equity 85,783,294 68,152,626 59,997,619 50,711,920 37,835,654
Page 28 of 143
25
<PAGE>
Consolidated Per Share Data
Net income $ .44 $ .32 $ .28 $ .38 $ .38
Gain of repossession/
sale of investments .11 .03 .03 .08 .04
Dividends .47 .42 .39 .37 .34
Tax status of dividend
Capital gain 6.3% 2.9% 21% 1.6% 11.0%
Ordinary income 76.0% 97.1% 79% 98.4% 89.0%
Return of capital 17.7% 0.0% 0.0% 0.0% 0.00%
</TABLE>
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 and 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). IRET, through its wholly owned subsidiary,
IRET, Inc., is the general partner of IRET Properties, a North Dakota limited
partnership (the "Operating Partnership"). All business operations for IRET are
conducted through the Operating Partnership. No other material change in IRET's
business is contemplated at this time.
This discussion and analysis should be read in conjunction with the attached
audited financial statements prepared by Brady Martz & Associates, certified
public accountants, which firm has 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.
RESULTS OF OPERATIONS:
FISCAL YEAR 1999 COMPARED TO FISCAL YEARS 1998 AND 1997.
OVERVIEW.
A continuation of stable occupancy rates for IRET's apartment
communities and good results from newly acquired properties resulted in
another year of significant increases in Funds From Operations and
earnings for IRET's 29th year, which ended April 30, 1999. Total assets
and shareholder equity also increased materially.
Page 29 of 143
26
<PAGE>
FUNDS FROM OPERATIONS.
Funds From Operations of the Operating Partnership(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 1999 increased to $11,778,502
($.6753 per share), compared to $9,447,425 ($.6042 per share) for
Fiscal 1998 and $7,144,622 ($.51 per share) received in Fiscal 1997.
These increases in Funds From Operations resulted primarily from
increased revenues from existing and newly acquired rental properties
as detailed below.
NET INCOME.
The Operating Partnership's income for Fiscal Year 1999 increased to
$7,604,135 from the $5,014,909 earned in Fiscal 1998 and the $3,897,849
earned in Fiscal 1997. On a per share basis, net income was $.33 per
share in Fiscal 1999, compared to $.29 in Fiscal 1998 and $.25 in
Fiscal 1997.
These increases in net income resulted from increased capital gains and
rental income, which is detailed below.
REVENUES.
Total revenues of the Operating Partnership for Fiscal 1999 were
$39,927,262, compared to $32,407,545 in Fiscal 1998 (an increase of
23%) and $23,833,981 in Fiscal 1997. The increase in revenues received
during Fiscal 1999 in excess of the prior year revenues was $7,519,717.
This increase resulted from:
<TABLE>
<S> <C>
Rent from 12 properties acquired/
completed in Fiscal 1999 $3,182,170
Rent from 7 properties acquired in
Fiscal 1998 in excess of that
received in Fiscal 1998 3,245,774
An increase in rental income on
existing properties 1,081,995
An decrease in rent on Smith Home
Furnishing Building (bankruptcy of
tenant) (30,877)
A decrease in rent - properties sold
during 1999 (388,091)
A decrease in interest income 429,016
----------
$7,519,717
</TABLE>
The increase in revenues received during Fiscal 1998 in excess of that
received during Fiscal 1997 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
A increase in rent on Smith Home
Page 30 of 143
27
<PAGE>
Furnishing Building (bankruptcy
of tenant) 54,021
A decrease in rent - properties sold
during 1997 (194,534)
An increase in interest income (148,654)
----------
$8,573,564
</TABLE>
As shown by the above analysis, the Fiscal 1999 and 1998 increases in
revenues resulted primarily from the addition of new real estate
properties to the operating partnership's portfolio.
Rents received on properties owned at the beginning of Fiscal 1998
increased by $893,976 (2.2%) in Fiscal 1998 and another $1,081,995
(2.1%) in Fiscal 1999, and the occupancy level for those properties
increased from 90% during Fiscal 1997 to 94% in Fiscal 1998 and to 95%
in Fiscal 1999. Thus, the new properties acquired during Fiscal Years
1998 and 1999 generated most of the new revenues during the past two
years.
CAPITAL GAINS.
The Operating Partnership realized capital gain income for Fiscal 1999
of $1,947,184.
This compares to $465,499 of capital gain income recognized in Fiscal
1998 and the $398,424 recognized in Fiscal 1997.
IRET will continue to seek to market several of its older and smaller
apartment properties.
NET INCOME. The $2,589,226 increase in net taxable income for Fiscal
1999 over the net income earned in the prior fiscal year resulted from:
<TABLE>
<S> <C>
An increase in gain from sale of
investments $ 1,481,685
An increase in net rental income
(rents, less utilities, maintenance,
taxes, insurance and management) 4,357,772
A increase in interest income 429,016
An increase in interest expense (1,622,877)
An increase in depreciation expense (1,174,967)
An increase in operating expenses
and advisory trustee services (229,897)
An increase in amortization expense (48,569)
An increase in Minority interest of
Operating Partnership Income (602,937)
------------
$ 2,589,226
</TABLE>
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
Page 31 of 143
28
<PAGE>
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>
RESULTS FROM FULLY STABILIZED PROPERTIES. IRET defines fully stabilized
properties as those both owned at the beginning of the prior Fiscal
Year AND having completed the rent-up phase (90% occupancy). "Same
store" results of these properties for Fiscal 1999 and 1998 were as
follows:
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998 %INCREASE
----------- ----------- ---------
<S> <C> <C> <C>
Scheduled Rent $28,777,572 $28,237,875 1.91%
Actual Collected Rent 28,501,453 27,230,777 4.67%
Utilities & Maintenance 4,557,793 4,254,657 7.12%
Management 2,361,905 2,204,936 7.12%
Taxes & Insurance 3,009,579 2,912,047 3.35%
----------- ----------- -----
Total Operating Expense $ 9,929,277 $ 9,371,640 5.95%
"Same Store"
Net Operating Income $18,572,176 $17,859,137 3.99%
----------- ----------- -----
</TABLE>
PROPERTY ACQUISITIONS. The Operating Partnership added $62,455,508 of
real estate investments to its portfolio during Fiscal 1999, compared
to the $39,014,222 added in the prior year, as detailed below:
FISCAL 1999 PROPERTY ACQUISITIONS
<TABLE>
<CAPTION>
COMMERCIAL:
<S> <C>
Edgewood Vista, Sioux Falls, SD $ 965,000
(Assisted Living)
Edgewood Vista, Billings, MT $ 965,000
(Assisted Living)
Corner Express, Minot, ND
(Convenience Store) $ 1,190,432
Viromed, Eden Prairie, MN
(Office/Laboratory) $ 4,826,310
Ameritrade Holdings, Omaha, NE
(Office) $ 8,283,977
</TABLE>
APARTMENTS:
<TABLE>
<CAPTION>
UNITS COMMUNITY NAME
<S> <C> <C>
182 Heritage Manor, Rochester, MN $ 7,371,208
Page 32 of 143
29
<PAGE>
64 Westwood Park, Bismarck, ND $ 2,025,455
67 **Country Meadows II, Billings, MT $ 1,321,962
60 Clearwater, Boise, ID $ 3,786,463
67 **Legacy III, Grand Forks, ND $ 2,260,345
100 Van Mall Woods, Vancouver, WA $ 6,021,312
27 **The Meadows by IRET, Jamestown, ND $ 1,502,301
165 Castle Rock, Billings, MT $ 5,614,223
67 Cottonwood II, Bismarck, ND $ 4,645,444
204 Ivy Club, Vancouver, WA $11,676,076
--- -----------
1003 $62,455,508
</TABLE>
** Property not in service on 4/30/99. Additional costs
to be incurred
FISCAL 1998 PROPERTY ACQUISITIONS
<TABLE>
<CAPTION>
COMMERCIAL:
<S> <C>
Edgewood Vista, East Grand Forks,
MN (Assisted Living) $ 892,500
Edgewood Vista, Minot, ND $ 6,191,410
(Assisted Living)
</TABLE>
APARTMENTS:
<TABLE>
<CAPTION>
UNITS COMMUNITY NAME
<S> <C> <C>
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 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 1,362,804
---- -----------
935 Total $39,014,222
</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.
PROPERTY DISPOSITIONS. Real estate assets sold by the Operating Partnership
during Fiscal 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
BOOK VALUE &
PROPERTY SOLD SALES PRICE SALES COSTS GAIN
(Fiscal 1999)
Page 33 of 143
30
<PAGE>
<S> <C> <C> <C>
Fairfield Apts.,
Marshall, MN $ 466,000 $ 385,878 $ 80,122
Superpumper,
Emerado, ND $ 297,000 $ 138,854 $ 158,146
Bison Apts.,
Jamestown, ND $1,760,000 $ 418,101 $1,341,899
Park Place Apts.,
Waseca, MN $ 960,000 $ 593,983 $ 366,017
----------
Installment Sale 1,000
----------
$1,947,184
----------
(Fiscal 1998)
Scottsbluff Apts.,
Scottsbluff, NE $ 940,000 $ 613,862 $ 326,138
Superpumper
Bottineau, ND $ 330,000 $ 246,421 $ 83,579
Superpumper
New Town, ND $ 250,000 $ 224,486 $ 25,414
----------
Installment & Misc. Sales $ 30,365
----------
$ 465,496
----------
</TABLE>
DIVIDENDS. The following dividends were paid during Fiscal Years 1997, 1998
and 1999:
<TABLE>
<CAPTION>
DATE 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C>
July 1 $.0975 $.10125 $.11
October 1, $.095 $.1030 $.115
January 15,(16th) $.0975 $.105 $.12
April 1, 1999 $.10 $.107 $.1225
------------------------------------
$.39 $.41625 $.4675
</TABLE>
The Fiscal 1999 dividends increased 12.3% over the dividends paid during Fiscal
Year 1998 and 19.9% over Fiscal 1997.
FUNDS FROM OPERATIONS. The funds derived during Fiscal 1999 by the Trust from
its operations increased by 25% over the prior year and by 65% from the Fiscal
1997 level ($11,778,502 in Fiscal 1999, versus $9,447,425 in 1998 and $7,144,604
in 1997). On a per share basis, Funds From Operations increased to $.6753 per
share from $.6042 in Fiscal 1998 (an increase of 12%) and the $.51 generated in
Fiscal 1997. (IRET uses the definition of "Funds From Operations" recommended by
the National Association of Real Estate Investment Trusts to mean "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.)
Page 34 of 143
31
<PAGE>
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 Fiscal
Item 1999 1998 1997 1996 1995(Restated)
- ---- ---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C>
Net Income (GAAP) $7,604,135 $5,014,909 $3,897,849 $4,611,970 $3,967,830
Adjustments
Gain from Property
Sales (1,947,184) (465,499) (398,424) (994,163) (407,512)
------------ ---------- ---------- ---------- ----------
Operating Income $ 5,656,951 $4,549,410 $3,499,425 $3,617,807 $3,560,318
Plus Depreciation 5,966,874 4,791,907 3,584,591 2,261,724 1,767,294
Plus Amortization $ 154,677 106,108 60,588 97,900 20,659
---------- ----------- ---------- ---------- ---------
Funds from Operations $11,778,502 $ 9,447,425 $7,144,604 $5,977,431 $5,348,271
Dividends Paid $ 8,193,538 $ 6,518,627 $5,508,689 $4,439,034 $3,660,986
----------- --------- --------- --------- ---------
$ 3,584,964 $ 2,928,798 $1,635,915 $1,538,397 $1,687,285
</TABLE>
Management expects that the Funds From Operations (as defined above)
will continue to improve during Fiscal 2000 and will continue to
exceed dividends paid in the coming year.
LIQUIDITY AND CAPITAL RESOURCES. Important investment and Financing
events in Fiscal 1999 were:
- The net proceeds from sale of Shares of Beneficial Interest
under Best Efforts offerings were $18,387,260;
- An additional $6,485,927 of equity capital was contributed to
the Operating Partnership in UPREIT transactions for a total
increase of equity capital of $24,873,187;
- Five property loans were refinanced at a lower interest rate
than the old loans. The new loans totaled $11,400,000. The
payoff of the old loans was $8,737,840, resulting in
refinancing proceeds of $2,662,110. At 4-30-99, the weighted
interest rate on the $175,071,069 of mortgage indebtedness
owed by IRET was 7.12%.
- Nearly $65,000,000 of new real estate investments were
acquired by the Operating Partnership.
IRET's financial condition at the end of Fiscal 1999 continued at the
very strong level of its prior fiscal year.
- IRET's shareholder equity increased to $85,783,294 from
$68,152,626 on April 30, 1998, a gain of $17,630,668 (26%).
Equity capital on April 30, 1997 was $59,997,619. 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
$191,229,475 from $148,276,615 on April 30, 1998. IRET's
liabilities on April 30, 1997, were $126,995,322.
- Total assets of the Operating Partnership increased to
$291,493,311 from $224,718,514 on April 30, 1998. Total assets
on April 30, 1997, were $186,993,943.
- Cash and marketable securities were $7,412,236 compared to the
year earlier figure of $6,389,446 and $6,457,182 on April 30,
1997.
Page 35 of 143
32
<PAGE>
- In addition to its cash and marketable securities, IRET
Properties has unsecured line of credit agreements with First
International Bank & Trust, Bremer Bank and First Western Bank
& Trust, all of Minot, North Dakota, of $11,500,000, none of
which was in use on April 30, 1999.
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 1999 saw continued stable economic
conditions in the northern plains states in which IRET operates.
Occupancy rates for residential properties increased slightly from the
year earlier level. However, the current economic outlook for much of
IRET's trade area is guarded due to a depressed farm economy. Continued
low commodity prices and uncertain weather will impact IRET's operating
results.
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 are
now Year 2000 compliant. IRET does not anticipate that the Year 2000
problem will have any material cost to it.
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 9 Trustees.
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.
Page 36 of 143
33
<PAGE>
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.
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.
Stephen L. Stenehjem has served as an independent Trustee since 1999. He is
the President and Chief Executive Officer of Watford City BancShares, Inc.;
owner of First International Insurance and President and Chairman of First
International Bank, Watford City, North Dakota.
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.
Timothy P. Mihalick has served as a Trustee since 1999. He is a Vice
President and Chief Operating Officer of IRET and its Advisor - Odell-Wentz &
Associates, L.L.C.
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
Page 37 of 143
34
<PAGE>
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 90.54% of the Operating Partnership on
April 30, 1999. 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. 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 has
organized four 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: Forest Park - IRET, Inc., formed as the
sole General Partner of Forest Park Properties, a North Dakota Limited
Partnership, to hold title to three apartment complexes; 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
Page 38 of 143
35
<PAGE>
years). In the event of dissolution of IRET, the Investment Certificates
would be paid in preference to the shares of Beneficial Interest. As of April
30, 1999, the Investment Certificates outstanding totaled $11,770,136. 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
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cost of Property
Acquired $62,455,508 $39,014,223 $59,377,674
Net Increase in
Mortgages Payable $41,011,095 $18,325,028 $44,035,887
Percent of Acquisition
Price Represented by
Net Increase in
Mortgages Payable 66% 47% 74%
</TABLE>
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 4/30/99
Location Security Balance Rate
- -------- -------- ------- ----
<S> <C> <C> <C>
FARGO, ND
Great Plains Software Office Complex $9,185,758 9.5%
GILBERT, AZ
NE1/4-27-2-6 Commercial Land 742,811 8%
OTHER MORTGAGES
Over $100,000 $ 294,968 8-9%
$20,000 to $99,999 387,895 8-9%
Less than $20,000 109,782 7-9%
----------
TOTAL $10,721,214
Unearned Discounts (1,898)
Page 39 of 143
36
<PAGE>
Allowance for Losses (120,314)
Deferred Gain (1,000)
----------
$10,598,002
==========
</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.
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.
Page 40 of 143
37
<PAGE>
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 April 30, 1999, the ratio of total
liabilities ($191,229,475) to total assets ($291,493,311) was 65.6%.
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.
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 $791,318. 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 April 30, 1999:
COMMERCIAL PROPERTIES
Page 41 of 143
38
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1999
STATE PROPERTY SQ. FEET INVESTMENT OCCUPANCY
<S> <C> <C> <C> <C>
Georgia
- Lithia Springs Wedgewood Retirement Center
- Assisted Living 29,408 $ 3,971,878 100.00%
------ ----------- -------
GEORGIA TOTALS 29,408 $ 3,971,878 100.00%
====== =========== =======
Idaho
- Boise America's Best Furniture
- Retail 139,198 $ 5,792.182 28.75%
------- ----------- -------
IDAHO TOTALS 139,198 $ 5,792,182 28.75%
======= =========== =======
Michigan
- Kentwood COMP USA - Retail 16,000 $ 2,113,574 100.00%
------ ----------- -------
MICHIGAN TOTALS 16,000 $ 2,113,574 100.00%
====== =========== =======
Minnesota
- East Grand Edgewood Vista
Forks - Assisted Living 10,778 $ 899,821 100.00%
- Eden Prairie Lindberg Building
- Office/Whse 40,491 $ 1,455,789 100.00%
Viromed
- Office/Laboratory 48,700 $ 4,863,634 N/A
- Moorhead Pioneer Seed Company
- Office/Whse 75,900 $ 653,876 100.00%
------ ----------- -------
MINNESOTA TOTALS 176,319 $ 7,873,122 100.00%
======= =========== =======
Montana
- Billings Creekside Office Park
- Office 37,318 $ 1,684,918 88.41%
Edgewood Vista
- Assisted Living 11,971 $ 980,218 100.00%
- Missoula Edgewood Vista
- Assisted Living 10,314 $ 962,428 100.00%
------ ----------- -------
MONTANA TOTALS 59,603 $ 3,627,565 92.05%
====== =========== =======
Nebraska
- Omaha Ameritrade
- Office 73,774 $ 8,283,977 100.00%
Barnes & Noble
- Retail 27,500 $ 3,699,101 100.00%
------ ----------- -------
Page 42 of 143
39
<PAGE>
NEBRASKA TOTALS 101,274 $11,983,078 100.00%
======= =========== =======
North Dakota
- Bismarck Lester Chiropractic Clinic
- Office 5,400 $ 268,917 100.00%
- Fargo Barnes & Noble
- Retail 30,000 $ 3,292,012 100.00%
Petco
- Retail 18,000 $ 1,278,934 100.00%
Stone Container
- Office/Mfg 151,850 $ 4,998,485 100.00%
Great Plains Campus
Facility 121,600 $ 408,700* N/A
*Additional costs to be
incurred.
- Grand Forks Carmike Theatre 28,300 $ 2,545,737 100.00%
- Minot Walter's (114 South Main St)
- Retail 3,500 $ 111,940 100.00%
1st Ave Building
- Office 15,900 $ 838,837 73.61%
401 South Main
- Office 9,200 $ 609,119 62.62%
Arrowhead Shopping Center
- Retail/Office 80,000 $ 2,831,164 98.8%
Corner C Store
- Retail 4,674 $ 1,196,342 N/A
Edgewood Vista
- Assisted Living 97,821 $ 6,275,931 100.00%
408 1st St. SE 2,000 $ 46,907 100.00%
Minot Plaza
- Retail 10,020 $ 509,079 100.00%
------- ----------- -------
NORTH DAKOTA TOTALS 578,265 $25,212,104 97.86%
======= =========== =======
South Dakota
- Sioux Falls Edgewood Vista
- Assisted Living 11,971 $ 974,739 N/A
Hutchinson Technology
- Office/Mfg 94,176 $ 4,429,026 100.00%
------- ----------- -------
SOUTH DAKOTA TOTALS 106,147 $ 5,403,765 100.00%
======= =========== =======
Other Commercial Prop.
Crookston, MN Superpumper
- Convenience Store 6,000 $ 428,777 100.00%
Grand Forks,ND Superpumper
Page 43 of 143
40
<PAGE>
- Convenience Store 7,000 $ 485,007 100.00%
Langdon, ND Superpumper
- Convenience Store 5,500 $ 239,212 100.00%
Sidney, MT Superpumper
- Convenience Store 4,000 $ 120,600 100.00%
------ ----------- -------
OTHER COMMERCIAL PROPERTIES 22,500 $ 1,273,596 100.00%
====== =========== =======
FISCAL 1999
SQ. FEET INVESTMENT OCCUPANCY
TOTAL COMMERCIAL PROPERTIES 1,228,714 $67,250,863 96.54%
=========================== ========= =========== =======
</TABLE>
==============================================================================
APARTMENT PROPERTIES
<TABLE>
<CAPTION>
APARTMENT FISCAL 1999
STATE COMMUNITIES BY IRET UNITS INVESTMENT OCCUPANCY
<S> <C> <C> <C> <C>
Colorado
- Colorado Springs - Neighborhood by IRET 192 $11,097,183 95.87%
- Fort Collins - MiraMont by IRET 210 $14,285,175 97.80%
- Pine Cone by IRET 195 $13,216,920 94.20%
--- ----------- ------
COLORADO TOTALS 597 $38,599,278 96.03%
=== =========== ======
Idaho
- Boise - Clearwater 60 $ 3,822,199 N/A
-- ----------- -----
IDAHO TOTALS 60 $ 3,822,199 N/A
== =========== =====
Minnesota
- Moorhead - Terrace on the Green 116 $ 2,044,286 96.08%
- Rochester - Woodridge 108 $ 6,534,011 99.69%
- Heritage Manor 182 $ 7,421,977 N/A
- IBM Land - $ 11,871 N/A
- St. Cloud - West Stonehill 313 $11,492,684 99.02%
- Waite Park - Park Meadows 360 $11,141,014 95.04%
--- ----------- ------
MINNESOTA TOTALS 1079 $38,645,843 98.06%
==== =========== =====
Montana
- Billings - Castle Rock 165 $ 5,673,197 N/A
- Country Meadows 67 $ 6,157,497 98.97%
- Rocky Meadows 98 $ 6,672,694 96.54%
--- ----------- ------
MONTANA TOTALS 330 $18,503,389 97.12%
=== =========== ======
Page 44 of 143
41
<PAGE>
North Dakota
- Bismarck/Mandan - Cottonwood Lake 134 $ 9,961,391 83.59%
- Crestview 152 $ 4,799,607 90.40%
- Hill Park 92 $ 3,024,159 91.85%
- Kirkwood Manor 108 $ 3,587,282 93.48%
- North Pointe 49 49 $ 2,403,175 94.41%
- Pleasantview (Man) 18 $ 289,671 95.99%
- Westwood Park 64 $ 2,127,861 N/A
- Dickinson - 41 East 38 $ 434,579 80.04%
- Century 120 $ 2,124,281 89.96%
- Oak Manor 27 $ 350,484 98.23%
- Fargo - Candlelight 44 $ 899,092 98.77%
- Park East 122 $ 4,951,327 97.06%
- Sunchase 36 $ 1,020,291 95.23%
- Grand Forks - Forest Park 270 $ 7,120,900 97.16%
- Jenner Properties 121 $ 2,513,168 90.00%
- Legacy 183 $13,818,179 99.54%
- Southwinds 164 $ 5,712,354 97.18%
- Minot - Chateau 64 $ 2,406,110 92.48%
- Colton Heights 18 $ 926,045 95.48%
- Dakota Arms 18 $ 614,752 97.42%
- Magic City 248 $ 5,428,774 94.17%
- South Pointe 196 $10,295,666 96.95%
- Southview 24 $ 713,128 86.02%
- Virginia 15 $ 231,163 79.56%
- Williston - Century 192 $ 3,909,583 78.95%
- Other Communities - Beulah Condominiums 26 $ 471,449 49.26%
- Bison Properties - Carrington
and Cooperstown 35 $ 569,783 93.97%
- The Meadows - Jamestown -- $ 1,954,986 N/A
- Lonetree Manor - Harvey 12 $ 255,709 86.07%
- Parkway - Beulah 36 $ 122,058 56.08%
- Sweetwater Properties
- Devils Lake & Grafton 114 $ 1,838,691 84.09%
--- ----------- ------
NORTH DAKOTA TOTALS 2,740 $94,845,697 92.67%
===== =========== ======
South Dakota
- Rapid City - Pointe West 90 $ 3,957,341 90.55%
- Sioux Falls - Oakwood Estates 160 $ 5,493,266 93.53%
- Oxbow 120 $ 4,989,273 99.44%
- Prairie Winds 48 $ 1,987,675 96.80%
SOUTH DAKOTA TOTALS 418 $16,427,555 95.07%
=== =========== ======
Washington
- Vancouver - Ivy Club 204 $11,696,668 N/A
- Van Mall Woods 100 $ 6,034,347 N/A
--- ----------- -----
WASHINGTON TOTALS 304 $17,731,015 N/A
=== =========== =====
</TABLE>
Page 45 of 143
42
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1999
UNITS INVESTMENT OCCUPANCY
<S> <C> <C> <C>
TOTAL APARTMENTS 5,528 $228,574,976 94.79%
================ ===== ============ ======
</TABLE>
N/A = PROPERTY HELD LESS THAN 12 MONTHS
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 April 30, 1999, IRET had not entered into
any contracts or options to sell any of the above properties, except the four
Superpumper properties.
OCCUPANCY AND LEASES. Occupancy rates shown above are for the twelve months
ended April 30, 1999. 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
three prior registrations of 6,350,000 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, enabling 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, March 14, 1997, and December 15, 1998 respectively, will be
"restricted" securities under the meaning of Rule 144 of the 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
Page 46 of 143
43
<PAGE>
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 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
Page 47 of 143
44
<PAGE>
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 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
Page 48 of 143
45
<PAGE>
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 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
Page 49 of 143
46
<PAGE>
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 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.
Page 50 of 143
47
<PAGE>
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.
(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.
Page 51 of 143
48
<PAGE>
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.
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
Page 52 of 143
49
<PAGE>
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 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
Page 53 of 143
50
<PAGE>
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.
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
Page 54 of 143
51
<PAGE>
effect of IRET's failure to meet such tests for a taxable year. IRET will not
enter 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 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
Page 55 of 143
52
<PAGE>
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 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
Page 56 of 143
53
<PAGE>
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 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
Page 57 of 143
54
<PAGE>
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."
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.
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.
Page 58 of 143
55
<PAGE>
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- 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
Page 59 of 143
56
<PAGE>
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 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
Page 60 of 143
57
<PAGE>
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.
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
10-31-98 7.500 7.000 489,586 232
1-31-99 7.688 7.000 343,128 249
4-30-99 8.000 7.000 445,900 313
</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, at $7.45 per share from 1-05-98 to
11-20-98, at $7.85 from 1- 15-98 to 4-30-99, and at $8.10 from 6-4-99 to
7-20-99. 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:
Page 61 of 143
58
<PAGE>
<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
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
Quarter Ended 10/31/98
- Shares sold 768,922 $ 5,565,703
- Commissions paid (290,653)
- Shares repurchased (126,336) (912,133)
---------- -----------
17,409,955 $81,608,143
Quarter Ended 1/31/99
- Shares sold 793,599 $ 5,689,642
- Commissions paid (356,872)
- Shares repurchased (68,853) (514,881)
---------- -----------
18,134,701 $86,426,032
Quarter Ended 4/30/99
- Shares sold 994,953 $ 7,620,458
- Commissions paid (480,732)
- Shares repurchased (62,700) (469,938)
---------- -----------
19,066,954 $93,095,819
---------- -----------
---------- -----------
</TABLE>
As of May 31, 1999, IRET had 3,092 shareholder accounts. No shareholder held
5% or more of the 19,066,954 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
Page 62 of 143
59
<PAGE>
October 1st .0950 .10300 .115
January 5th .0975 .10500 .12
April 1st .1000 .10700 .125
---------------------------------------------------------------
Total $.385 $.41625 $.4675
</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/
Date Share Price(1)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
6/30/71 $.0125 $1.00
10/30/71 $.015 $1.00
1/1/72 $.015 $1.00
4/1/72 $.015 $1.10
7/1/72 $.016 $1.10
10/1/72 $.016 $1.10
1/1/73 $.016 $1.10
4/1/73 $.0165 $1.30
7/1/73 $.0165 $1.30
10/1/73 $.0165 $1.30
1/1/74 $.0175 $1.30
4/1/74 $.0175 $1.40
7/1/74 $.0175 $1.40
10/1/74 $.0185 $1.40
1/1/75 $.02 $1.40
4/1/75 $.02 $1.50
7/1/75 $.02 $1.50
10/1/75 $.02 $1.50
1/1/76 $.021 $1.50
4/1/76 $.021 $1.60
7/1/76 $.0225 $1.60
10/1/76 $.0225 $1.70
1/1/77 $.0225 $1.70
4/1/77 $.0225 $1.80
7/1/77 $.025 $1.80
10/1/77 $.025 $1.80
1/1/78 $.025 $1.80
4/1/78 $.025 $1.80
7/1/78 $.0275 $1.90
10/1/78 $.0275 $1.90
1/1/79 $.0275 $2.00
4/1/79 $.0275 $2.10
7/1/79 $.0275 $2.00
10/1/79 $.03 $2.00
1/1/80 $.03 $1.70
4/1/80 $.0325 $1.70
7/1/80 $.035 $1.70
10/1/80 $.035 $1.80
1/1/81 $.035 $1.80
4/1/81 $.035 $1.80
7/1/81 $.035(2) $1.70
10/1/81 $.035(2) $1.70
1/1/82 $.035(2) $1.70
4/1/82 $.035(2) $1.70
7/1/82 $.0375 $1.70
Page 63 of 143
60
<PAGE>
10/1/82 $.04 $1.70
1/1/83 $.0425 $1.90
4/1/83 $.045 $2.07
7/1/83 $.0475 $2.20
10/1/83 $.05 $2.61
1/1/84 $.0525 $2.66
4/1/84 $.055 $2.75
7/1/84 $.05625 $2.75
10/1/84 $.0575 $2.79
1/1/85 $.05875 $2.84
4/1/85 $.06 $2.88
7/1/85 $.06125 $2.97
10/1/85 $.0625 $3.11
1/1/86 $.06375 $3.15
4/1/86 $.065 $3.20
7/1/86 $.066 $3.29
10/1/86 $.067 $3.38
1/1/87 $.068 $3.47
4/1/87 $.069 $3.56
7/1/87 $.0695 $3.56
10/1/87 $.07 $3.65
1/1/88 $.07 $3.65
4/1/88 $.071 $3.74
7/1/88 $.075 $3.74
10/1/88 $.071 $3.83
1/1/89 $.072 $3.92
4/1/89 $.0725 $4.01
7/1/89 $.073 $4.10
10/1/89 $.0735 $4.19
1/1/90 $.074 $4.28
4/1/90 $.0745 $4.28
7/1/90 $.075 $4.37
10/1/90 $.0755 $4.50
1/5/91 $.076 $4.50
4/1/91 $.0765 $4.59
7/1/91 $.077 $4.68
10/1/91 $.0775 $4.77
1/5/92 $.078 $4.86
4/1/92 $.0785 $4.95
7/1/92 $.079 $4.95
10/1/92 $.0795 $5.04
1/5/93 $.08 $5.13
4/1/93 $.0805 $5.22
7/1/93 $.081 $5.31
10/1/93 $.0815 $5.31
1/5/94 $.082 $5.40
4/1/94 $.0825 $5.49
7/1/94 $.088 $5.49
10/1/94 $.084 $5.63
1/1/95 $.085 $5.89
4/1/95 $.08625 $5.89
7/1/95 $.0925 $6.03
10/1/95 $.08875 $6.16
1/5/96 $.09 $6.16
4/1/96 $.09125 $6.30
7/1/96 $.0975 $6.30
Page 64 of 143
61
<PAGE>
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
1/15/99 $.12 $7.25
4/1/99 $.1225 $7.3125
7/1/99 $.124 $7.65
</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, IRET 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
the full commission, it is unlikely that the price of shares purchased under
the Plan will exceed price of newly issued shares offered under a primary
offering. 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. 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
Page 65 of 143
62
<PAGE>
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 and officers owned 9.44% of such shares on May 31,
1999.
The following tabulation shows the ownership of and compensation paid by IRET to
its Trustees, Trustees Emeritus and Officers during its Fiscal Year ended April
30, 1999. IRET has no retirement, bonus or any deferred, direct or indirect
compensation plan and no other compensation will accrue, directly or indirectly,
to any of the following persons, except as noted below:
<TABLE>
<CAPTION>
CASH COMPENSATION
SECURITIES FOR YEAR ENDED
NAME OWNERSHIP (1) APRIL 30, 1999
- -----------------------------------------------------------------------------
<S> <C> <C>
TRUSTEES
C. Morris Anderson 185,754 12,001.00
Ralph A. Christensen 42,659 15,265.25
John F. Decker 23,392 7,933.00
Mike F. Dolan 236,770 13,683.25
J. Norman Ellison, Jr. 19,177 12,101.00
Daniel L. Feist 526,269 12,201.00
Patrick G. Jones 96,403 12,201.00
Jeff L. Miller 162,908 13,583.25
Thomas A. Wentz, Jr. 174,255 (3)
TRUSTEE EMERITUS
John D. Decker 63,312 4,268.00
Page 66 of 143
63
<PAGE>
OFFICERS
Roger R. Odell 290,538 (2)
President
Thomas A. Wentz, Sr. 224,976 (2 and 3)
Vice President
Timothy P. Mihalick 16,014 (2)
Vice President
Diane K. Bryantt 1,688 (2)
Secretary
</TABLE>
The last shareholder meeting at which trustees were elected was held on August
19, 1998, at which meeting shareholders owning 60.66% 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.
(1) Includes all shares of Beneficial Interest and Limited Partnership
Units of IRET Properties exchangeable into Shares of Beneficial
Interest owned directly by the person indicated or indirectly owned by
such person's spouse, minor children, Individual Retirement Account,
corporation, partnership, or in any manner giving power to direct the
voting of such securities.
(2) Mr. Odell and Mr. Wentz, Sr., are members of Odell-Wentz & Associates,
L.L.C., the Advisor to the Trust. Mr. Mihalick is Vice President and
Principal Operating Officer of the Advisor. Diane Bryantt is Secretary
and Controller of IRET and 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 the Trust and, in addition, a
percentage fee for investigating and negotiating the acquisition of new
investments. For the year ending April 30, 1999, Odell-Wentz &
Associates, L.L.C., received compensation and reimbursement of
disbursements under said Agreement of $951,234. 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 the Trust and
receives as compensation a percentage of rents received from such real
estate. For the fiscal year ending April 30, 1999, Investors Management
& Marketing, Inc., received $609,783 as real estate management
commissions. In addition, Inland National Securities, Inc., a
corporation in which Mr. Odell and members of his family are minority
shareholders, acts as a broker-dealer for the dale of Trust securities.
During the fiscal year ending April 30, 1999, the Trust paid Inland
National Securities, Inc., $157,392 as security sales fees.
(3) Mr. Wentz, Jr., is a member of the law firm of Pringle & Herigstad,
P.C., counsel for the Trust. Mr. Wentz, Sr., was a member of the firm
until August 1, 1998. During the fiscal year ending April 30, 1999, the
Trust paid Pringle & Herigstad, P.C., the sum of $33,022 for legal
services rendered and disbursements made on behalf of the Trust.
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
Page 67 of 143
64
<PAGE>
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
----------------------------
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
Advisor's and Trustees'
Compensation $336,142 $458,019 $559,149 $ 745,907 $ 927,063
Other Administrative
Expenses 79,974 162,588 158,627 271,738 320,479
-------- -------- -------- ---------- ----------
TOTAL $416,116 $620,607 $717,776 $1,017,645 $1,247,542
</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 1995-1999, the amount of these acquisition fees were
$49,836, $117,506, $177,834, $141,468 and $177,834, respectively.
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.
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:
Collection of rent, contract and mortgage payments and depositing the same in
IRET bank accounts;
Payment of bills;
Disbursement of dividends;
Page 68 of 143
65
<PAGE>
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 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 1999 by action of the Board
of Trustees at its December, 1998 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.
Page 69 of 143
66
<PAGE>
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, 1999,
Odell-Wentz & Associates, L.L.C., received compensation and reimbursement of
disbursements under said Agreement of $951,234. 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, 1999,
IRET paid Pringle & Herigstad, P.C., the sum of $33,022 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:
Page 70 of 143
67
<PAGE>
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, except as it may pertain to legal fees incurred in the normal
course of business.
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 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. INDEMNIFICATION.
A. 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
Page 71 of 143
68
<PAGE>
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:
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.
Page 72 of 143
69
<PAGE>
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.
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, 1998, and April 30, 1999, the
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended April 30, 1999, 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, is the advisor. The PERSON
responsible for directing or performing the day-to-day business affairs of a
REIT, including a PERSON to which an Advisor subcontracts substantially all
such functions. To the extent the provisions of this Statement of Policy are
germane they shall apply to self-administered REITs.
ADVISORY AGREEMENT: The contract between IRET and the ADVISOR which is
summarized in this Prospectus. See "Advisory Agreement."
Page 73 of 143
70
<PAGE>
AFFILIATE: An AFFILIATE of another PERSON includes any of the following:
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. The declaration of trust, by-laws, certificate, articles of
incorporation or other governing instrument pursuant to which a REIT is
organized.
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.
FUNDS FROM OPERATIONS: Net income (computed in accordance with Generally
Accepted Accounting Principles), excluding gains (or losses) from debt
restructuring and
Page 74 of 143
71
<PAGE>
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.
IRET, INC.: The general partner of the OPERATING PARTNERSHIP.
IRET, PROPERTIES: The OPERATING PARTNERSHIP.
IRS: The United States Internal Revenue Service.
Page 75 of 143
72
<PAGE>
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, 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.
ROLL-UP: A transaction involving the acquisition, merger, conversion, or
consolidation either directly or indirectly of the REIT and the issuance of
securities of a ROLL-UP ENTITY. Such term does not include:
Page 76 of 143
73
<PAGE>
a. a transaction involving securities of the REIT that have been
for at least 12 months listed on a national securities
exchange or traded through the National Association of
Securities Dealers Automated Quotation National Market System;
or
b. a transaction involving the conversion to corporate, trust, or
association form of only the REIT if, as a consequence of the
transaction there will be no significant adverse change in any
of the following:
i. SHAREHOLDERS' voting rights;
ii. the term of existence of the REIT;
iii. SPONSOR or ADVISOR compensation;
iv. the REIT'S investment objectives.
SHARES: The shares of beneficial interest of IRET being offered under this
PROSPECTUS.
SHAREHOLDERS: The registered holders of IRET's SHARES.
SPONSOR: Any PERSON directly or indirectly instrumental in organizing, wholly
or in part, a REIT or any PERSON who will control, manage or participate in
the management of a REIT, and any AFFILIATE of such PERSON. Not included is
any PERSON whose only relationship with the REIT is as that of an independent
property manager of REIT assets, and whose only compensation is as such.
SPONSOR does not include wholly independent third parties such as attorneys,
accountants and underwriters whose only compensation is for professional
services. A PERSON may also be deemed a SPONSOR of the REIT by:
a. taking the initiative, directly or indirectly, in founding or
organizing the business or enterprise of the REIT; either
alone or in conjunction with one or more other PERSONS;
b. receiving a material participation in the REIT in connection
with the founding or organizing of the business of the REIT,
in consideration of services or property, or both services and
property;
c. having a substantial number of relationships and contacts with
the REIT;
d. possessing significant rights to control REIT properties;
e. receiving fees for providing services to the REIT which are
paid on a basis that is not customary in the industry; or
f. providing goods or services to the REIT on a basis which was
not negotiated at arms length with the REIT.
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,
Page 77 of 143
74
<PAGE>
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.
Page 78 of 143
75
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
MINOT, NORTH DAKOTA
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
APRIL 30, 1999, 1998 AND 1997
AND
INDEPENDENT AUDITOR'S REPORT
F-1
Page 79 of 143
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
INDEPENDENT AUDITOR'S REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-4 to F-5
Consolidated Statements of Operations F-6
Consolidated Statements of Shareholders' Equity F-7
Consolidated Statements of Cash Flows F-8 to F-9
Notes to Consolidated Financial Statements F-10 to F-24
ADDITIONAL INFORMATION
Independent Auditor's Report on Additional Information F-26
Marketable Securities F-27
Supplemental Income Statement Information F-27
Real Estate and Accumulated Depreciation F-28 to F-32
Investments in Mortgage Loans on Real Estate F-33 to F-35
Selected Financial Data F-36
Gain From Property Dispositions F-37
Mortgage Loans Payable F-38 to F-39
Significant Property Acquisitions F-40
Schedules other than those listed above are omitted since they are not
required or are not applicable, or the required information is shown in
the financial statement or notes thereon.
Quarterly Results of Consolidated Operations (Unaudited) F-41
</TABLE>
F-2
Page 80 of 143
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Trustees
Investor 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, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years ended April 30, 1999, 1998 and 1997. 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 of 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, 1999 and
1998, and the consolidated results of its operations and cash flows for the
years ended April 30, 1999, 1998 and 1997, in conformity with generally
accepted accounting principles.
BRADY, MARTZ & ASSOCIATES, P.C.
May 26, 1999
F-3
Page 81 of 143
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
REAL ESTATE INVESTMENTS 1999 1998
------------ ------------
<S> <C> <C>
Property owned $295,825,839 $231,416,322
Less accumulated depreciation (26,112,399) (21,516,129)
------------ ------------
$269,713,440 $209,900,193
Mortgage loans receivable 10,721,214 3,438,308
Less discounts and allowances (123,212) (127,132)
------------ ------------
Total real estate investments $280,311,442 $213,211,369
------------ ------------
OTHER ASSETS
Cash $ 3,713,053 2,132,220
Marketable securities -
Held-to-maturity 2,964,434 3,536,538
Marketable securities -
Available-for-sale 734,749 720,688
Accounts receivable 77,438 55,326
Real estate deposits 300,900 2,493,713
Investment in partnership 0 6,705
Prepaid insurance 216,348 219,871
Tax and insurance escrow 1,761,195 1,254,068
Deferred charges 1,413,752 1,088,016
------------ ------------
TOTAL ASSETS $291,493,311 $224,718,514
------------ ------------
------------ ------------
</TABLE>
F-4
Page 82 of 143
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
LIABILITIES
Accounts payable $ 4,388,270 $ 2,847,080
Notes payable 0 1,000,000
Mortgages payable 175,071,069 134,059,974
Investment certificate issued 11,770,136 10,369,561
------------- ------------
Total liabilities $191,229,475 $148,276,615
------------- ------------
MINORITY INTEREST OF UNITHOLDERS IN
OPERATING PARTNERSHIP $ 14,480,542 $ 8,289,273
------------- ------------
SHAREHOLDER'S EQUITY
Shares of beneficial interest
(unlimited authorization, no
par value, 19,066,954 shares
outstanding in 1999 and
16,391,412 shares outstanding
in 1998) 93,095,819 74,708,559
Accumulated distributions in
excess of net income (7,255,958) (6,666,555)
Accumulated other comprehensive
Income (loss) (56,567) 110,622
------------- -------------
$ 85,783,294 $ 68,152,626
------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $291,493,311 $224,718,514
------------- ------------
------------- ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-5
Page 83 of 143
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED APRIL 30, 1999, 1998 AND 1997
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUE
Real estate rentals $ 38,785,287 $ 31,694,586 $ 22,972,368
Interest, discounts and fees 1,141,975 712,959 861,613
------------ ------------ ------------
Total revenue $ 39,927,262 $ 32,407,545 $ 23,833,981
------------ ------------ ------------
EXPENSES
Interest $ 12,101,981 $ 10,479,104 $ 7,638,776
Depreciation 5,966,874 4,791,907 3,584,591
Utilities and maintenance 6,356,483 5,142,459 3,741,877
Taxes and insurance 4,409,762 3,536,147 2,720,495
Property management 3,288,267 2,642,977 1,870,435
expenses
Advisory and trustee 927,063 745,907 559,149
services
Operating expenses 320,479 271,738 158,627
Amortization 154,677 106,108 60,588
------------ ------------ ------------
Total expense $ 33,525,586 $ 27,716,347 $ 20,334,538
------------ ------------ ------------
OPERATING INCOME $ 6,401,676 $ 4,691,198 $ 3,499,443
GAIN ON SALE OF PROPERTIES 1,947,184 465,499 398,424
MINORITY INTEREST PORTION OF
OPERATING PARTNERSHIP
INCOME (744,725) (141,788) (18)
------------ ------------ ------------
NET INCOME $ 7,604,135 $ 5,014,909 $ 3,897,849
------------ ------------ ------------
------------ ------------ ------------
Net income per share (basic and diluted)
Operating income $ 0.33 $ 0.29 $ 0.25
Gain on sale of properties 0.11 0.03 0.03
------------ ------------ ------------
Net income $ 0.44 $ 0.32 $ 0.28
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-6
Page 84 of 137
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED APRIL 30, 1999, 1998 AND 1997
<TABLE>
Accumulated
Shares of Distributions Other Total
Number of Beneficial in excess of Comprehensive Shareholder's
Shares Interest Net Income Income (Loss) Equity
<S> <C> <C> <C> <C> <C>
BALANCE MAY 1, 1996 13,258,908 $ 54,263,917 $ (3,551,997) $ 0 $ 50,711,920
Comprehensive income
Net income 0 0 3,897,849 0 3,897,849
Unrealized gain on
securities available for sale 0 0 0 86,505 86,505
------------
Total comprehensive income $ 3,984,354
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)
------------ ------------ ------------ ------------ ------------
BALANCE APRIL 30, 1997 14,940,513 $ 65,073,951 $ (5,162,837) $ 86,505 $ 59,997,619
Comprehensive income
Net income 0 0 5,014,909 0 5,014,909
Unrealized gain on
securities available for sale 0 0 0 24,117 24,117
------------
Total comprehensive income $ 5,039,026
Dividends distributed 0 0 (6,518,627) 0 (6,518,627)
Dividends reinvested 639,799 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)
------------ ------------ ------------ ------------ ------------
BALANCE APRIL 30, 1998 16,391,412 $ 74,708,559 $ (6,666,555) $ 110,622 $ 68,152,626
Comprehensive income
Net income 0 0 7,604,135 0 7,604,135
Unrealized loss on
securities available for sale 0 0 0 (167,189) (167,189)
-------------
Total comprehensive income $ 7,436,946
Dividends distributed 0 0 (8,193,538) 0 (8,193,538)
Dividends reinvested 762,051 5,389,464 0 0 5,389,464
Sales of shares 2,368,504 16,284,684 0 0 16,284,684
Shares repurchased (455,013) (3,286,888) 0 0 (3,286,888)
------------ ------------ ------------ ------------ ------------
BALANCE APRIL 30, 1999 19,066,954 $ 93,095,819 $ (7,255,958) $ (56,567) $ 85,783,294
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-7
Page 85 of 137
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED APRIL 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,604,135 5,014,909 3,897,849
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6,121,551 4,898,015 3,645,179
Minority interest portion of operating
partnership income 744,725 141,788 18
Accretion of discount on contracts (2,920) (5,706) (7,698)
Gain on sale of properties (1,947,184) (465,499) (398,424)
Interest reinvested in investment certificates 408,097 349,791 288,517
Changes in other assets and liabilities:
(Increase) decrease in real estate deposits 2,192,813 (350,000) (100,000)
(Increase) decrease in other assets (11,884) 377,758 (415,274)
Increase in tax and insurance escrow (507,127) (3,599) (98,942)
Increase in deferred charges (480,413) (558,660) (180,779)
Increase (decrease) in accounts payable
and accrued expenses 1,541,190 (225,991) (69,119)
------------ ------------ ------------
Net cash provided from operating activities $ 15,662,983 9,172,806 6,561,327
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of marketable
securities held-to-maturity $ 572,104 518,921 356,398
Principal payments on mortgage loans receivable 372,155 565,359 1,706,202
Proceeds from sale of property 435,787 1,482,046 0
Payments for acquisitions and
improvement of properties (45,325,061) (22,894,602) (38,046,177)
Purchase of marketable securities available-for-sale (181,250) 0 (596,961)
Investment in mortgage loans receivable (7,655,061) (2,061,179) (2,835,212)
------------ ------------ ------------
Net cash used for investing activities $(51,781,326) (22,389,455) (39,415,750)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of shares, net of issue costs $ 16,284,684 8,421,858 9,025,706
Proceeds from investment certificates issued 4,591,528 3,283,248 4,225,004
Proceeds from mortgages payable 32,326,973 10,612,652 27,094,270
Proceeds from short-term lines of credit 0 12,900,000 8,450,000
Proceeds from sale of minority interest 0 0 0
Repurchase of shares and minority interest units (3,534,813) (3,077,791) (1,795,416)
Dividends paid (2,804,074) (2,228,086) (1,930,439)
Distributions paid to minority interest unitholders (791,458) (179,185) (16)
Redemption of investment certificates (3,599,050) (1,450,783) (2,128,686)
Principal payments on mortgage loans (3,774,614) (2,751,301) (2,634,017)
Payments on short-term lines of credit (1,000,000) (11,900,000) (8,450,000)
------------ ------------ ------------
Net cash provided from financing activities $ 37,699,176 13,630,612 31,857,406
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH $ 1,580,833 413,963 (977,017)
CASH AT BEGINNING OF YEAR 2,132,220 1,718,257 2,715,274
------------ ------------ ------------
CASH AT END OF YEAR $ 3,713,053 2,132,220 1,718,257
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-8
Page 86 of 143
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED APRIL 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
SUPPLEMENTARY SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Dividends reinvested $ 5,389,464 4,290,541 3,579,744
Real estate investment and mortgage
loans receivable acquired through
assumption of mortgage loans payable
and accrual of costs 12,458,735 10,463,677 19,575,635
Mortgage loan receivable transferred to
property owned 0 1,161,878 2,810,000
Proceeds from sale of properties
deposited directly with escrow agent 6,863,691 2,870,387 455,329
Properties acquired through the issuance of minority
interest units in the operating partnership 6,485,927 8,325,652 0
Interest reinvested directly in
investment certificates 408,097 349,791 288,517
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest paid on mortgages $10,998,722 9,613,154 6,773,978
Interest paid on investment certificates 895,214 657,966 508,686
----------- ----------- -----------
$11,893,936 10,271,120 7,282,664
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-9
Page 87 of 143
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999, 1998 AND 1997
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 primarily 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. Rental
revenue from residential properties represents the major source of
revenues for the Trust.
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
substantially 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 a distribution equivalent to
the dividend received by 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. The trust is also the sole shareholder of
Miramont - IRET Inc. and Pine Cone - IRET Inc., both of which are
invested in real estate. All material intercompany transactions and
balances have been eliminated in the consolidated financial statements.
Prior to May 1, 1998, IRET Properties was also a general partner in six
limited partnerships, and due to the immaterial involvement of the
limited partners, had substantial influence over their operations.
These limited partnership were as follows:
F-10
Page 88 of 143
<PAGE>
NOTE 1 - (CONTINUED)
Eastgate Properties, Ltd.
Bison Properties, Ltd.
First Avenue Building, Ltd.
Sweetwater Properties, Ltd.
Hill Park Properties, Ltd.
Colton Heights, Ltd.
The above partnerships were consolidated in prior year financial statements.
Effective May 1, 1998, the related partnerships were acquired by IRET Properties
through the issuance of operating partnership units as part of UPREIT
transactions.
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. Interest, real estate taxes, and other
development costs relating to the acquisition and development of certain
qualifying properties are also capitalized. Expenditures for maintenance and
repairs which do not add to the value or extend useful lives 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 "available- for-sale" consist of equity shares in other
real estate investment trusts and are stated at fair value. Unrealized gains and
losses
F-11
Page 89 of 143
<PAGE>
NOTE 1 - (CONTINUED)
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. The securities
classified as "held-to-maturity" consist of Government National
Mortgage Association securities for which the Trust has 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.
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 was accounting for its investment
in Chateau Properties, Ltd. under the equity method of accounting,
wherein the appropriate portion of the earnings or loss was recognized
annually. 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.
MINORITY INTEREST - Interests in the operating partnerships held by
limited partners are represented by operating partnership units. The
operating partnerships' income is allocated to holders of units based
upon the ratio of their holdings to the total units outstanding during
the period. 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 - Effective May 1, 1998, the Trust adopted
Statement of Financial Accounting Standard No. 128, Earnings Per Share.
Basic net income per share is computed using the weighted average
number of shares outstanding. There is potential for dilution of net
income per share due to the conversion option of operating partnership
units. However, basic and diluted net income per share are the same.
The computation of basic and diluted net income per share can be found
in Note 13.
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.
F-12
Page 90 of 143
<PAGE>
NOTE 1 - (CONTINUED)
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 the Internal Revenue Code Section
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
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:
a. 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.
b. 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.
RECLASSIFICATIONS - Certain previously reported amounts have been
reclassified to conform with the current financial statement
presentation.
ACCOUNTING CHANGES - During the year ended April 30, 1999, the Trust
adopted SFAS No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting and disclosing comprehensive income
and its components. Besides net income, SFAS No. 130 requires the
reporting of other comprehensive income, defined as revenues, expenses,
gains, and losses that under generally
F-13
Page 91 of 143
<PAGE>
NOTE 1 - (CONTINUED)
accepted accounting principles are not included in net income.
Unrealized gains/losses on securities available-for-sale represent the
only items presented as other comprehensive income. Comprehensive
income is presented in the Consolidated Statements of Shareholders'
Equity.
During the year ended April 30, 1999, the Trust adopted SFAS No 131,
"Disclosure About Segments of an Enterprise and Related Information."
This statement establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. Operating segments are defined as components of an
enterprise about which separate financial information is available that
is evaluated by the chief decision makers in deciding how to allocate
resources and in assessing performance. Operating segments of the Trust
would include commercial and residential rental operations. Generally,
segmental information follows the same accounting policies utilized for
consolidated reporting, except, certain expenses, such as depreciation,
are not allocated to segments for management purposes. See Note 12 for
the Trust's disclosure of segment information in compliance with SFAS
No. 131.
THE DIVIDEND REINVESTMENT PLAN is available to all shareholders of the
Trust. Under the Dividend Reinvestment Plan, shareholders may elect for
their dividends to be used by the plan administrator to acquire
additional shares on the NASDAQ Small Cap Market or, if not available,
directly from the Trust for approximately 95% of the market price on
the date of purchase.
NOTE 2 - OFF-BALANCE-SHEET RISK
The Trust had deposits at First Western Bank and Bremer Bank which
exceeded Federal Deposit Insurance Corporation limits by $3,128,203 and
$665,255, respectively, at April 30, 1999
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, 1999 April 30, 1998
-------------- --------------
<S> <C> <C>
Residential $ 228,574,976 $ 180,986,906
Less accumulated depreciation (19,002,784) (15,449,736)
---------------- -----------
$ 209,572,192 $ 165,537,170
---------------- -----------------
Commercial $ 67,250 863 $ 50,429,416
Less accumulated depreciation (7,109,615) (6,066,393)
----------------- ------------------
$ 60,141,248 $ 44,363,023
---------------- -----------------
Remaining cost $ 269,713,440 $ 209,900,193
================ =================
</TABLE>
There were no repossessions during the years ended April 30, 1999 and 1998.
F-14
Page 92 of 143
<PAGE>
NOTE 3 - (CONTINUED)
The above cost of residential real estate owned included construction
in progress of $7,492,062 and $753,680 as of April 30, 1999 and 1998,
respectively. As of April 30, 1999 the trust expects to fund
approximately $5,000,000 during the upcoming year to complete these
construction projects and has a commitment to purchase the Great Plains
Software building for approximately $15,000,000. The Trust also has
outstanding offers to purchase selected properties as part of their
normal operations.
Construction period interest of $211,882, $220,573 and $269,513 has
been capitalized for the years ended April 30, 1999, 1998 and 1997,
respectively.
Residential apartment units are rented to individual tenants with lease
terms up to one year. Gross revenues from residential rentals totaled
$33,010,126, $27,231,714 and $18,935,111 for the years ended April 20,
1999, 1998 and 1997, respectively.
Gross revenues from commercial property rentals totaled $5,775,161,
$4,462,872 and $4,037,258 for the years ended April 30, 1999, 1998 and
1997, 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 $101,032, $28,316 and $16,517 for the years ended April
30, 1999, 1998 and 1997, respectively.
The future minimum lease payments to be received under these operating
leases for the commercial properties as of April 30, 1999, are as
follows:
<TABLE>
<CAPTION>
Year ending April 30,
<S> <C>
2000 $ 8,069,271
2001 8,061,284
2002 7,289,618
2003 6,992,587
2004 6,987,797
Thereafter 67,613,980
----------
$ 105,014,537
=================
</TABLE>
NOTE 4 - MORTGAGE LOANS RECEIVABLE
Mortgage loans receivable consists of nine contracts which are collateralized by
real estate. Contract terms call for monthly payments of principals 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-15
Page 93 of 143
<PAGE>
NOTE 4 - (CONTINUED)
Future principal payments due under the mortgage loans contracts as of
April 30, 1999 are as follows:
<TABLE>
<CAPTION>
Year ending April 30,
<S> <C>
2000 $ 9,323,959
2001 85,035
2002 92,144
2003 202,017
2004 113,307
Later years 904,752
-----------------
$ 10,721,214
=================
</TABLE>
Details concerning mortgage loans receivable from related parties can
be found in Note 10.
There were no significant non-performing mortgage loans receivable as
of April 30, 1999 and 1998. Non-performing loans are recognized as
impaired in conformity with FASB Statement No. 114, Accounting by
Creditors for Impairment of a Loan. The average balance of impaired
loans for the year ended April 30, 1999 and 1998 was not significant.
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 would have
been earned on loans if they had not been non-performing was not
significant in 1999, 1998 or 1997. There was no interest income on
non-performing loans recognized on a cash basis for 1999, 1998 and
1997.
NOTE 5 - MARKETABLE SECURITIES
The amortized cost and estimated market values of marketable securities
held-to-maturity at April 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross
1999 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
ISSUER
GNMA $ 2,964,434 $ 34,773 $ 21,723 $ 2,977,484
================ ================= ================= ==============
1998
ISSUER
GNMA $ 3,536,538 $ 22,757 $ 0 $ 3,559,295
================ ================= ================= ==============
</TABLE>
The amortized cost and estimated market values of marketable securities
available-for-sale at April 30, 1999 and 1998 are as follows:
F-16
Page 94 of 143
<PAGE>
NOTE 5 - (CONTINUED)
<TABLE>
<CAPTION>
1999 Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity shares in
other REIT's $ 791,316 $ 82,524 $ 139,091 $ 734,749
========== ========= ================ ===========
1998
Equity shares in
other REIT's $ 610,666 $ 110,6227 $ 0 $ 720,688
========== =========== ================ ===========
</TABLE>
There were no realized gains or losses on sales of securities for the
years ended April 30, 1999, 1998 and 1997.
Marketable securities held-to-maturity consists of Governmental
National Mortgage Association (GNMA) securities bearing interest from
6.5% to 9.5% with maturity dates ranging from May 15, 2016 to September
15, 2023. The following is a summary of the maturities of securities
held-to-maturity at April 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due after 10 years $ 791,316 $ 734,749 $ 3,536,538 $ 3,559,295
========== ========== ============ ==================
</TABLE>
NOTE 6 - NOTES PAYABLE
As of April 30, 1999, the trust had lines of credit available from
three 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 February 1, 2000. 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 15, 1999. A third unsecured line of credit
from Bremer Bank was issued in the amount of $5,000,000 carrying an
interest rate equal to Bremer Financial Corp.'s reference rate and
maturing September 1, 1999. Interest payments are due monthly on all
three notes. As of April 30, 1999, the Trust had no unpaid balances on
any of their three lines of credit. 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. The Trust did not have a line of credit available from
Bremer Bank as of April 30, 1998.
F-17
Page 95 of 143
<PAGE>
NOTE 7 - MORTGAGES PAYABLE
Mortgages payable as of April 30, 1999 included mortgages on properties
owned totaling $175,064,346 and mortgages of $6,723 on property sold on
contract. The carrying value of the related real estate owned was
$198,076,573 and the carrying value of the related mortgage loans
receivable was $159,965 as of April 30, 1999.
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.
Monthly installments are due on the mortgages with interest rates
ranging from 6.47% to 9.75% and with varying maturity dates through
November 30, 2034.
Of the mortgages payable, the balances of fixed rate mortgages totaled
$138,616,556 and $85,899,604, and the balances of variable rate
mortgages totaled $36,454,513 and $48,160,370 as of April 30, 1999 and
1998, respectively.
The aggregate amount of required future principal payments on mortgages
payable is as follows:
<TABLE>
<CAPTION>
Years ending April 30,
<S> <C>
2000 $ 4,257,321
2001 4,560,488
2002 4,897,046
2003 8,353,234
2004 5,197,797
Later years 147,805,183
----------------
Total payments $ 175,071,069
----------------
----------------
</TABLE>
NOTE 8 - INVESTMENT CERTIFICATES ISSUED
The Trust has placed investment certificates with the public. The
interest rates vary from 6% 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>
<CAPTION>
DUE IN YEARS ENDING APRIL 30
<S> <C>
2000 $ 7,908,954
2001 896,483
2002 902,368
2003 562,451
2004 1,466,151
Thereafter 33,729
-----------------
$ 11,770,136
-----------------
-----------------
</TABLE>
Page 96 of 143
F-18
<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 $1,000, $16,713 and $146,361 for the years ended April 30,
1999, 1998 and 1997, 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, 1999, Odell-Wentz & Associates received total fees under said
agreement of $951,234. The fees for April 30, 1998 were $740,393 and
for April 30, 1997 were $667,367.
For the years ended April 30, 1999, 1998 and 1997, the Trust has
capitalized $195,019, $141,468 and $177,834, respectively, of these
fees, with the remainder of $756,215, $598,925 and $489,533,
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 $609,783, $530,678 and $408,904 for services rendered for
years ended April 30, 1999, 1998 and 1997, 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 $157,392, $171,755 and $291,143 for the years ended April 30,
1999, 1998 and 1997, respectively.
The Trust paid fees and expense reimbursements to the law firm in which
Thomas A. Wentz, Jr. is a partner totaling $33,022, $62,293 and $36,045
for the years ended April 30, 1999, 1998 and 1997, respectively. Thomas
A. Wentz, Jr. is a trustee of the Trust.
Investment certificates issued by the Trust to officers and trustees
totaled $2,138,758, $1,219,457 and $519,528, at April 30, 1999, 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 during the year ended April 30,
1998. Mr. Odell and Mr. Anderson owned all of Magic City Realty. Mr.
Anderson is also a trustee of the Trust.
NOTE 11 - MARKET PRICE RANGE OF SHARES
Since October 17, 1997, Investors Real Estate Trust traded shares on
the NASDAQ Small Capital Market. For the year ended April 30, 1998 a
total of 812,498 shares were traded in 445 separate trades. The high
trade price during the period was 7.41, low was 6.56, and the closing
price on April 30, 1998 was 7.12. For the year ended April 30, 1999, a
total of
Page 97 of 143
F-19
<PAGE>
1,862,187 shares were traded in 1,017 separate trades. The high
trade price during the period was 14.00, low was 6.50, and the
closing price on April 30, 1999 was 7.50.
Prior to October 17, 1997, Investors Real Estate Trust shares were
traded on Over-the- Counter-Market. The price range is as follows:
<TABLE>
<CAPTION>
Bid Ask
---------------------------------------------------
Low High Low High
---------------------------------------------------
<S> <C> <C> <C> <C>
May 1, 1996 to April 30, 1997 $ 6.44 6.62 7.00 7.20
May 1, 1997 to October 17, 1997 6.62 6.85 7.20 7.45
</TABLE>
NOTE 12 - SEGMENT DATA
The following information summarizes the Trust's segment reporting for
Residential and Commercial properties along with reconciliations to the
consolidated financial statements:
YEAR ENDING APRIL 30, 1999
<TABLE>
<CAPTION>
Commercial Residential Total
-----------------------------------------
<S> <C> <C> <C>
Segment revenue
Rental revenue $ 5,775,161 $33,010,126 $38,785,287
Segment expenses
Mortgage interest 2,417,316 8,782,600 11,199,916
Utilities and maintenance 113,374 6,243,109 6,356,483
Taxes and insurance 91,003 4,318,759 4,409,762
Property management 60,612 3,227,655 3,288,267
----------- ----------- -----------
$ 2,682,206 22,572,123 25,254,428
----------- ----------- -----------
Segment gross profit $ 3,092,856 10,438,003 13,530,859
----------- -----------
----------- -----------
Reconciliation to consolidated operations:
Interest discounts and fee revenue 1,141,975
Other interest expense (902,065)
Depreciation (5,966,874)
Advisory and trust fees (927,063)
Operating expenses (320,479)
Amortization (154,677)
-------------
Consolidated operating income $ 6,401,676
-------------
-------------
</TABLE>
Page 98 of 143
F-20
<PAGE>
NOTE 12 - (CONTINUED)
APRIL 30, 1999
<TABLE>
<CAPTION>
Commercial Residential Total
--------------------------------------------------
<S> <C> <C> <C>
Segment Assets
Property owned $ 67,250,863 $ 228,574,976 $ 295,825,839
Less accumulated depreciation (7,109,615) (19,002,784) (26,112,399)
------------- ------------- -------------
Total consolidated property owned $ 60,141,248 $ 209,572,192 $ 269,713,440
============= ============= =============
YEAR ENDING APRIL 30, 1998
<CAPTION>
Commercial Residential Total
------------- ------------- -------------
<S> <C> <C> <C>
Segment revenue
Rental revenue $ 5,775,161 $ 25,919,425 $ 31,694,586
------------- ------------- -------------
Segment expenses
Mortgage interest $ 2,048,990 $ 7,665,969 $ 9,714,959
Utilities and maintenance 113,374 5,029,085 5,142,459
Taxes and insurance 229,696 3,306,451 3,536,147
Property management 50,700 2,592,277 2,642,977
------------- ------------- -------------
$ 2,442,760 $ 18,593,782 $ 21,036,542
------------- ------------- -------------
Segment gross profit $ 3,332,401 $ 7,325,643 $ 10,658,044
============= =============
Reconciliation to consolidated operations:
Interest discounts and fee revenue $ 712,959
Other interest expense (764,145)
Depreciation (4,791,907)
Advisory and trust fees (745,907)
Operating expenses (271,738)
Amortization (106,108)
-------------
Consolidate operating income $ 4,691,198
=============
APRIL 30, 1998
<CAPTION>
Commercial Residential Total
------------- ------------ -------------
<S> <C> <C> <C>
Segment Assets
Property owned $ 50,429,416 180,986,906 231,416,322
Less accumulated depreciation (6,066,393) (15,449,736) (21,516,129)
------------- ------------- -------------
Total consolidated property owned $ 44,363,023 $ 165,537,170 $ 209,900,193
============= ============= =============
</TABLE>
Page 99 of 143
F-21
<PAGE>
NOTE 12 - (CONTINUED)
YEAR ENDING APRIL 30,1997
<TABLE>
<CAPTION>
Commercial Residential Total
----------- ----------- -----------
<S> <C> <C> <C>
Segment revenue
Rental revenue $ 4,063,284 $18,909,084 $22,972,368
----------- ----------- -----------
Segment expenses
Mortgage interest 1,670,216 5,406,681 7,076,897
Utilities and maintenance 254,248 3,487,629 3,741,877
Taxes and insurance 225,810 2,494,685 2,720,495
Property management 45,249 1,825,186 1,870,435
----------- ----------- -----------
$ 2,195,523 $13,214,181 $15,409,704
----------- ----------- -----------
Segment gross profit $ 1,867,761 $ 5,694,903 $ 7,562,664
=========== ===========
Reconciliation to consolidated operations:
Interest discounts and fee revenue 861,613
Other interest expense (561,879)
Depreciation (3,584,591)
Advisory and trust fees (559,149)
Operating expenses (158,627)
Amortization (60,588)
-----------
Consolidated operating income $ 3,499,443
===========
APRIL 30, 1997
<CAPTION>
Commercial Residential Total
------------- ------------- -------------
<S> <C> <C> <C>
Segment Assets
Property owned $ 42,241,096 $ 149,643,413 $ 191,884,509
Less accumulated depreciation (5,102,464) (11,845,692) (16,948,156)
------------- ------------- -------------
Total consolidated property owned $ 37,138,632 $ 137,797,721 $ 174,936,353
============= ============= =============
</TABLE>
Page 100 of 143
F-22
<PAGE>
NOTE 13 - EARNINGS PER SHARE
Basic earnings per share are computed by dividing the earnings
available to stockholders by the weighted average number of shares
outstanding during the period. Diluted earnings per share reflect per
share amounts that would have resulted if potential dilutive
securities had been converted to shares. Operating partnership units
can be exchanged for shares on a one for one basis. The following
tables reconciles amounts reported in the consolidated financial
statements for the years ended April 30, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
NUMERATOR
Net income applicable to shares $ 7,604,135 $ 5,014,909 $ 3,897,849
=========== =========== ===========
Numerator for basic earnings per share 7,604,135 5,014,909 3,897,849
Minority interest portion of operating
partnership income 744,725 141,788 18
----------- ----------- -----------
Numerator for diluted earnings per share $ 8,348,860 $ 5,156,697 $ 3,897,867
----------- ----------- -----------
DENOMINATOR
Denominator for basic earnings per share
Weighted average shares 17,441,976 15,636,214 14,044,467
Effect of dilutive securities
Convertible operating partnership units 1,662,489 417,445 13
----------- ----------- -----------
Denominator for diluted earnings per share 19,104,465 16,053,659 14,044,480
----------- ----------- -----------
Basic earnings per share $ 0.44 $ 0.32 $ 0.28
=========== =========== ===========
Diluted earnings per share $ 0.44 $ 0.32 $ 0.28
=========== =========== ===========
</TABLE>
Page 101 of 143
F-23
<PAGE>
NOTE 14 - 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.
Notes payable - The carrying amount approximates fair value because
of the short maturity of those notes.
Mortgages payable - For variable rate loans that re-price
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 which interest will be
paid.
The estimated fair values of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Mortgage loan receivable $ 10,721,214 $ 10,721,214 $ 3,438,308 $ 3,438,308
Cash 3,713,053 3,713,053 2,132,220 2,132,220
Marketable securities
held-to-maturity 2,964,434 2,977,484 3,536,538 3,559,295
Marketable securities
available-for-sale 734,749 734,749 720,688 720,688
FINANCIAL LIABILITIES
Notes payable $ 0 $ 0 $ 1,000,000 $ 1,000,000
Mortgages payable 175,071,069 175,561,542 135,059,974 129,354,699
Investment certificates issued 11,770,136 11,619,938 10,369,561 10,202,603
Accrued interest payable 1,428,222 1,428,222 1,220,177 1,220,177
</TABLE>
Page 102 of 143
F-24
<PAGE>
ADDITIONAL INFORMATION
Page 103 of 143
F-25
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON ADDITIONAL INFORMATION
Board of Trustees
Investor 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,
1999, 1998 and 1997, 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 24 through 38 related to the 1999, 1998
and 1997 consolidated financial statements is presented for purposes of
additional analysis and is not a required part of the basic consolidated
financial statements. Such information, except for information on page 39
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, 1999, 1998 and 1997, taken as a
whole.
We also have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheets of Investors Real Estate
Trust and Subsidiaries as of April 30, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the two years ended April 30, 1996 and 1995, none of which is
presented herein, and we expressed unqualified opinions on those consolidated
financial statements. In our opinion, the information on page 34 relating to
the 1996 and 1995 consolidated financial statements is fairly stated in all
material respects in relation to the basic consolidated financial statements
from which is has been derived.
BRADY, MARTZ & ASSOCIATES, P.C.
May 26, 1999
Page 104 of 143
F-26
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
APRIL 30, 1999 AND 1998
Schedule I
MARKETABLE SECURITIES
<TABLE>
<CAPTION>
April 30, 1999 April 30, 1998
-------------------------------------------------------------------------------------
Principal Principal
Amount Market Amount Market
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA Pools $ 2,964,434 $ 2,977,484 $ 3,536,538 $ 3,559,295
=====================================================================================
Cost Market Cost Market
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity shares in
other REIT's $ 791,316 $ 734,749 $ 610,066 $ 720,688
=====================================================================================
</TABLE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
FOR THE YEARS ENDED APRIL 30, 1999, 1998 AND 1997
Schedule X
SUPPLEMENTAL INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Charged to Costs and Expenses
-------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------
<S> <C> <C> <C>
ITEM
Maintenance and repairs $ 3,470,202 $ 2,832,772 $ 1,812,496
Taxes, other than payroll and
income taxes
Property taxes 4,025,560 3,162,656 2,515,631
Royalties * * *
Advertising costs * * *
</TABLE>
*Less than 1 percent of total revenues
Page 105 of 143
F-27
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
APRIL 30, 1999
Schedule XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
COST CAPITALIZATION
INITIAL COST TO TRUST SUBSEQUENT TO ACQUISITION
--------------------------- ---------------------------
BUILDING & CARRYING
APARTMENTS ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COSTS
- ---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1112 32ND AVE SW $ 354,903 $ 50,000 $ 543,147 $ 21,605 $ 0
177 10TH AVE E-DICKINSON, ND 221,575 40,000 318,109 76,470 0
405 GRANT AVE-HARVEY, ND 0 13,584 157,211 54,914 0
4301-4313 9TH AVE SW-FARGO, ND 415,847 52,870 908,727 58,694 0
BEULAH CONDOS ND 0 6,360 336,589 128,500 0
BISON PROPERTIES 0 38,581 333,394 197,808 0
CANDLELIGHT APTS-FARGO, ND 473,605 80,040 757,977 61,075 0
CASTLE ROCK-BILLINGS, MT 3,946,539 736,000 4,375,683 561,514 0
CENTURY APTS-DICKINSON, ND 1,481,672 100,000 1,564,598 459,683 0
CENTURY APTS-WILLISTON, ND 2,508,160 200,000 3,166,750 542,834 0
CHATEAU APTS-MINOT, ND 1,625,659 122,000 2,242,090 42,020 0
CLEARWATER APTS-BOISE, ID 2,652,705 585,000 3,189,463 47,736 0
COUNTRY MEADOWS-BILLINGS, MT 2,609,222 245,624 3,638,442 9,855 120,821
COUNTRY MEADOWS PHASE II 0 245,623 1,897,131 0 0
COLTON HEIGHTS-MINOT, ND 313,877 80,000 734,286 111,759 0
COTTONWOOD LAKE-BISMARCK, ND 2,792,497 1,055,862 8,027,224 763,951 114,353
CRESTVIEW APTS-BISMARCK, ND 3,360,790 235,000 4,290,031 274,576 0
EASTGATE PROPERTIES 0 23,917 1,490,181 530,188 0
FOREST PARK ESTATES-G FORKS 3,849,741 810,000 5,579,164 731,736 0
HERITAGE MANOR-ROCHESTER, MN 5,014,255 403,256 6,967,952 50,769 0
HILL PARK PROPERTIES 1,365,554 224,750 2,562,296 237,113 0
IBM LAND-ROCHESTER, MN 0 11,871 0 0 0
IVY CLUB-VANCOUVER, WA 7,079,422 1,274,000 9,973,755 448,913 0
JENNER PROPERTIES 1,298,052 220,000 2,077,500 215,668 0
KIRKWOOD APTS-BISMARCK, ND 2,205,000 449,290 2,729,745 408,247 0
LEGACY APTS-GRAND FORKS, ND 6,404,073 1,361,855 8,886,258 360,264 224,180
LEGACY UNDERGROUND-G FORKS 0 725,277 2,260,345 0 0
MAGIC CITY APTS, MINOT, ND 2,546,829 532,000 4,738,000 158,774 0
MANDAN APTS, MANDAN, ND 818 20,000 236,500 32,921 0
MEADOWS-JAMESTOWN-INS. CLAIM 0 0 1,334,976 0 0
MEADOWS-JMSTWN-NEW CONST 0 167,325 452,685 0 0
MIRAMONT APTS-FT. COLLINS, CO 11,481,696 1,470,000 12,765,460 49,715 0
NEIGHBORHOOD APTS-CO SPRINGS 7,291,069 1,033,592 9,811,600 251,991 0
NORTH POINTE, BISMARCK, ND 1,678,718 143,500 1,996,726 139,262 123,687
OAK MANOR APTS-DICKINSON, ND 0 25,000 225,000 100,484 0
OAKWOOD ESTATES-SIOUX FALLS, SD 2,090,133 342,800 2,783,950 418,581 0
OXBOW-SIOUX FALLS, SD 3,311,700 404,072 4,494,441 90,760 0
PARK EAST APTS-FARGO, ND 3,466,359 83,000 4,082,665 785,662 0
PARK MEADOWS-WAITE PARK, MN 7,753,474 1,143,450 9,099,297 898,267 0
PARKWAY APTS-BEULAH, ND 0 7,000 40,738 74,320 0
PINE CONE APTS-FT. COLLINS, CO 10,472,304 904,545 12,167,093 145,282 0
POINTE WEST APTS-MINOT, ND 2,372,322 240,000 3,537,775 179,566 0
PRAIRIE WINDS APTS-S FALLS, SD 1,307,534 144,097 1,816,011 27,567 0
ROCKY MEADOWS 96-BILLINGS, MT 2,788,609 655,985 5,484,735 428,596 103,378
ROSEWOOD/OAKWOOD-S. FALLS 1,243,428 200,000 1,738,245 9,690 0
SOUTH POINTE-MINOT, ND 6,418,627 550,000 9,151,175 191,819 402,672
SOUTHVIEW APTS-MINOT, ND 0 185,000 468,585 59,543 0
SOUTHWIND APTS-GRAND FORKS, ND 4,048,673 400,000 5,033,683 278,671 0
SWEETWATER PROPERTIES 162,315 90,767 1,208,847 539,077 0
VAN MALL WOODS, VANCOUVER, WA 4,031,894 600,000 5,421,312 13,036 0
VIRGINIA APTS-MINOT, ND 0 37,600 163,036 30,527 0
WEST STONEHILL-ST CLOUD, MN 7,799,243 939,000 10,167,355 386,329 0
WESTWOOD PARK-BISMARCK, ND 1,254,294 161,114 1,717,304 249,443 0
WOODRIDGE APTS-ROCHESTER, MN 4,177,096 370,000 6,028,096 135,915 0
------------ ------------ ------------ ------------ ------------
$135,670,283 $ 20,240,607 $195,173,588 $ 12,071,690 $ 1,089,091
------------ ------------ ------------ ------------ ------------
</TABLE>
F-28
Page 106 of 143
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
APRIL 30, 1999
Schedule XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
LIFE ON WHICH
LATEST INCOME
BUILDINGS & ACCUMULATED DATE STATEMENT IS
APARTMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED COMPUTED
- ---------- ------------ ------------ ------------ ------------ ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
1112 32ND AVE SW $ 50,000 $ 564,752 $ 614,752 $ 49,252 1996 24-40 YEARS
177 10TH AVE E DICKINSON 40,278 394,301 434,579 82,205 1989 24-40 YEARS
405 GRANT AVE HARVEY 14,674 211,036 225,710 37,196 1991 24-40 YEARS
4301-4313 9TH AVE SW FARGO 68,868 951,423 1,020,291 252,252 1988 5-40 YEARS
BEULAH CONDOS ND 78,339 393,110 471,449 323,402 1983 15-40 YEARS
BISON PROPERTIES 38,581 531,202 569,783 43,202 1972 25-40 YEARS
CANDLELIGHT APTS FARGO 80,040 819,052 899,092 128,130 1993 24-40 YEARS
CASTLE ROCK BILLINGS 736,000 4,937,197 5,673,197 46,470 1999 40 YEARS
CENTURY APTS DICKINSON 126,738 1,997,543 2,124,281 607,904 1986 35-40 YEARS
CENTURY APTS WILLISTON 274,971 3,634,613 3,909,584 1,263,633 1986 35-40 YEARS
CHATEAU APTS MINOT 122,000 2,284,110 2,406,110 60,360 1997 12-40 YEARS
CLEARWATER BOISE 585,000 3,237,199 3,822,199 50,368 1999 40 YEARS
COUNTRY MEADOWS BILLINGS 245,624 3,769,118 4,014,742 135,691 1996 40 YEARS
COUNTRY MEADOWS PHASE II 245,623 1,897,131 2,142,754 0 1999 N/A-CONST IN PROGRESS
COLTON HEIGHTS PROPERTIES 80,095 845,950 926,045 364,965 1984 33-40 YEARS
COTTONWOOD LAKE BISMARCK 1,055,862 8,905,528 9,961,390 172,173 1997 40 YEARS
CRESTVIEW APTS BISMARCK 235,000 4,564,607 4,799,607 610,281 1994 24-40 YEARS
EASTGATE PROPERTIES 28,639 2,015,647 2,044,286 1,376,073 1970 33-40 YEARS
FOREST PARK ESTS G FORKS 811,954 6,308,946 7,120,900 966,124 1993 24-40 YEARS
HERITAGE MANOR ROCHESTER 403,256 7,018,721 7,421,977 124,570 1999 40 YEARS
HILL PARK PROPERTIES 245,653 2,778,506 3,024,159 1,207,552 1985 33-40 YEARS
IBM LAND ROCHESTER 11,871 0 11,871 0 1999 N/A LAN
IVY CLUB VANCOUVER 1,274,000 10,422,668 11,696,668 54,423 1999 40 YEARS
JENNER PROPERTIES 1,357,209 1,155,959 2,513,168 98,005 1996 40 YEARS
KIRKWOOD APTS BISMARCK 449,290 3,137,992 3,587,282 130,417 1997 12-40 YEARS
LEGACY APTS GRAND FORKS 1,361,855 9,470,702 10,832,557 507,423 1996 24-40 YEARS
LEGACY UNDERGROUND G FORKS 725,277 2,260,345 2,985,622 0 1997 N/A-CONST IN PROGRESS
MAGIC CITY APTS MINOT 532,000 4,896,774 5,428,774 186,966 1997 12-40 YEARS
MANDAN APTS MANDAN 20,000 269,671 289,671 58,649 1989 24-40 YEARS
MEADOWS JMSTWN-INS CLAIM 0 1,334,976 1,334,976 0 1999 N/A-CONST IN PROGRESS
MEADOWS JMSTWN-NEW CONST 167,325 452,685 620,010 0 1999 N/A-CONST IN PROGRESS
MIRAMONT APTS FT COLLINS 1,470,000 12,815,175 14,285,175 801,792 1996 40 YEARS
NEIGHBORHOOD APTS CO SPRING 1,033,592 10,063,591 11,097,183 640,191 1996 40 YEARS
NORTH POINTE 49 BISMARCK 143,500 2,259,675 2,403,175 195,742 1995 24-40 YEARS
OAK MANOR APTS DICKINSON 29,012 321,472 350,484 63,163 1989 24-40 YEARS
OAKWOOD ESTS SIOUX FALLS 342,800 3,202,531 3,545,331 496,449 1993 24-40 YEARS
OXBOW SIOUX FALLS 404,073 4,585,200 4,989,273 512,778 1994 24-40 YEARS
PARK EAST APTS FARGO 83,000 4,868,327 4,951,327 142,292 1997 12-40 YEARS
PARK MEADOWS WAITE PARK 1,143,450 9,997,564 11,141,014 645,662 1997 40 YEARS
PARKWAY APTS BEULAH 11,816 110,242 122,058 17,555 1988 5-40 YEARS
PINE CONE APTS FT COLLINS 904,545 12,312,375 13,216,920 1,226,183 1994 40 YEARS
POINTE WEST APTS MINOT 240,000 3,717,341 3,957,341 498,446 1994 24-40 YEARS
PRAIRIE WINDS APTS S FALLS 144,097 1,843,577 1,987,674 296,874 1993 24-40 YEARS
ROCKY MEADOWS 96 BILLINGS 655,985 6,016,710 6,672,695 377,901 1996 40 YEARS
ROSEWOOD/OAKWOOD S FALLS 200,000 1,747,935 1,947,935 108,851 1996 40 YEARS
SOUTH POINTE MINOT 275,000 10,020,666 10,295,666 721,002 1995 24-40 YEARS
SOUTHVIEW APTS MINOT 185,000 528,128 713,128 60,658 1994 24-40 YEARS
SOUTHWIND APTS G FORKS 409,892 5,302,462 5,712,354 456,706 1996 24-40 YEARS
SWEETWATER PROPERTIES 94,270 1,744,421 1,838,691 1,012,925 1972 5-40 YEARS
VAN MALL WOODS VANCOUVER 600,000 5,434,347 6,034,347 73,671 1999 40 YEARS
VIRGINIA APTS MINOT 37,600 193,563 231,163 68,508 1987 27 1/2-40 YEARS
WEST STONEHILL ST. CLOUD 939,000 10,553,684 11,492,684 923,809 1995 40 YEARS
WESTWOOD PARK BISMARCK 161,114 1,966,747 2,127,861 35,926 1999 40 YEARS
WOODRIDGE APTS ROCHESTER 370,000 6,164,011 6,534,011 388,014 1996 40 YEARS
------------ ------------ ------------ ------------
$ 21,343,768 $207,231,208 $ 228,574,976 $ 19,002,784
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
F-29
Page 107 of 143
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
APRIL 30, 1999
Schedule XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
COST CAPITALIZATION
INITIAL COST TO TRUST SUBSEQUENT TO ACQUISITION
--------------------------- -------------------------------
BUILDING & CARRYING
OFFICE BUILDINGS ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COSTS
- ---------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1ST AVENUE BUILDING $ 0 $ 30,000 $ 219,496 $ 589,341 $ 0
401 SOUTH MAIN MINOT 0 70,600 334,308 204,211 0
408 1ST ST SE MINOT 0 10,000 34,836 2,072 0
CREEKSIDE OFFICE BLDG BILLINGS 1,210,759 311,310 1,088,149 285,459 0
LESTER CHIROPRACTIC CLINIC 0 25,000 243,916 0 0
WALTERS 214 S MAIN MINOT 0 27,055 76,076 8,809 0
------------ ------------ ------------ ------------ ------------
$ 1,210,759 $ 473,965 $ 1,966,781 $ 1,089,892 $ 0
------------ ------------ ------------ ------------ ------------
COMMERCIAL
- ----------
AMERICA'S BEST FURNITURE $ 3,453,722 $ 765,000 $ 4,874,576 $ 152,606 $ 0
AMERITRADE OMAHA, NE 6,150,000 326,500 7,873,500 83,977 0
ARROWHEAD SHOPPING CENTER 0 100,359 1,063,925 1,666,880 0
BARNES & NOBLE FARGO 2,032,279 540,000 2,752,012 0 0
BARNES & NOBLE OMAHA 2,201,636 600,000 3,099,101 0 0
CARMIKE THEATRE GRAND FORKS 1,945,022 183,515 2,225,585 69,569 67,068
COMPUTER CITY KENTWOOD, MI 1,456,644 225,000 1,888,574 0 0
CORNER C-STORE MINOT 869,944 195,000 999,432 5,910 0
EDGEWOOD VISTA BILLINGS 705,332 130,000 837,405 12,813 0
EDGEWOOD VISTA E. GRAND FORKS 605,008 25,000 874,821 0 0
EDGEWOOD VISTA MINOT 4,248,353 260,000 1,835,335 4,180,596 0
EDGEWOOD VISTA MISSOULA 609,135 108,900 853,528 0 0
EDGEWOOD VISTA SIOUX FALLS 707,751 130,000 838,366 6,373 0
GREAT PLAINS SOFTWARE FARGO 0 125,501 283,199 0 0
HUTCHINSON TECH S FALLS 3,177,752 244,800 4,029,426 154,800 0
LINDBERG BLDG EDEN PRAIRIE 1,178,965 198,000 1,154,404 103,385 0
MINOT PLAZA MINOT 0 50,000 452,898 6,181 0
PETCO FARGO 1,058,364 324,148 873,080 54,461 27,245
PIONEER SEED MOORHEAD 278,123 56,925 548,075 48,876 0
STONE CONTAINER FARGO 2,884,434 440,251 4,319,924 149,155 89,156
SUPERPUMPER CROOKSTON 0 13,125 214,153 201,499 0
SUPERPUMPER GRAND FORKS 0 80,000 405,007 0 0
SUPERPUMPER LANGDON 0 59,674 151,500 28,038 0
SUPERPUMPER SIDNEY 0 12,000 108,600 0 0
VIROMED EDEN PRAIRIE 3,120,000 666,000 4,160,310 37,324 0
WEDGEWOOD SWEETWATER, GA 1,500,840 334,346 2,475,655 1,161,878 0
------------ ------------ ------------ ------------ ------------
$ 38,183,304 $ 6,194,044 $ 49,188,391 $ 8,124,321 $ 183,469
------------ ------------ ------------ ------------ ------------
TOTALS $175,064,346 $ 26,908,616 $246,358,760 $ 21,285,903 $ 1,272,560
============ ============ ============ ============ ============
</TABLE>
Page 108 of 143
F-30
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
APRIL 30, 1999
Schedule XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
LIFE ON WHICH
LATEST INCOME
BUILDINGS & ACCUMULATED DATE STATEMENT IS
OFFICE BUILDINGS LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED COMPUTED
- ---------------- ------------ ------------ ------------ ------------ -------- --------------
IS COMPUTED
-----------
<S> <C> <C> <C> <C> <C> <C>
1ST AVENUE BUILDING $ 67,710 $ 771,127 $ 838,837 $ 340,708 1981 33-40 YEARS
401 SOUTH MAIN MINOT 70,722 538,397 609,119 138,716 1987 24-40 YEARS
408 1ST STREET SE MINOT 10,016 36,892 46,908 23,918 1986 19-40 YEARS
CREEKSIDE OFFICE BLDG 311,310 1,373,608 1,684,918 233,355 1992 40 YEARS
LESTER CHIROPRACTIC 25,000 243,917 268,917 64,206 1988 40 YEARS
WALTERS 214 S MAIN 27,829 84,110 111,939 76,556 1978 20-40 YEARS
------------ ------------ ------------ ------------
$ 512,587 $ 3,048,051 $ 3,560,638 $ 877,459
------------ ------------ ------------ ------------
COMMERCIAL
- ----------
AMERICA'S BEST $ 765,000 $ 5,027,182 $ 5,792,182 $ 672,263 1994 40 YEARS
AMERITRADE OMAHA 326,500 7,957,477 8,283,977 8,289 1999 40 YEARS
ARRWHD SHOPPING CTR 100,411 2,730,753 2,831,164 2,147,694 1973 15 1/2- 40 YEARS
BARNES & NOBLE FARGO 540,000 2,752,012 3,292,012 309,601 1994 40 YEARS
BARNES & NOBLE OMAHA 600,000 3,099,101 3,699,101 271,171 1995 40 YEARS
CARMICKE THEATRE 183,516 2,362,221 2,545,737 265,687 1994 40 YEARS
COMPUTER CITY 225,000 1,888,574 2,113,574 118,036 1996 40 YEARS
CORNER C-STORE 195,000 1,001,342 1,196,342 21,904 1999 40 YEARS
EDGEWD V BILLINGS 130,000 850,218 980,218 18,504 1999 40 YEARS
EDGEWD V E G FORKS 630,608 269,213 899,821 39,175 1997 40 YEARS
EDGEWD V MINOT 260,000 6,015,931 6,275,931 227,907 1997 40 YEARS
EDGEWD V MISSOULA 108,900 853,528 962,428 53,346 1997 40 YEARS
EDGEWD V SIOUX FALLS 130,000 844,739 974,739 18,437 1999 40 YEARS
GT PLAINS SOFTWARE 125,501 283,199 408,700 0 1998 N/A-CONST IN PROGRESS
HUTCHINSON TECH 244,800 4,184,226 4,429,026 672,223 1993 40 YEARS
LINDBERG BLDG EDEN 198,000 1,257,789 1,455,789 226,447 1992 40 YEARS
MINOT PLAZA 50,000 459,079 509,079 74,132 1993 40 YEARS
PETCO FARGO 324,148 954,786 1,278,934 106,679 1994 40 YEARS
PIONEER SEED MRHD 56,925 596,951 653,876 107,107 1992 40 YEARS
STONE CONTAINER 440,251 4,558,235 4,998,486 396,231 1995 40 YEARS
SPRPUMPER CROOKSTON 13,125 415,652 428,777 90,248 1988 40 YEARS
SPRPUMPER G FORKS 80,000 405,007 485,007 86,064 1991 40 YEARS
SPRPUMPER LANGDON 59,674 179,538 239,212 62,067 1987 31 1/2- 40 YEARS
SPRPUMPER SIDNEY 12,000 108,600 120,600 17,648 1993 40 YEARS
VIROMED EDEN PRAIRIE 666,000 4,197,634 4,863,634 21,787 1999 40 YEARS
WEDGEWD SWEETWATER 334,346 3,637,533 3,971,879 199,509 1996 40 YEARS
------------ ------------ ------------ ------------
$ 6,799,705 $ 56,890,520 $ 63,690,225 $ 6,232,156
------------ ------------ ------------ ------------
TOTALS $ 28,656,060 $267,169,779 $295,825,839 $ 26,112,399
============ ============ ============ ============
</TABLE>
Page 109 of 143
F-31
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
APRIL 30, 1999
Schedule XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
Reconciliations of total real estate carrying value for the three years ending
April 30, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 231,416,322 $ 191,884,509 $ 131,447,734
Additions during year
- acquisitions 62,455,508 39,014,23 59,377,674
- improvements and other 4,780,853 1,463,878 635,791
---------------- ---------------- -----------------
$ 298,652,683 $ 232,687,071 $ 192,289,286
Deductions during year
- cost of real estate sold (2,826,844) (1,270,749) (404,777)
--------------- ----------------- ----------------
Balance at close of year $ 295,825,839 $ 231,416,322 $ 191,884,509
================ ================ =================
</TABLE>
Reconciliations of accumulated depreciation for the three years ended April 30,
1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 21,516,129 $ 16,948,156 $ 13,551,571
Additions during year
- provisions for depreciation 5,966,874 4,791,907 3,584,591
Deduction during year
- accumulated depreciation
on real estate sold (1,370,604) (223,934) (188,006)
---------------- ---------------- -----------------
Balance at close of year $ 26,112,399 $ 21,516,129 $ 16,948,156
================ ================ =================
</TABLE>
Page 110 of 143
F-32
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
APRIL 30, 1999
Schedule XII
INVESTMENTS IN MORTGAGE LOANS ON REAL ESTATE
<TABLE>
<CAPTION>
Interest Final Maturity Payment Prior
Rate Date Terms Liens
--------------------------------------------------------------
<S> <C> <C> <C> <C>
RESIDENTIAL
Higley Heights, Phoenix, AZ 8% 3-31-04 Quarterly -
Great Plains Software, Fargo, ND 9.50% 1-1-99 Balloon Pmt -
Rolland Hausman 9% 2-1-16 Monthly -
Other - over $100,000 8-10.25% 11-1-02 to
6-1-07 Monthly -
- less than $100,000 7-8.75% 12-1-00 to
1-1-04 Monthly -
Total
</TABLE>
Less - Unearned discounts
- Deferred gain from property dispositions
- Allowance for loan losses
Page 111 of 143
F-33
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Face Carrying of Loans Subject to
Amounts of Amounts of Delinquent Principal
Mortgages Mortgages or Interest
---------------------------------------------------------------------
<C> <C> <C>
$ 809,786 $ 742,811 $ 742,811
15,000,000 9,185,758 0
315,659 294,968 0
517,325 387,895 0
113,970 109,782 0
---------------- ---------------- -----------------------
$ 16,756,740 $ 10,721,214 $ 742,811
================ =======================
(1,898)
(1,000)
(120,314)
----------------
$ 10,598,002
================
</TABLE>
Page 112 of 143
F-34
<PAGE>
Schedule XII (Continued)
<TABLE>
<CAPTION>
1999 1998
----------------- ------------------
<S> <C> <C>
MORTGAGE LOANS RECEIVABLE,
BEGINNING OF YEAR $ 3,438,308 $ 3,108,933
New participations in and advances
on mortgage loans 7,655,061 2,061,179
---------------- -----------------
$ 11,093,369 $ 5,170,112
Collections (372,155) (1,727,237)
Write-off through allowance 0 (4,567)
---------------- -----------------
MORTGAGE LOANS RECEIVABLE,
END OF YEAR $ 10,721,214 $ 3,438,308
================ =================
</TABLE>
Page 113 of 143
F-35
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Income Statement Data
Revenue $ 39,927,262 $ 32,407,545 $ 23,833,981 $ 18,659,665 $13,801,123
Operating income 6,401,676 4,691,198 3,499,443 3,617,807 3,560,318
Gain on repossession/
Sale of properties 1,947,184 465,499 398,424 994,163 407,512
Minority interest of portion of
Operating partnership income (744,725) (141,788) (18) 0 0
Net income 7,604,135 5,014,909 3,897,849 4,611,970 3,967,830
Consolidated Balance Sheet Data
Total real estate investments $280,311,442 $213,211,369 $177,891,168 $122,377,909 $84,005,635
Total assets 291,493,311 224,718,514 186,993,943 131,355,638 94,616,744
Shareholders' equity 85,783,294 68,152,626 59,997,619 50,711,920 37,835,654
Consolidated Per Share Data
(basic and diluted)
Operating income $ .33 $ .29 $ .25 $ .30 $ .34
Gain on sale of properties .11 .03 .03 .08 .04
Dividends .47 .42 .39 .37 .34
Tax status of dividend
Capital gain 6.3% 2.9% 21.0% 1.6% 11.0%
Ordinary income 76.0% 97.1% 79.0% 98.4% 89.0%
Return of capital 17.7% 0.0% 0.0% 0.0% 0.0%
</TABLE>
Page 114 of 143
F-36
<PAGE>
INVESTORS REAL ESTATE TRUST
AND AFFILIATED PARTNERSHIPS
APRIL 30, 1999, 1998 AND 1997
GAIN FROM PROPERTY DISPOSITIONS
<TABLE>
<CAPTION>
Total
Original Unrealized Realized Realized Realized
Gain 4/30/99 4/30/99 4/30/98 4/30/97
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Brooklyn Addition* $ 25,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
1302 South 19 1/2* 87,699 0 0 15,713 6,732
406 17th St. - Mandan* 233,522 0 0 0 138,629
Fairfeild Apts - Marshall 80,121 0 80,121 0 0
Superpumper - Emerado 158,146 0 158,146 0 0
Park Place Apts - Waseca 366,018 0 366,018 0 0
Bison Props. - Jamestown 1,341,899 0 1,341,899 0 0
Scottsbluff Estates 326,138 0 0 326,138 0
Superpumper - Bottineau 83,579 0 0 83,579 0
Superpumper - New Town 25,417 0 0 25,417 0
Other gains 13,652 0 0 13,652 0
Hutchinson, MN 252,063 0 0 0 252,063
---------- ---------- ---------- ----------
$ 1,000 $1,947,184 $ 465,499 $ 398,424
========== ========== ========== ==========
</TABLE>
* The gain from the sale of these properties is being realized based on the
installment method. The amount of deferred gain realized was $1,000, $16,713 and
$146,361 for the years ended April 30, 1999, 1998 and 1997, respectively.
Page 115 of 143
F-37
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
APRIL 30, 1999
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% 07/20/10 Monthly $ 425,000 $ 354,903 0
177 10th Ave E Dickinson 8.50% 11/01/18 Monthly 250,963 221,575 0
4301 9th Ave Sunchase I 9.04% 09/01/02 Monthly 364,765 116,019 0
4313 9th Ave Sunchase II 9.04% 02/01/14 Monthly 370,000 299,828 0
America's Best (FKA Smiths Home) 9.75% 03/29/03 Monthly 3,750,000 3,453,722 0
Ameritrade-Omaha, NE 7.25% 05/01/19 Monthly 6,150,000 6,150,000 0
Barnes & Noble Stores 7.98% 12/01/10 Monthly 4,900,000 4,233,915 0
Candlelight Apts 8.50% 12/01/99 Monthly 578,000 473,605 0
Carmike-Grand Forks 7.75% 02/01/07 Monthly 2,000,000 1,945,022 0
Castle Rock-Billings 6.66% 03/01/09 Monthly 3,950,000 3,946,539 0
Century Apts-Dickinson 8.00625% 03/01/06 Monthly 1,595,000 1,481,672 0
Century Apts-Williston 8.00625% 03/01/06 Monthly 2,700,000 2,508,160 0
Chateau-Minot 8.00625% 03/01/06 Monthly 1,674,350 1,625,659 0
Clearwater-Boise 6.47000% 01/01/09 Monthly 2,660,000 2,652,705 0
Cottonwood Phase I 6.59000% 01/01/09 Monthly 2,800,000 2,792,497 0
Country Meadows-Billings 7.51000% 01/01/08 Monthly 2,660,000 2,609,222 0
Creekside-Billings 8.35% 06/01/13 Monthly 1,250,000 1,210,759 0
Crestview Apts-Bismarck 8.69% 07/01/08 Monthly 3,400,000 3,360,790 0
COMPUSA 7.75% 02/01/01 Monthly 1,565,361 1,456,644 0
Corner Express-Minot 7.52% 10/01/13 Monthly 885,000 869,944 0
Edgewod Vista-Billings 7.13% 10/01/13 Monthly 720,000 705,332 0
Edgewood Vista-E Grand Forks 8.35% 07/05/12 Monthly 650,000 605,008 0
Edgewood Vista-Minot 8.27% 09/20/12 Monthly 4,510,000 4,248,353 0
Edgewood Vista-Missoula 9.75% 04/15/12 Monthly 647,500 609,135 0
Edgewood Vista-Sioux Falls 7.52% 07/01/13 Monthly 720,000 707,751 0
Forest Park Estates IDS 7.625% 05/01/03 Monthly 4,500,000 3,849,741 0
Heritage Manor-Rochester 6.800% 10/01/18 Monthly 5,075,000 5,014,255 0
Hutchinson Technology 8.75% 08/01/08 Monthly 3,250,000 3,177,752 0
Ivy Club Apts-Vancouver 7.36% 12/01/01 Monthly 7,092,443 7,079,422 0
Jenner Properties, ND 9.50% 11/01/99 Monthly 1,391,585 1,298,052 0
Kirkwood Manor-Bismarck 9.05% Various Bond - Semi 2,330,000 2,205,000 0
Page 116 of 143
F-38
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
APRIL 30, 1999
MORTGAGE LOANS PAYABLE (continued)
Final Periodic Carrying Delinquent
Interest Maturity Payment Face Amount Amount of Principal or
Rate Date Terms of Mortgage Mortgage Interest
----------- ---------- ------- ------------ ------------ ------------
Legacy Apts-Phase I-G Forks 7.070% 01/01/04 Monthly 4,000,000 3,861,356 0
Legacy Apts Phase II-G Forks 7.070% 05/29/28 Monthly 2,575,000 2,542,717 0
Lindberg Bldg-Eden Prairie 7.625% 12/01/08 Monthly 1,200,000 1,178,965 0
Magic City Apts-Minot 8.50% 10/10/10 Monthly 2,794,192 2,546,829 0
Mandan Apts-Mandan 8.75% 08/01/99 Monthly 134,767 818 0
Miramont Apts 8.25% 08/01/36 Monthly 11,582,472 11,481,696 0
Neighborhood Apts-Colorado Springs 7.98% 12/20/06 Monthly 7,525,000 7,291,069 0
North Pointe-Bismarck 7.12% 08/01/15 Monthly 1,700,000 1,678,718 0
Oakwood Estate-Sioux Falls 8.00625% 03/01/06 Monthly 2,250,000 2,090,133 0
Oxbow-Sioux Falls 8.00625% 03/01/06 Monthly 3,565,000 3,311,700 0
Park East-Fargo 6.82000% 04/06/08 Monthly 3,500,000 3,466,359 0
Park Meadows-Phase I 8.50% 01/10/07 Monthly 2,600,000 2,469,369 0
Park Meadows-Phase II 7.8990% 01/10/07 Monthly 2,214,851 2,134,105 0
Park Meadows-Phase III 3.84% 30 yr bond Monthly 3,235,000 3,150,000 0
PETCO Warehouse 8.50% 12/01/10 Monthly 1,100,000 1,058,364 0
Pinecone-Ft. Collins 7.125% 12/01/34 Monthly 10,685,215 10,472,304 0
Pioneer Building-Fargo 8.375% 12/01/06 Monthly 425,000 278,123 0
Pointe West Apts-Rapid City 8.97% 01/01/04 Monthly 2,400,000 2,372,322 0
Prairie Winds Apts-Sioux Falls 7.67% 05/01/18 Monthly 1,470,000 1,307,534 0
Rocky Meadows-Billings 7.75% 08/01/16 Monthly 3,000,000 2,788,609 0
Rosewood Ct-Sioux Falls 7.975% 09/01/96 Monthly 1,323,000 1,243,428 0
South Pointe-Minot 7.12% 06/05/16 Monthly 6,500,000 6,418,627 0
Southwinds Apts-Grand Forks 7.12% 04/28/10 Monthly 4,100,000 4,048,673 0
Stone Container-Fargo 8.25% 12/01/10 Monthly 3,300,000 2,884,434 0
Van Mall Woods-Vancouver 6.86% 12/01/03 Monthly 4,070,426 4,031,894 0
Viromed-Eden Prairie 6.98% 04/01/14 Monthly 3,120,000 3,120,000 0
Wedgewood Retirement 7.975% 04/23/17 Monthly 1,566,720 1,500,840 0
West Stonehill-St. Cloud 7.93% 02/01/98 Monthly 8,232,569 7,799,243 0
Westwood Park-Bismarck 9.25% 03/01/11 Monthly 1,295,866 1,254,294 0
Woodridge-Rochester 7.85% 12/01/16 Monthly 4,410,000 4,177,096 0
Colton Heights 8.75% 06/01/07 Monthly 730,000 313,877 0
Grafton 24 Plex 9.75% 03/20/03 Monthly 270,000 68,670 0
Grafton 18 Plex 9.75% 03/20/03 Monthly 198,000 93,645 0
Hill Park Properties 8.00625% 03/01/06 Monthly 1,470,000 1,365,554 0
1516 N Bismarck 8.00% 08/01/99 Monthly 246,000 6,723 0
------------ ------------ ------------
TOTALS $183,604,045 $175,071,069 $ 0
============ ============ ============
</TABLE>
Page 117 of 143
F-39
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
APRIL 30, 1999
SIGNIFICANT PROPERTY ACQUISITIONS
Acquisitions for cash, assumptions of mortgages, and
issuance of units in the operating partnership
<TABLE>
<CAPTION>
<S> <C>
Commercial:
Edgewood Vista - Sioux Falls, SD 965,000
Edgewood Vista - Billings, MT 965,000
Corner Express - Minot, ND 1,190,432
Viromed - Eden Prairie, MN 4,826,310
Ameritrade - Omaha, NE 8,283,977
-----------
$16,230,719
-----------
Apartments:
Heritage Manor - Rochester, MN 7,371,208
Westwood Park Apartments - Bismarck, ND 2,025,455
Country Meadows Phase II - Billings, MT** 1,321,962
Clearwater Apts. - Boise, ID 3,786,463
Legacy - Phase III - Grand Forks, ND** 2,260,345
Van Mall Woods - Vancouver, WA 6,021,312
Meadows - Jamestown, ND** 1,502,301
Castle Rock Apartments - Billings, MT 5,614,223
Cottonwood Lake - Bismarck, ND*** 4,645,444
Ivy Club Apartments - Vancouver, WA 11,676,076
-----------
$46,224,789
-----------
$62,455,508
===========
</TABLE>
**Property not placed in service at April 30, 1999. Additional costs are still
to be incurred.
***Represents costs to complete a project started in year ending April 30,
1998.
Page 118 of 143
F-40
<PAGE>
INVESTORS REAL ESTATE TRUST
AND SUBSIDIARIES
QUARTERLY RESULTS OF CONSOLIDATED OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------
7-31-98 10-31-98 1-31-99 4-30-99
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 9,102,179 $ 9,836,370 $ 10,236,797 $ 10,751,916
Income before gains on sale
of properties 1,327,851 1,760,067 1,732,928 1,580,830
Net gain on sale of properties 366,017 1,341,899 80,122 158,146
Minority interest of unitholders
in operating partnership (133,863) (287,579) (158,820) (164,463)
Net income 1,560,005 2,814,387 1,654,228 1,575,515
Per share (basic and diluted)
Income before gains on sale
of properties .07 .09 .09 .08
Net gain on sale of properties .02 .08 .00 .01
QUARTER ENDED
------------------------------------------------------------
7-31-97 10-31-97 1-31-98 4-30-98
------------ ------------ ------------ ------------
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 36,096 83,579 326138 16,713
Minority interest of unitholders
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 (basic and diluted)
Income before gains on sale
of properties .06 .08 .08 .07
Net gain on sale of properties .00 .01 .02 .00
QUARTER ENDED
------------------------------------------------------------
7-31-96 10-31-96 1-31-97 4-30-97
------------ ------------ ------------ ------------
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 0 138,629 7,733
Minority interest of unitholders
in operating partnership 0 0 0 (18)
Net income 1,230,169 1,048,154 1,165,746 453,780
Per share (basic and diluted)
Income before gains on sale
of properties .07 .08 .07 .03
Net gain on sale of properties .02 .00 .01 .00
</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.
Page 119 of 143
F-41
<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 180,000
Accounting: 1,000
Registration Fees: 10,000
--------
$41,000 to 206,000
</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.
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
None.
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
Page 120 of 143
ii-1
<PAGE>
<TABLE>
<CAPTION>
Financial Statement Filed Included in Prospectus
------------------------- ----------------------
<S> <C>
Financial Statement by Investors Real See F-1 through F-41
Estate Trust for the period ended
April 30, 1999, prepared by Brady
Martz & Associates, P.C.,
Certified Public Accountants
</TABLE>
b) Exhibit Index
<TABLE>
<CAPTION>
Description of Exhibit Location in Form S-11 Filing
---------------------- ----------------------------
<S> <C>
(1) Security Sales Agreement Ex-1(i), Pages 135 - 136
(2) Plan of acquisition, Not Applicable
reorganization, arrangement,
liquidation or succession
(3) (i) Second Restated Filed as Ex-3(i) to Form S-11
Declaration of Trust filed by the Registrant on May
Dated February 10, 1999 11, 1999 (File No. O-14851) and
incorporated by reference herein
(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
Page 121 of 143
ii-2
<PAGE>
(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.
(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 (i) Ex-99, Page 143
(ii) 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;
Page 122 of 143
ii-3
<PAGE>
(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:
(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
Page 123 of 143
ii-4
<PAGE>
Date
August 6, 1999
BY /s/ Roger R. Odell
----------------------------------
Roger R. Odell
Its President
Page 124 of 143
ii-5
<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>
/s/ Ralph A. Christensen Trustee and Chairman August 6, 1999
- -------------------------
Ralph A. Christensen
/s/ Mike F. Dolan Trustee and Vice Chairman August 6, 1999
- -------------------------
Mike F. Dolan
/s/ Jeffrey L. Miller Trustee and Vice-Chairman August 6, 1999
- -------------------------
Jeffrey L. Miller
/s/ John F. Decker Trustee August 6, 1999
- -------------------------
John F. Decker
/s/ Patrick G. Jones Trustee August 6, 1999
- -------------------------
Patrick G. Jones
/s/ J. Norman Ellison Trustee August 6, 1999
- -------------------------
J. Norman Ellison
/s/ Daniel L. Feist Trustee August 6, 1999
- -------------------------
Daniel L. Feist
/s/ Thomas A. Wentz, Jr. Trustee August 6, 1999
- -------------------------
Thomas A. Wentz, Jr.
/s/ C. Morris Anderson Trustee August 6, 1999
- -------------------------
C. Morris Anderson
/s/ Roger R. Odell President and Trustee August 6, 1999
- -------------------------
Roger R. Odell
/s/ Thomas A. Wentz Vice-president August 6, 1999
- -------------------------
Thomas A. Wentz
/s/ Timothy P. Mihalick Vice-president August 6, 1999
- -------------------------
Timothy P. Mihalick
/s/ Diane K. Bryantt Secretary August 6, 1999
- -------------------------
Diane K. Bryantt
</TABLE>
Page 125 of 143
ii-6
<PAGE>
<TABLE>
<CAPTION>
INDEX OF EXHIBITS
DESCRIPTION OF EXHIBIT LOCATION IN FORM S-11 FILING
<S> <C> <C>
(1) Security Sales Agreements Ex-1(i), Pages 135 - 136
(2) Plan of acquisition, Not Applicable
reorganization, arrangement,
liquidation or succession
(3) (i) Second Restated Declaration Filed as Ex-3(i) to Form S-11 of
Trust dated February 10, 1999 filed by the Registrant on May
11, 1999 (File No. 0-14581)
and incorporated by reference
herein
(ii) IRET Properties Partnership IRET Properties 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
(15) Letter re unaudited Not Applicable
interim financial information
Page 126 of 143
ii-7
<PAGE>
(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 (i) Ex-99, Page 143
(iii) 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>
THE BALANCE OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.
Page 127 of 143
ii-8
<PAGE>
EX-1(i) FORM S-11 INVESTORS REAL ESTATE
TRUST
SECURITY SALES AGREEMENT
THIS AGREEMENT, made this _____ day of August, 1999, 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 $8.25 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
ii-9 Page 128 of 143
<PAGE>
characteristics set forth in said Prospectus and IRET is
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
------------------------------
ii-10 Page 129 of 143
<PAGE>
August 6, 1999
EXHIBIT EX-5
OPINION RE LEGALITY
Securities and Exchange Commission
Washington, D.C. 20549
INVESTORS REAL ESTATE TRUST - FORM S-11 DATED AUGUST 6, 1999
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. Second Restated Declaration of Trust of Investors Real Estate
Trust dated February 10, 1999.
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
pending or threatened to which Investors Real Estate Trust is a
party or which the property thereof is the subject; and it and we
ii-21 Page 130 of 143
<PAGE>
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
ii-22 Page 131 of 143
<PAGE>
EXHIBIT EX-8
OPINION RE TAX MATTERS
August 6, 1999
Securities and Exchange Commission
Washington, D.C. 20549
INVESTORS REAL ESTATE TRUST - FORM S-11 DATED AUGUST 6, 1999 - 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.
kak
ii-23 Page 132 of 143
<PAGE>
EX-23(i)
August 6, 1999
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 August 6, 1999, 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
ii-24 Page 133 of 143
<PAGE>
EX-23(ii)
BRADY
MARTZ
- ----------------------------
CERTIFIED PUBLIC ACCOUNTANTS
August 5, 1999
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, 1999, as well as our
Independent Auditor's Report dated May 26, 1999. We also consent to the
reference to us under the heading "Experts" in the Prospectus, which is part of
the Registration Statement.
BRADY MARTZ & ASSOCIATES, P.C.
/s/ BRADY, MARTZ
- ----------------------------------
BRADY, MARTZ & ASSOCIATES, P.C.
24 West Central P.O. Box 848
Minot, ND 58702-0848
(701) 852-0196
Fax (701) 839-5452
ii-25 Page 134 of 143
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
FINANCIAL STATEMENT ATTACHED HERETO AS EXHIBIT F FOR THE TWELVE MONTH PERIOD
ENDED APRIL 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
EXHIBIT F.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> APR-30-1999
<CASH> 3,713,053
<SECURITIES> 3,699,183
<RECEIVABLES> 14,490,847
<ALLOWANCES> (123,212)
<INVENTORY> 0
<CURRENT-ASSETS> 21,779,871
<PP&E> 295,825,839
<DEPRECIATION> (26,112,399)
<TOTAL-ASSETS> 291,493,311
<CURRENT-LIABILITIES> 18,868,812
<BONDS> 186,841,205
0
0
<COMMON> 93,095,819
<OTHER-SE> (7,312,525)
<TOTAL-LIABILITY-AND-EQUITY> 291,493,311
<SALES> 0
<TOTAL-REVENUES> 39,927,262
<CGS> 0
<TOTAL-COSTS> 21,423,605
<OTHER-EXPENSES> 744,725
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,101,981
<INCOME-PRETAX> 5,656,951
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,656,951
<DISCONTINUED> 1,947,184
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,604,135
<EPS-BASIC> .44
<EPS-DILUTED> 0
</TABLE>
<PAGE>
Investors Real Estate Trust EX-99
SUBSCRIPTION AGREEMENT
AMOUNT $__________________ NUMBER OF COMMON SHARES ________________
OWNERSHIP
Name(s)________________________________________________________________________
REGISTRATION: 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 FOR CORRESPONDENCE AND CASH DISTRIBUTIONS
Name(s)________________________________________________________________________
Address________________________________________________________________________
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 DEALER ENDORSEMENT:
Firm _________________________________________________________________
Registered Representative ____________________________ Phone _________
ii-17 Page 136 of 143
<PAGE>
Address ______________________________________________________________
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 (Advisor) Date ___________
ii-18 Page 137 of 143
