Filed Pursuant to Rule 424(b)(3)
CORNERSTONE REALTY INCOME TRUST, INC.
COMMON SHARES (THE "SHARES")
$11 PER SHARE
MINIMUM INVESTMENT--$5,000
Cornerstone Realty Income Trust, Inc. (the "Company") is a Virginia
corporation which has elected to be treated as a real estate investment trust
("REIT") for federal income tax purposes. The Company invests primarily in
existing residential apartment communities in the mid-Atlantic and southeastern
regions of the United States. The Company anticipates that it will hold its
Properties for an indefinite length of time. Cornerstone Advisors, Inc. (the
"Advisor") and Cornerstone Management Group, Inc., will provide the day-to-day
management for the Company and its Properties, respectively. The sole
shareholder of the Advisor and Cornerstone Management Group, Inc. is the
Chairman of the Board and President of the Company. Accordingly, the Advisor and
Cornerstone Management Group, Inc. may be deemed to be Affiliates of the
Company.
THESE ARE SPECULATIVE SECURITIES. The offering involves certain risks and
investment considerations (see "Risk Factors"), including:
o There will be no public trading market for the Shares for an indefinite
period of time, if ever. Thus, investors may be unable to resell their
shares, or may be able to resell them only at a substantial discount from
the purchase price.
o There can be no assurance that the Company will generate sufficient cash
from operations to continue to make distributions at the current rate.
o The Company has not identified any Properties to be acquired with the
proceeds of this offering, and prospective investors may receive no
information regarding new Property acquisitions before buying Shares.
o The Advisor and persons related to it will receive substantial compensation
from the Company. The payment of such compensation may tend to reduce
investment return by reducing funds available for investment and reducing
cash flow from operations. The compensation is generally payable before
distributions to Shareholders and regardless of Company profitability. See
"Compensation."
o The Advisor and persons related to it will be subject to various conflicts
of interest with the Company, including non-arms-length transactions and
competition for management services. See "Conflicts of Interest." As a
result, such persons could have an incentive to favor their interests to
those of the Company.
o The Company's success depends upon maximizing revenues (primarily rent
payments) while minimizing Company and Property operating expenses, which
in turn will be affected by Property selection, Property and Company
management, Property location and local and general economic conditions.
The Company may not operate profitably.
o Company borrowing is permitted within limits set forth in the Company's
Bylaws, and would entail additional risks such as reduction of cash
available for distribution and risk of default. See "Risk Factors --
Possible Borrowing; Debt Financing May Reduce Cash Flow and Increase Risk
of Default."
o Certain private partnerships sponsored by persons related to the Advisor
have experienced adverse business developments. See "The Advisor-Prior
Performance of Programs Sponsored by Affiliates of the Advisor."
All of the Shares offered hereby are being sold by the Company. It is
expected that approximately 86.5% of the gross offering proceeds will be
available for investment in Properties and 0.5% allocated to a working capital
reserve. The balance of proceeds will pay expenses and fees of the Advisor and
others. See "Estimated Use of Proceeds."
The Shares are being offered through the Managing Dealer on a "best-efforts"
basis, meaning that neither the Managing Dealer nor any other broker-dealers are
obligated to purchase any Shares. There is no required minimum number of Shares
which must be sold in the offering made by this Prospectus. The Company may, as
an administrative convenience, place prospective investors' subscription funds
in a separate escrow account (with or without a separate "escrow agent").
Disbursement of such funds to the Company is not subject to any conditions
pertaining to the receipt of a minimum amount of offering proceeds. The offering
will terminate when all Shares have been sold or one year from the date hereof,
unless sooner terminated by the Company or extended for up to an additional
year. See "Summary of the Offering -- The Offering" and "Plan of Distribution."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
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Price to Selling Proceeds to
the Public Commissions (1)(2) the Company(3)
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Per Share....................... $ 11 $ 0.825 $ 10.175
Total Offering(4)............... $50,000,000 $ 3,750,000 $46,250,000
</TABLE>
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(1) The Shares are being offered exclusively through David Lerner Associates,
Inc. (the "Managing Dealer") pursuant to an Agency Agreement. Under the
Agency Agreement, the Managing Dealer may engage other broker-dealers. The
Company has agreed to indemnify the Managing Dealer and such other
broker-dealers against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Payable to David Lerner Associates, Inc., the Managing Dealer, which will
also receive a Marketing Expense Allowance equal to 2.5% of the purchase
price of the Shares.
(3) Before deducting other expenses payable by the Company in connection with
the offering. Such expenses are estimated at $1,750,000 for the entire
offering (including the Marketing Expense Allowance referred to in (2)). See
"Estimated Use of Proceeds."
(4) The Company estimates that approximately 300,000 Shares ($3,300,000 at $11
per Share) will be purchased through Shareholders' reinvestment of
distributions during the offering period. See "Plan of Distribution."
DAVID LERNER ASSOCIATES, INC.
-----------------------------
477 JERICHO TURNPIKE, SYOSSET, NEW YORK 11791
---------------------------------------------
The date of this Prospectus is July 19, 1996
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Each purchaser of Shares must certify that he has either (i) a minimum annual
gross income of $50,000 and a net worth of at least $50,000 (exclusive of equity
in home, home furnishings and personal automobiles), or (ii) a net worth
(similarly defined) of at least $100,000, or $150,000 in the case of North
Carolina purchasers. No purchaser of Shares may purchase Shares costing more
than 10% of the purchaser's net worth (similarly defined).
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH SUCH
OFFER MAY NOT LEGALLY BE MADE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES
NOT IMPLY THAT INFORMATION HEREIN HAS NOT CHANGED AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
AVAILABLE INFORMATION
Cornerstone Realty Income Trust, Inc., with principal executive offices at
306 East Main Street, Richmond, Virginia 23219, telephone number (804) 643-1761,
is subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company can be inspected and copies at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of such material can also be
obtained from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement on Form S-3 (the "Registration
Statement") under the Securities Act of 1933, as amended, with respect to the
securities offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement, certain items of which are contained in
schedules and exhibits to the Registration Statement as permitted by the rules
and regulations of the Commission. For further information, reference is hereby
made to the Registration Statement, including the schedules and exhibits filed
as a part thereof, which may be obtained from the Commission upon payment of the
fees prescribed by the Commission.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31, 1995
(including Amendments No. 1 and No. 2 thereto on Form 10-K/A), the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, the
Company's Current Reports on Form 8-K dated January 31, 1996 (including
Amendment No. 1 thereto on Form 8-K/A) and April 30, 1996, and the Company's
Registration Statement on Form 8-A under the Exchange Act, each of which has
been filed by the Company with the Commission, are incorporated herein by
reference.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of the Common Stock shall be deemed
to be incorporated by reference in this Prospectus and to be a part hereof from
the date of filing of such documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference in this
Prospectus shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
Information relating to the Company contained in this Prospectus summarizes,
is based upon, or refers to, information and financial statements contained in
one or more of the documents incorporated by reference herein; accordingly, such
information contained herein is qualified in its entirety by reference to such
documents and should be read in conjunction therewith.
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THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF
ANY DOCUMENT INCORPORATED BY REFERENCE IN THIS PROSPECTUS, OTHER THAN EXHIBITS
TO ANY SUCH DOCUMENT UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE INTO THE INFORMATION IN THIS PROSPECTUS. REQUESTS FOR SUCH DOCUMENTS
SHOULD BE DIRECTED TO CORNERSTONE REALTY INCOME TRUST, INC., 306 EAST MAIN
STREET, RICHMOND, VIRGINIA 23219, ATTENTION: INVESTOR RELATIONS (TELEPHONE
NUMBER (804) 643-1761).
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TABLE OF CONTENTS
<TABLE>
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<S> <C>
AVAILABLE INFORMATION........................... i
SUMMARY OF THE OFFERING......................... 1
RISK FACTORS.................................... 10
Absence of Public Trading Market............... 10
Risk of Insufficient Cash Available for
Distribution.................................. 10
Properties to be Acquired are not Identified... 10
Compensation to Affiliates is Payable Before
Distributions and May Reduce Investors'
Return........................................ 10
Acquisition, Management and Other Fees and
Expenses May Reduce Return.................... 10
Conflicts of Interest.......................... 11
Uncertainty Regarding Revenues and Expenses.... 12
Possible Borrowing; Debt Financing May Reduce
Cash Flow and Increase Risk of Default. ...... 12
Prior Performance Difficulties of Certain
Affiliates.................................... 13
Federal Income Tax Risks....................... 14
Failure to Maintain REIT Status............... 14
Uncertainties in and Possible Changes to the
Tax Law...................................... 14
Immediate Dilution............................. 15
Environmental Problems and Liabilities......... 15
Competition for Properties and Tenants......... 15
Uninsured Losses............................... 15
Required Reliance on Management................ 16
Possible Changes in Investment Objectives and
Policies May Not Serve the Interests of
Certain Shareholders ......................... 16
Responsibilities of Directors, Advisor and
Affiliates -- Possible Inadequacy of Remedies;
Directors, Advisor and Affiliates benefit from
Exculpation and Indemnification Provisions ... 16
Arbitrary Share Offering Price................. 17
Advisor and Affiliates May Purchase and Vote
Shares........................................ 17
Potential Dilution of Shareholders' Interests.. 17
Accumulation Restrictions ..................... 17
Joint Venture Investments -- Risks of
Conflicting Interests and Impasse............. 18
ESTIMATED USE OF PROCEEDS....................... 18
COMPENSATION.................................... 20
Generally...................................... 20
Compensation Paid to Advisor and Affiliates in
1994 and 1995................................. 23
Compensation Paid to David Lerner Associates,
Inc........................................... 25
CONFLICTS OF INTEREST........................... 25
General........................................ 25
Transactions with Affiliates and Related
Parties....................................... 26
Competition by the Company with Affiliates..... 26
Competition for Management Services............ 26
Lack of Separate Representation; Relationship
with Certain Law Firms........................ 27
David Lerner as Former Director................ 27
INVESTMENT OBJECTIVES AND POLICIES.............. 27
General........................................ 27
Investment Criteria............................ 28
Types of Investments........................... 29
Diversification................................ 30
Joint Venture Investments...................... 30
Borrowing Policies............................. 30
Management of Properties....................... 31
Reserves....................................... 32
Sale and Refinancing Policies.................. 32
Changes in Objectives and Policies............. 32
DISTRIBUTION POLICY............................. 33
PAGE
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BUSINESS AND PROPERTIES........................ 34
Business....................................... 34
Legal Proceedings.............................. 35
Regulation..................................... 35
Properties Owned by The Company................ 36
MANAGEMENT...................................... 93
Directors and Officers......................... 93
Committees of Directors........................ 97
Director Compensation.......................... 97
Indemnification and Insurance.................. 97
Officer Compensation........................... 98
Stock Incentive Plans.......................... 98
The Incentive Plan............................. 98
Directors' Plan................................ 99
Stock Option Grants............................ 101
THE ADVISOR AND AFFILIATES...................... 102
General........................................ 102
The Advisory Agreement......................... 102
Cornerstone Realty Group, Inc.................. 104
Cornerstone Management Group, Inc.............. 104
Prior Performance of Programs Sponsored by
Affiliates of the Advisor..................... 105
PRINCIPAL AND MANAGEMENT STOCKHOLDERS........... 106
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PAGE
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FEDERAL INCOME TAX
CONSIDERATIONS................................. 107
Federal Income Taxation of the
Company....................................... 107
Requirements for Qualification as a REIT....... 107
Organizational Requirements................... 108
Income Tests.................................. 108
Asset Tests................................... 110
Annual Distribution Requirement............... 110
Failure to Qualify as a REIT.................. 111
Federal Income Taxation of the Shareholders.... 111
Investment by Tax-Exempt Entities.............. 112
Foreign Investors.............................. 112
Foreign Shareholders.......................... 112
Backup Withholding............................ 113
State and Local Taxes......................... 114
INVESTMENT BY TAX-EXEMPT ENTITIES............... 114
Unrelated Business Taxable Income.............. 114
ERISA Considerations........................... 114
DILUTION........................................ 115
SELECTED FINANCIAL DATA......................... 117
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . 118
Liquidity and Capital Resources................ 118
Results of Operations.......................... 120
Impact of Inflation............................ 121
PLAN OF DISTRIBUTION............................ 122
DESCRIPTION OF CAPITAL STOCK.................... 123
General........................................ 123
Repurchase of Shares and Restrictions on
Transfer...................................... 124
Facilities for Transferring Shares............. 125
Transfer Agent and Registrar................... 125
SUMMARY OF ORGANIZATIONAL DOCUMENTS............. 126
Board of Directors ............................ 126
Responsibility of Board of Directors, Advisor,
Officers and Employees........................ 126
Issuance of Securities......................... 127
Redemption and Restrictions on Transfer........ 127
Amendment...................................... 128
Shareholder Liability.......................... 128
SALES LITERATURE................................ 128
REPORTS TO SHAREHOLDERS......................... 128
LEGAL OPINIONS.................................. 128
EXPERTS......................................... 129
CHANGE IN COMPANY'S CERTIFYING
ACCOUNTANT..................................... 129
GLOSSARY........................................ 130
INDEX TO FINANCIAL STATEMENTS OF
THE COMPANY.................................... F-1
SUBSCRIPTION AGREEMENT........................ Exhibit A
</TABLE>
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SUMMARY OF THE OFFERING
The following is a summary of important information contained in this
Prospectus, but is not complete and is qualified in its entirety by reference to
the entire Prospectus. Certain capitalized terms used in this Prospectus are
defined, or are defined with more particularity, under "Glossary."
The Company. Cornerstone Realty Income Trust, Inc. (the "Company") is a
Virginia corporation which has elected to be treated for federal income tax
purposes, and intends to qualify on a continuing basis, as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). The principal executive offices of the Company are located at 306
East Main Street, Richmond, Virginia 23219 (telephone: 804-643-1761).
The Advisor. Cornerstone Advisors, Inc. (the "Advisor") is the advisor to the
Company and will provide its day-to-day management under an agreement (the
"Advisory Agreement") between the Company and the Advisor.
The Company is an "externally-advised" or "externally-managed" REIT. As
described herein, the Advisor (Cornerstone Advisors, Inc.) oversees the ordinary
business of the Company pursuant to the Advisory Agreement. In addition,
Cornerstone Management Group, Inc. and Cornerstone Realty Group, Inc. (both
Affiliates of the Advisor) provide Property management services and Property
acquisition and disposition services to the Company. In exchange for their
services, the Advisor, Cornerstone Management Group, Inc. and Cornerstone Realty
Group, Inc. all receive certain fees and expense reimbursements from the
Company. See "Compensation" herein.
The officers and Directors of the Company have undertaken an evaluation of
whether it would be in the best interests of the Company and the Shareholders to
convert the Company into a "self-administered" or "self-managed" REIT. This
conversion, if undertaken, would involve transferring some or all of the
management and other services now being provided by other companies to employees
of the Company. If such conversion were implemented, the Company would no longer
pay fees (such as the Asset Management Fee, Real Estate Commissions and Property
Management Fees) to other companies for services assumed by employees of the
Company, but would itself bear the costs thereof (including salaries and wages
to such employees). Any such conversion would likely involve the payment of
consideration, either in Shares, cash or other property, from the Company to the
entities whose contracts with the Company were being terminated in connection
with such conversion, in recognition of such companies agreeing to the
termination of their agreements. Material developments, if any, pertaining to
the possible conversion of the Company to "self-administered" or "self-managed"
status will be reported in supplements to this Prospectus or in appropriate
filings under the Securities Exchange Act of 1934.
Previous Share Offerings. Pursuant to a Prospectus dated December 31, 1992,
as supplemented (the "1992 Prospectus"), and a Prospectus dated November 4,
1994, as supplemented (the "1994 Prospectus"), the Company conducted public
offerings of Shares during the period from January, 1993 through September 7,
1994 and November 4, 1994 through July, 1996 (the "Initial Offering Periods").
During the Initial Offering Periods, the Company raised approximately $250
million (approximately $225 million net of selling commissions) through the sale
of an aggregate of 22,899,118 Shares.
As of July 31, 1995, the Company had closed the sale to investors of
3,461,545 Shares in the Offering under the 1994 Prospectus, representing
aggregate gross proceeds to the Company of $38,077,003, and net proceeds (net of
selling of commissions) of $34,269,303. On March 31, 1995, June 2, 1995,
September 5, 1995, September 14, 1995 and October 6, 1995, the Company filed
with the Securities and Exchange Commission post-effective amendments
(containing the Company's audited financial statements for the year ended
December 31, 1994) to the registration statement which had been declared
effective November 4, 1994. Each of the post-effective amendments was filed
pursuant to the Company's undertaking to file at least once every three months a
post-effective amendment to consolidate all supplements theretofore used in
connection with the Offering and to file any prospectus required by section
10(a)(3) of the Securities Act of 1933 in a post-effective amendment. Subsequent
to July 31, 1995, the Company continued the offering and sale of Shares and, in
August, 1995, closed the sale to investors of approximately 668,728 Shares,
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representing aggregate gross proceeds to the Company of approximately
$7,756,010, and net proceeds (net of selling commissions) of approximately
$6,818,409. All of the post-effective amendments were declared effective on
October 6, 1995.
The Offering. The offering made by this Prospectus will continue until all
Common Shares of the Company (the "Shares" or "Common Shares") offered under
this Prospectus have been sold or until one year from the date of this
Prospectus, unless the Company terminates the offering at an earlier date or
extends it beyond such date for up to an additional year. In some states,
extension of the offering may not be allowed or may be allowed only upon certain
conditions. Closings will occur from time to time during the offering period.
The Shares are being offered through David Lerner Associates, Inc. and other
selected broker-dealers. All of the Shares offered hereby are being sold by the
Company.
Because there is no minimum number of Shares required to be sold in the
offering made by this Prospectus, the prospective investors' payments for Shares
are not required to be held by an escrow agent or in an escrow account. However,
the Company expects as an administrative convenience, to place prospective
investors' subscription funds in a separate escrow account (with or without a
separate "escrow agent") for disbursement to the Company in a block at a
"closing." Disbursement of such funds to the Company is not subject to any
conditions pertaining to the receipt of a minimum amount of offering proceeds.
In no event is the Company required to accept the proffered subscription of
any prospective investor, and no such proffered subscription shall become
binding on the Company until a properly completed Subscription Agreement
prepared and executed by the prospective investor has been accepted by a duly
authorized representative of the Company. The Company intends to cause to be
paid from any escrow account each investor's share of net interest on escrowed
funds, whether or not the investor's subscription for Shares is accepted. The
Company reserves the right to adopt reasonable simplifying conventions or
assumptions in determining each investor's share of such net interest. If the
Company elects to use a separate escrow account (with or without a separate
"escrow agent"), investors' subscription funds will be deemed to remain the
Property of the investors, and the investors' subscriptions will be revocable by
written notice delivered to the escrow agent at least five days before the
applicable closing. Subject to the foregoing, an investor's subscription funds
may remain in escrow for an indefinite period of time.
The minimum investment for investors is $5,000 (approximately 454.5 Shares at
$11 per Share), except that Qualified Plans (defined as qualified employee
pension or profit-sharing trusts, Keogh Plan trusts and IRAs) may purchase a
minimum of $2,000 (approximately 181.8 Shares at $11 per Share). The record
holders of the Company's Shares will be the "Shareholders" of the Company.
As described under "Plan of Distribution," it is expected that investors
purchasing Shares in this offering will be able to elect to reinvest any
distributions from the Company in additional Shares available in this offering,
for as long as this offering continues. This option is referred to as the
"Additional Share Option." The Company estimates that approximately 300,000
Shares ($3,300,000 at $11 per Share) offered through this Prospectus will be
purchased through Shareholders' reinvestment of distributions in Shares pursuant
to the Additional Share Option, but the number of Shares which will be so
purchased cannot be determined at this time. Shares purchased pursuant to the
Additional Share Option will be at the same price per Share and on the same
terms applicable generally to subscriptions in this offering effective at the
time of reinvestment. Shareholders electing the Additional Share Option will be
taxed as if they received the reinvested distributions. See "Plan of
Distribution."
The Board of Directors is authorized, without Shareholder approval, to issue
additional Shares or other equity or debt securities of the Company, on such
terms and for such consideration as it may deem advisable. Without limiting the
generality of the foregoing, the Board of Directors may, in its sole discretion,
issue Shares or other equity or debt securities of the Company, (1) to persons
from whom the Company purchases a Property, as part or all of the purchase price
of the Property, or (2) to the Advisor or its Affiliates in lieu of cash
payments required under the Advisory Agreement or other contract or obligation.
The Board of Directors, in its sole discretion, may determine the value of any
Shares or other equity or debt securities issued in consideration of property or
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<PAGE>
services provided, or to be provided, to the Company, except that while Shares
are offered by the Company to the public, the public offering price of such
Shares shall be deemed to be their value. See "Summary of Organizational
Documents -- Issuance of Securities."
Affiliates of the Advisor. The term "Affiliate" used in this Prospectus,
which term is defined in the Glossary, refers generally to a person or entity
which is related to another specified person or entity through common control,
through significant (10% or more) equity ownership, or by serving as an officer
or director of (or in a similar capacity with) such specified entity. Affiliates
of the Advisor include Cornerstone Realty Group, Inc., Cornerstone Management
Group, Inc. and Glade M. Knight, who owns all of the outstanding stock of the
Advisor, Cornerstone Realty Group, Inc. and Cornerstone Management Group, Inc.
Risk Factors. An investment in Shares involves certain risks (described more
fully under "Risk Factors"), including the following:
o There will be no public trading market for the Shares for an indefinite
period of time, if ever. Accordingly, Shareholders may be required to hold
their Shares for an indefinite length of time. Shareholders may be unable
to resell their shares at all, or may be able to resell them only at a
substantial discount from the purchase price. See "Risk Factors -- Absence
of Public Trading Market."
o If the Company were to incur significant unanticipated cash expenditures,
the amount of cash available for distribution would decrease. There can be
no assurance that the Company will maintain any specific level of
distributions to Shareholders. See "Risk Factors -- Risk of Insufficient
Cash Available for Distribution."
o The Company has not identified any Properties to be acquired with the
proceeds from this offering of the Shares. Accordingly, prospective
investors may not have the opportunity to evaluate the assets to be
acquired with the proceeds of the offering before purchasing Shares. There
can be no assurance that any Property acquired by the Company after the
date of this Prospectus will operate successfully or will be comparable to
any Property currently owned by the Company.
o The Advisor and its Affiliates will receive substantial compensation from
the Company. Such compensation has been established without the benefit of
arm's-length negotiation. See "Compensation." The payment of compensation
to the Advisor, its Affiliates and others from proceeds of the offering
and Property revenues will reduce the amount of proceeds available for
investment in Properties, or the cash available for distributions, and
will therefore tend to reduce the return on Shareholders' investments. In
particular, the payment of such compensation means that the investment
return to Shareholders from the Company will likely be less than could be
obtained by a Shareholder's direct acquisition and ownership of the same
Properties. See "Risk Factors -- Fees and Expenses may Reduce Return." The
compensation is generally payable regardless of Company profitability, and
is generally payable prior to, and without regard to whether the Company
has sufficient cash for, distributions.
o The Advisor and its Affiliates will be subject to various conflicts of
interest in their dealings with the Company. Generally, such conflicts
arise because certain Directors and officers of the Company (i) are also
principals in or have relationships with other companies which will enter
into contracts with the Company, and (ii) are, and will in the future be,
principals in other programs which may compete with the Company. While
certain policies and procedures, described under "Conflicts of Interest,"
will be implemented to ameliorate potential conflicts of interest, certain
conflicts of interest cannot be completely ameliorated. To the extent
there are conflicts of interest, the Advisor or its Affiliates may be
inclined to favor their own interests over those of the Company. The
principal conflict of interest currently involving the Company is that
Glade M. Knight, who is a Director, Chairman of the Board and the
President of the Company, also owns the Advisor, Cornerstone Management
Group, Inc. and Cornerstone Realty Group, Inc., all of which provide
services to the Company in exchange for compensation. The business and
affairs of the Company are controlled by the Company's Board of Directors,
a majority of whom are not Affiliated with the Advisor and
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its Affiliates. Prospective Shareholders must rely upon the Board of
Directors to supervise the relationship between the Company, on the one
hand, and the Advisor and its Affiliates, on the other hand, to ensure
that any adverse effect of any potential conflict of interest is
minimized. Prospective Shareholders should note, however, that Mr. Knight
could have influence on the Board of Directors disproportionate to his
voting power because he is engaged on a full-time basis in the operation
of the Company and its Properties. See "Conflicts of Interest."
o The investment in residential apartment communities (and other real
property, if any) involves many potential risks, including high vacancy
rates, competition for tenants, expenses (including those related to
taxes, insurance and Property maintenance) exceeding income (which could
necessitate borrowing to fund deficits), on-site environmental problems,
and possible uninsurable losses. There can be no assurance that the
Company's Properties will operate profitably, appreciate in value or
generate cash for distribution. See "Risk Factors -- Real Estate
Investment Risks."
o Although not anticipated, except on the limited interim basis described
under "Business and Properties -- Properties Owned by the Company,"
borrowing by the Company is permitted, subject to certain limitations.
Company borrowing would entail additional risks, including the risks that
required principal and interest payments would reduce distributions to
Shareholders, and that the Company could lose Properties securing
borrowings through foreclosure. As of the date of this Prospectus, there
is no mortgage debt encumbering the Company's Properties. See "Risk
Factors -- Possible Borrowing; Debt Financing May Reduce Cash Flow and
Increase Risk of Default."
o Certain private partnerships sponsored by Affiliates of the Advisor have
experienced certain adverse business developments (bankruptcy
reorganizations and/or Property foreclosures). See "The Advisor -- Prior
Performance of Programs Sponsored by Affiliates of the Advisor."
o The ability of the Company to operate as planned will depend upon its
continuing to qualify as a "real estate investment trust" for federal
income tax purposes. If the Internal Revenue Service (the "Service") were
to determine that the Company failed to meet the requirements for REIT
status or if the Company fails to maintain REIT status on a continuing
basis, it will not be able to achieve its investment objectives. See "Risk
Factor -- Federal Income Tax Risks."
o Purchasers of the Shares offered hereby will experience immediate dilution
in the net tangible book value of the Shares from the public offering
price. See "Dilution."
Estimated Use of Proceeds. The proceeds of the offering will be used (i) to
pay expenses and fees of selling the Shares; (ii) to invest in Properties; (iii)
to pay expenses and fees associated with acquiring Properties; and (iv) to
establish a working capital reserve. It is estimated that the expenses and fees
described in clauses (i) and (iii) of the preceding sentence will aggregate 13%
of the gross offering proceeds, that the amount available to invest in
Properties will be 86.5% of the gross offering proceeds, after establishing a
working capital reserve equal to 0.5% of gross offering proceeds. See "Estimated
Use of Proceeds."
Compensation. The officers of the Company are not paid salaries by the
Company. Such officers are officers of the Advisor and its Affiliates, which
entities are entitled to certain fees for services rendered by them to the
Company. Thus, the officers of the Company are, in essence, compensated by the
Advisor or its Affiliates. Compensation and reimbursements payable to the
Advisor and its Affiliates are listed below. See "Compensation." Except as
indicated, the maximum dollar amount of such compensation and reimbursements is
not now determinable.
o The Advisor is entitled to receive an annual Asset Management Fee, based
upon the ratio of Funds from Operations to Total Contributions, of between
0.1% and 0.25% of Total Contributions. ("Funds from Operation" is defined
as net income (computed in accordance with generally accepted accounting
principles) excluding gains (or losses) from debt restruc turing and sales
of Property, plus depreciation and amortization, and after adjustments for
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<PAGE>
unconsolidated partnerships and joint ventures, if any. "Total
Contributions" is defined as the gross proceeds from the sale of the
Shares.) See "The Advisor and Affiliates -- The Advisory Agreement."
Assuming the Maximum Offering amount ($50,000,000) is sold, the Total
Contributions would be $300,000,000 and the annual Asset Management Fee
would be between $300,000 and $750,000. The Company believes that Funds
from Operations is an appropriate measure to use in determining the fees
to be paid to the Advisor because it ties compensation to an indicator of
performance. "Funds from Operations" is not the same as cash generated
from operating activities in accordance with generally accepted accounting
principles, and, therefore, should not be considered as an alternative to
net income as an indication of the Company's performance or to cash flows
as a measure of liquidity.
o Cornerstone Management Group, Inc., an Affiliate of the Advisor, will
manage the Company's Properties and will receive a Property management fee
equal to 5% of the monthly gross revenues of the Properties.
o Cornerstone Realty Group, Inc., an Affiliate of the Advisor, will serve as
the real estate broker in connection with the Company's purchases and
sales of Properties, and will receive fees from the Company of up to 2% of
the gross purchase price of each Property and up to 2% of the gross sale
prices.
o The Advisor and its Affiliates will be entitled to reimbursement for
actual costs incurred by them in connection with the offering of the
Shares and the operation of the Company.
o The Advisor and its Affiliates may provide other services or property to
the Company under certain conditions, and will be entitled to payment
therefor. Such conditions generally include the requirement that the
transaction be approved by the affirmative vote of a majority of the
"Independent Directors," who are those Directors who are not Affiliated
with the Advisor. There are currently no plans for the providing of
material services or property of the type described in this paragraph.
Conflicts of Interest. The Advisor and its Affiliates will be subject to
various conflicts of interest in their dealings with the Company. See "Conflicts
of Interest." These conflicts of interest include the following:
o The Advisor and its Affiliates will receive substantial compensation from
the Company which has been established without the benefit of arm's-length
negotiation. In certain circumstances, the receipt of such compensation
could create a conflict of interest between the entity receiving the
compensation and the Shareholders. The entity receiving the compensation
could have an incentive to take, or refrain from taking, a particular
action on behalf of the Company based upon the compensation to be received
by it, rather than based upon the best interests of the Company and the
Shareholders. Affiliates of the Advisor will attempt to resolve or
eliminate such conflicts of interest by determining what is in the best
interests of the Company and the Shareholders.
o Affiliates of the Advisor have formed, and may in the future form, other
real estate investment companies, including REIT's. Subject only to the
requirement that until more than 95% of the proceeds of the offering are
invested, the Advisor and its Affiliates must present to the Company any
suitable investment opportunity before offering it to any other Affiliated
entity, such other real estate investment companies may engage in the same
business as, and compete with, the Company. Thus, the Company could, in
the future be competing with the Advisor, its Affiliates, or other
companies managed or advised by the Advisor or its Affiliates, with
respect to Property acquisition, disposition and management.
o Since Affiliates of the Advisor are and may in the future become
principals in other businesses, including other real estate investment
companies, they may have conflicts of interest in allocating their time
and services between the Company and such other businesses. If the Advisor
or its Affiliates, in the future, devote time and services to other
businesses, the time and services available for the Company could be
reduced, which could adversely affect the operations of the Company.
5
<PAGE>
o David Lerner, a principal of the Managing Dealer, served as a Director of
the Company from August 3, 1992 to October 24, 1994. Thus, the Managing
Dealer may not be in the nature of an "independent sales agent" for the
Shares. Consequently, the Managing Dealer may not have undertaken the same
"due diligence" investigation contemplated by the Securities Act of 1933
with respect to the Company and its offering as would have been undertaken
by a truly independent sales agent.
Investment Objectives and Policies. The principal investment objectives of
the Company are to: (i) preserve and protect the capital of the Company; (ii)
provide quarterly distributions to the holders of the Company's Common Shares
(the "Shareholders"), a portion of which may constitute a nontaxable return of
capital (rather than current taxable income); and (iii) provide long-term
capital appreciation in the value of the Company's investments. The Company does
not intend to make distributions from borrowings or refinancings.
The Company anticipates that achievement of these objectives will enable it
to provide Shareholders with appreciation in the value of their Shares. There
can be no assurance that the Company will achieve these objectives. Attainment
of the objectives is contingent in part upon the Company's ability to acquire
suitable Properties. See "Investment Objectives and Policies -- General."
The Company invests primarily in existing residential apartment communities
in the mid-Atlantic and southeastern regions of the United States. Diversity in
geographic location will be a consideration for investment. See "Investment
Objectives and Policies -- Diversification."
The Company's management believes there is substantial opportunity for growth
from acquisitions of additional multi-family Properties in the mid-Atlantic and
southeastern regions of the United States. Management believes that the current
real estate environment is conducive to opportunistic acquisitions of existing
multi-family properties that meet the Company's investment criteria. In many
instances, such acquisitions may be made for less than the cost of new
construction. The extensive experience of the management personnel of the
Company and the Advisor and its Affiliates in operating multi-family properties
in the mid-Atlantic and southeastern regions is intended to assist the Company
in the evaluation of specific markets and Properties in this region.
The Company reserves the right to issue Shares at any time and from time to
time, consistent with the terms of this Prospectus and the Subscription
Agreements executed by investors. See "Plan of Distribution."
The Board of Directors may, in its sole discretion, issue Shares, or other
equity or debt securities of the Company, to sellers of Properties, as part or
all of the purchase price of the Property. See "Summary of Organizational
Documents -- Issuance of Securities."
The Company currently anticipates that it will continue to hold its
investment Properties for an indefinite length of time. Although the Company
intends, by the end of the third quarter in 1996 or as soon thereafter as
practicable, to use its best efforts to cause the Shares to be listed on a
national securities exchange or quoted on the NASDAQ National Market System, if
the Board of Directors determines such action to be prudent, there is no
assurance when, or that, the Shares will be so listed or quoted. In making its
determination, it is expected that the Board of Directors will consider all
relevant economic considerations affecting the Company, including general
economic and market conditions, the Company's satisfaction of the legal listing
or quotation requirements in effect at such time, the economic performance of
the Company, the Company's financial condition at the time listing or quotation
is considered, and the size of the Company. See "Risk Factors -- Absence of
Public Trading Market."
The Company generally intends to purchase its Properties either on an
all-cash basis or using the limited interim borrowing described under "Business
and Properties -- Properties Owned by the Company." The Company will endeavor to
repay any interim borrowing with proceeds from the sale of Shares and thereafter
to hold its Properties on an unleveraged basis. However, for the purpose of
flexibility in operations, the Company has the right, subject to the approval of
the Board of Directors, to borrow. See "Investment Objectives and Policies --
Borrowing Policies." Subject to this limitation, the investment policies of the
Company do not restrict the Company to
6
<PAGE>
any one method of financing its operations. Therefore, it may purchase
Properties subject to financing or mortgages existing before the date of
purchase, use either seller or new institutional financing or borrow from the
Advisor or its Affiliates. The Company's Bylaws prohibit the Company from
incurring debt (secured or unsecured) if such debt would result in aggregate
debt exceeding 100% of "Net Assets" (defined generally to mean assets at cost),
before subtracting liabilities, unless the excess borrowing is approved by a
majority of the Independent Directors and disclosed to the Shareholders as
required by the Bylaws. The Bylaws also prohibit the Company from allowing
aggregate borrowings to exceed 50% of the Company's "Adjusted Net Asset Value"
(defined generally to mean assets at fair market value), before subtracting
liabilities, subject to the same exception. In addition, the Bylaws provide that
the aggregate borrowings of the Company must be reasonable in relation to the
Net Assets of the Company and must be reviewed quarterly by the Directors.
The investment return to Shareholders from the Company will likely be less
than could be obtained by a Shareholder's direct acquisition and ownership of
the same Properties because (i) the Company will pay, principally to Affiliates
of Directors, substantial "front-end" fees (that is, fees paid directly from
funds received from sales of the Shares) to sell the Shares and acquire
Properties, which will reduce the net proceeds available for investment in
Properties; and (ii) the Company will likely pay, principally to the Advisor and
its Affiliates, substantial management and related compensation (which might be
greater than the fees for Property management which a direct owner would incur),
which will reduce funds available for distribution to Shareholders. Thus, for
example, if only 86.5% of the gross proceeds of the offering are available for
investment in Properties, revenues may be reduced by 13.5% compared to revenues
in the absence of such front-end fees. Similarly, any profit from appreciation
in values of Properties could be commensurately reduced to the extent gross
offering proceeds are used to pay front-end fees.
A person directly acquiring and owning properties like those sought by the
Company would likely incur at least some types of the fees and expenses which
the Company will incur in the acquisition and ownership of its Properties.
Furthermore, the Advisor believes that while the payment of certain fees (such
as the Selling Commissions) will not result in increased Company profitability,
the payment of other fees, such as management fees to a professional Property
manager, while being funded by revenues derived from Properties, may be at least
partially offset by increased revenues from the Properties attributable to the
services rendered in exchange for such fees.
The Board of Directors has the power and authority to modify the investment
objectives and policies of the Company, subject to the provisions of the
Company's Articles of Incorporation and Bylaws and applicable law. Any such
modification would be based upon the perceived best interests of the Company and
its Shareholders. See "Investment Objectives and Policies -- Changes in
Objectives and Policies."
Distribution Policy. The Company's policy and objective will be to pay to
Shareholders regular distributions. The timing and amounts of distributions will
be determined by the Board of Directors, acting in its sole discretion.
The distributions for the first, second, third and fourth quarters of 1995
were $.23 per Share, $.24 per Share, $.2425 per Share, and $.245 per Share,
respectively. Of the $.96 ($.9575) per Share distribution in 1995, 17% thereof
represented a return of capital and the balance represented ordinary dividend
income.
The first quarter distribution for 1996 was $.248 per Share. On an annual
basis, this distribution would be $.992 per Share. At the end of each year, the
Company will determine, and will report to Shareholders, the portions of the
year's distributions which represent ordinary dividend income and a return of
capital, respectively. The Company anticipates the funds available for
distribution will exceed earnings and profits due to non-cash expenses,
primarily depreciation and amortization, to be incurred by the Company. See
"Distribution Policy."
Business and Properties. The Company has been established to provide
Shareholders with a professionally managed, diversified portfolio of real estate
equity interests consisting primarily of existing residential apartment
communities which have the potential for current cash flow and capital
appreciation.
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The Company owns the following apartment Properties as of the date of this
Prospectus (see "Business and Properties" for additional information):
<TABLE>
<CAPTION>
EFFECTIVE
NUMBER OF DATE OF
APARTMENT ACQUISITION
NAME OF PROPERTY LOCATION UNITS BY COMPANY
- --------------------------------------- -------------------- --------------- --------------
<S> <C> <C> <C>
The Hollows ........................... Raleigh, NC 176 6-1-93
Polo Club (formerly La Vista) ......... Greenville, SC 365 6-3-93
Mayflower Seaside...................... Virginia Beach, VA 263 10-26-93
County Green .......................... Lynchburg, VA 180 12-1-93
Stone Ridge (formerly River Ridge) .... Columbia, SC 191 12-8-93
Wimbledon Chase (formerly Fountain
Head) ................................ Wilmington, NC 192 2-1-94
Harbour Club (formerly Birdneck Lakes) Virginia Beach, VA 214 5-1-94
Chase Mooring (formerly The Palms) ... Wilmington, NC 224 8-1-94
The Trestles........................... Raleigh, NC 280 12-30-94
Wind Lake (formerly Sterling Pointe) .. Greensboro, NC 299 4-1-95
Magnolia Run (formerly Edgewood) ...... Greenville, SC 212 6-1-95
Breckinridge........................... Greenville, SC 236 6-21-95
Bay Watch Pointe (formerly Broad
Meadows).............................. Virginia Beach, VA 160 7-18-95
Hanover Landing (formerly Lemon Tree) . Charlotte, NC 192 8-22-95
Mill Creek............................. Winston-Salem, NC 220 9-1-95
Glen Eagles............................ Winston-Salem, NC 166 10-1-95
Osprey Landing (formerly Summer Hill) . Wilmington, NC 176 11-1-95
Tradewinds............................. Hampton, VA 284 11-1-95
Sailboat Bay (formerly The Lake) ...... Charlotte, NC 358 11-1-95
Meadows................................ Asheville, NC 176 1-31-96
West Eagle Greens (formerly Scarlett
Oaks)................................. Augusta, GA 165 3-1-96
Ashley Park............................ Richmond, VA 272 3-1-96
Arbor Trace (formerly Colonial
Ridge)................................ Virginia Beach, VA 148 3-1-96
Longmeadow............................. Charlotte, NC 120 4-1-96
Trophy Chase (formerly Westfield) ..... Charlottesville, VA 185 4-1-96
Beacon Hill............................ Charlotte, NC 349 5-1-96
Meadow Creek........................... Pineville, NC 250 6-1-96
Summer Walk (formerly Lakewood) ....... Concord, NC 160 5-1-96
Willow Creek........................... Durham, NC 200 5-1-96
Lexington Towers....................... Richmond, VA 197 6-26-96
</TABLE>
As of the date of this Prospectus, there is no mortgage debt encumbering the
Company's Properties. The Company has an unsecured line of credit, described
under "Business and Properties -- Properties Owned by the Company."
Federal Income Tax Considerations. The Company has elected to be treated, and
intends to qualify on a continuing basis, as a REIT. The election was first made
for the Company's taxable year ended December 31, 1993. The Company anticipates
that it will qualify as a REIT throughout its existence, but there can be no
assurance that the Company will so qualify. As a REIT, the Company will be
allowed a deduction for the amount of distributions paid to its Shareholders,
thereby subjecting the distributed net income of the Company to taxation only at
the Shareholder level. The Company's continued qualification as a REIT will
depend upon its compliance with numerous requirements, including requirements as
to the nature of its income. For a discussion of
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<PAGE>
the risk that the Company may fail to meet one or more of the requirements for
REIT status, see "Risk Factors -- Federal Income Tax Risks." Each year, the
Company will send to each Shareholder a Form 1099 that will report the amount of
income taxable to such Shareholder for the preceding year.
As a REIT, the Company will deduct from its taxable income amounts
distributed to Shareholders and, therefore, will pay no tax on amounts
distributed to Shareholders. Distributions generally will be considered taxable
dividends to Shareholders to the extent of the Company's earnings and profits,
and, to such extent, will be considered portfolio rather than passive income for
purposes of Shareholders' use of investment expense deductions and passive
losses. Any distributions in excess of the Company's earnings and profits will
first reduce a Shareholder's basis in his or her Shares and, to the extent of
such reduction, will not be taxable to such Shareholder. Any distributions in
excess of both the Company's earnings and profits and the Shareholder's basis
will generally be treated as capital gain. Shareholders who are corporations
will not be eligible to claim the dividends-received deduction with respect to
any distributions paid by the Company. See "Federal Income Tax Considerations."
Investment by Tax-Exempt Entities. The Service has ruled that amounts
distributed by a REIT to a pension trust do not constitute "unrelated business
taxable income" ("UBTI"). Based on this analysis, amounts distributed by the
Company to tax-exempt Shareholders generally should not constitute UBTI,
although recent legislation has created the possibility of UBTI for certain
tax-exempt Shareholders in certain situations. Also, a tax-exempt entity that
incurs indebtedness to finance its purchase of Common Shares may be subject to
UBTI by virtue of the acquisition indebtedness rules. See "Federal Income Tax
Considerations Federal Income Taxation of the Shareholders -- Investment by
Tax-Exempt Entities" and "Investment by Tax-Exempt Entities." To assist
fiduciaries of Qualified Plans in satisfying their legal obligation to value
Plan assets annually, the Company intends to determine on an annual basis the
Company's current "Adjusted Net Asset Value" per Share, defined generally as the
net fair market value of Company assets divided by the number of Shares
outstanding.
Description of Capital Stock. The authorized capital stock of the Company
consists of 50,000,000 Common Shares, no par value. As of the completion of the
Second Offering, there were 22,899,118 Common Shares of the Company issued and
outstanding.
The Common Shares will have the sole voting power to elect Directors. Holders
of the outstanding Common Shares will be entitled to one vote per Share on all
matters submitted to a vote of the Shareholders. In addition, the holders of the
Common Shares will be entitled to participate equally in distributions paid in
respect of the Shares if, when and as declared by the Board of Directors and in
distributions of the net assets of the Company upon its liquidation, dissolution
or winding up.
Liquidity. Prior to this offering there has been no public market for the
Shares, and initially such a market is not expected to develop. Although the
Company plans to list the Shares on a national securities exchange or to have
them quoted on the NASDAQ National Market System by the end of the third quarter
of 1996 or as soon thereafter as practicable, if the Board determines such
action to be prudent, there is no assurance the Shares will be so listed or
quoted.
In addition, the Company's Bylaws prohibit any person from acquiring or
holding, directly or indirectly, ownership of a number of Shares in excess of
9.8% of all the outstanding Shares. This restriction is designed to ensure the
continued qualification of the Company as a REIT. See "Description of Capital
Stock -- Repurchase of Shares and Restrictions on Transfer."
9
<PAGE>
RISK FACTORS
Investment in the Shares involves various risks. No assurance can be given
that the investment objectives of the Company will be achieved. In addition to
the information set forth elsewhere in this Prospectus, investors should
consider the following risks before making a decision to purchase the Shares.
ABSENCE OF PUBLIC TRADING MARKET
Prior to this offering, there has been no public market for the Shares, and
initially such a market is not expected to develop. Accordingly, Shareholders
may be required to hold their Shares for an indefinite length of time and there
will be no liquidating distribution until such time, if ever, as a majority of
the shareholders determine to dissolve the Company. Shareholders may be unable
to resell their Shares at all, or may be able to resell them only at a
substantial discount from the purchase price. Thus, the purchase of Shares
should be considered a long-term investment.
RISK OF INSUFFICIENT CASH AVAILABLE FOR DISTRIBUTION
If the Company were to incur significant unanticipated cash expenditures, the
amount of cash available for distribution would decrease. Furthermore, there can
be no assurance that the Company will continue to be able to acquire Properties
that will generate sufficient cash from operations to enable the Company to
maintain distributions at the current rate. See the other risk factors in this
section entitled "Risk Factors" for a discussion of factors which could result
in unanticipated cash expenditures, or which could otherwise affect the
Company's ability to make cash distributions to Shareholders. There can be no
assurance that the Company will maintain any specific level of distributions to
Shareholders.
PROPERTIES TO BE ACQUIRED ARE NOT IDENTIFIED
The Company has not identified any Properties to be acquired with the
proceeds from this offering of the Shares. Accordingly, prospective investors
may not have the opportunity to evaluate the assets to be acquired with the
proceeds of the offering before purchasing Shares. There can be no assurance
that any Property acquired by the Company after the date of this Prospectus will
operate successfully or will be comparable to any Property currently owned by
the Company.
COMPENSATION TO AFFILIATES IS PAYABLE BEFORE DISTRIBUTIONS AND MAY REDUCE
INVESTORS' RETURN
The Advisor and its Affiliates will receive substantial compensation from the
Company in exchange for various services they have agreed to render to the
Company. See "Compensation." This compensation has been established without the
benefit of arms-length negotiation, and the payment of such compensation from
proceeds of the offering and Property revenues will reduce the amount of
proceeds available for investment in Properties, or the cash available for
distribution, and will therefore tend to reduce the return on Shareholders'
investments. In addition, the compensation is generally payable regardless of
Company profitability, and is generally payable prior to, and without regard to
whether the Company has sufficient cash for distributions.
ACQUISITION, MANAGEMENT AND OTHER FEES AND EXPENSES MAY REDUCE RETURN
The investment return to Shareholders likely will be less than could be
obtained by a Shareholder's direct acquisition and ownership of the same
properties because (i) the Company will pay, principally to Affiliates of
Directors, substantial "front-end" fees and expenses to sell the Shares, and
acquire Properties, which will reduce the net proceeds available for investment
in Properties; and (ii) the Company will pay, principally to the Advisor and its
Affiliates, substantial management and related compensation (which might be
greater than the fees for property management that a direct owner would incur),
which will reduce cash available for distribution to Shareholder. Thus, for
example, if only 86.5% of the gross proceeds of the offering are available for
investment in Properties and 0.5% of the gross proceeds are reserved for working
capital, revenues may be reduced by 13% compared to revenues in the absence of
such front-end fees. Similarly, any profit from appreciation in values of
Properties could be commensurately reduced to the extent gross offering proceeds
are used to pay front-end fees.
10
<PAGE>
A person directly acquiring and owning properties of the type sought by the
Company likely would incur most of the types of fees and expenses which the
Company will incur in the acquisition and ownership of its Properties. Also, the
Advisor believes that while the payment of certain fees (such as the Selling
Commissions) will not result in increased Company profitability, the payment of
other fees, such as management fees to a professional Property manager, while
being funded by revenues derived from Properties, may be at least partially
offset by increased revenues from the Properties attributable to the services
rendered in exchange for such fees. Furthermore, the Company may offer an
opportunity to invest in a larger and more diverse group of Properties than
might be available to an individual investing directly in real estate.
CONFLICTS OF INTEREST
The Advisor and its Affiliates will be subject to various conflicts of
interest in their dealings with the Company. See "Conflicts of Interest."
Generally, such conflicts of interest arise because certain Directors and
officers of the Company (i) are also principals in other companies which will
enter into contracts with the Company (principally for asset management and
Property management, acquisition and disposition services), and (ii) are, and
will in the future be, principals in other real estate investment programs which
may compete with the Company. Other possible transactions involving conflicts of
interest would include the Company's acquisition of Properties from the Advisor
or an Affiliate (which is permitted under the conditions summarized in
"Investment Objectives and Policies -- Investment Criteria"), and the Company
borrowing from the Advisor or an Affiliate (which is permitted under the
conditions summarized in "Investment Objectives and Policies -- Borrowing
Policies").
The differing types of compensation payable to the Advisor and its Affiliates
present different potential conflicts of interest for such entities. Cornerstone
Realty Group, Inc. is paid an acquisition fee in connection with each
acquisition of a Property by the Company, and a disposition fee in connection
with certain Property dispositions. As a consequence, Cornerstone Realty Group,
Inc. may have an incentive to recommend the purchase or disposition of a
Property, in order to receive a fee, rather than based upon the best interests
of the Company. Cornerstone Management Group, Inc. receives a Property
management fee which is a percentage of gross revenues from each Property owned
by the Company. This entity could, therefore, have an incentive to recommend
that the Company retain a Property, rather than dispose of it, so that
Cornerstone Management Group, Inc. can continue to receive its Property
management compensation. Cornerstone Advisors, Inc. receives a fee which is a
percentage of the total consideration received by the company with sale of
Shares and therefore could have an incentive, from a compensation standpoint, to
close the sales of Shares as rapidly as possible.
As discussed under "Conflicts of Interest," the Company has implemented
certain policies and procedures designed to eliminate or ameliorate the effects
of potential conflicts of interest, certain potential conflicts of interest. For
example, the business and affairs of the Company, including, without limitation,
all of the relationships between the Company, on the one hand, and the Advisor
and its Affiliates, on the other hand, are under the supervision and control of
the Company's Board of Directors, a majority of whom is not Affiliated with the
Advisor or its Affiliates. In evaluating the significance of a majority of the
Board of Directors being unaffiliated, prospective Shareholders should bear in
mind that Mr. Knight may have an influence on the Board of Directors
disproportionate in relation to his voting power, since he is engaged full-time
in connection with the management of the Company and its Properties. In general,
if a person with responsibilities both to the Company and to an entity
contracting with the Company, or both to the Company and to a program in
competition with the Company, were to resolve a potential conflict of interest
in such dual capacity against the interest of the Company, the operation of the
Company could be adversely affected. However, in light of the policies and
procedures implemented to ameliorate the effects of potential conflicts of
interest, the Advisor and its Affiliates do not believe that the potential
conflicts of interest will have a material adverse effect upon the Company's
ability to realize its investment objectives, although there can be no assurance
to this effect.
UNCERTAINTY REGARDING REVENUES AND EXPENSES
The Company's success depends upon maximizing revenues (primarily rent
payments) while minimizing Company and Property operating expenses, which in
turn will be affected by Property selection, Property and Company management,
Property location and local and general economic conditions. The
11
<PAGE>
Company's investment in residential apartment communities involves many
potential risks bearing on potential revenues and expenses, including high
vacancy rates, competition for tenants, expenses (including those related to
taxes, insurance and Property maintenance) exceeding income (which could
necessitate borrowing to fund deficits, on-site environmental problems, and
possible uninsurable losses. Although the Company and the Advisor and its
Affiliates will seek to minimize the effect of factors such as these, some of
such factors are beyond the control of such persons. In addition, to the extent
such factors are within the control of such persons, the skill and ability of
such persons to select, maintain and operate such Properties will largely
determine whether the Company will operate profitably. There can be no assurance
that the Company's Properties will operate profitably, appreciate in value or
generate cash for distribution.
Equity real estate investments will tend to limit the ability of the Company
to vary its portfolio promptly in response to changing economic, financial and
investment conditions. These investments will be subject to risks such as
adverse changes in general economic conditions or local conditions (for example,
excessive building resulting in an oversupply of available space, or a decrease
in employment, reducing the demand for real estate) as well as other factors
affecting real estate values (for example, increasing labor, materials and
energy costs, the attractiveness of the Properties to tenants and the
attractiveness of the surrounding area). Investments will also be subject to
such risks as the inability of the Company to provide for adequate maintenance
of its Properties. If the Company found it necessary to borrow, its operations
could be affected adversely by factors such as increased interest rates and
reduced availability of debt financing. However, to the extent that the
Company's investments are made on an all-cash basis, the risks relating to
interest rates and availability of long-term financing are not present.
The Company's investments will be primarily in existing residential apartment
communities. Some of the proceeds may be allocated to the repair and renovation
of such apartment communities. The Company's real estate equity investments will
be subject to the risk of inability to attract or retain tenants, and to the
risk of a decline in rental income as a result of adverse changes in economic
conditions, local real estate markets, or other factors. Also, certain
expenditures associated with equity investments (such as real estate taxes, the
costs of maintenance, renovations or improvements, insurance and utility costs)
are not necessarily decreased by events adversely affecting the Company's income
from those investments. Should any such events occur, the Company's cash
distributions to Shareholders may be impaired.
While it is the policy of the Company primarily to buy income-producing
Properties at a price equal to or below their appraised values and below the
replacement cost of similar structures, there is no assurance that any Company
Properties will operate at a profit, will appreciate in value, or will ever be
sold at a profit, or that distributions will be paid by the Company. The
marketability and value of any such Properties will depend upon many factors
beyond the control of the Board of Directors and the Advisor.
If the Company does not operate profitably and exhausts its reserves, it
might be required to borrow funds or liquidate some of its investments to pay
fixed expenses of the Company which are not reduced by events which reduce
income.
POSSIBLE BORROWING; DEBT FINANCING MAY REDUCE CASH FLOW AND INCREASE RISK OF
DEFAULT.
The Company generally intends to purchase its Properties either on an
all-cash basis or using the limited interim borrowing described under "Business
and Properties -- Properties Owned by the Company." The Company will endeavor to
repay any interim borrowing with proceeds from the sale of Shares and thereafter
to hold its Properties on an unleveraged basis. However, for the purpose of
flexibility in operations, the Company will have the right, subject to the
approval of the Board of Directors, to borrow. See "Investment Objectives and
Policies -- Borrowing Policies." As of the date of this Prospectus, there is no
mortgage debt encumbering the Company's Properties.
One purpose of borrowing could be to permit the Company's acquisition of
additional Properties through the "leveraging" of Shareholders' equity
contributions. Alternatively, the Company might find it necessary to borrow to
permit the payment of operating deficits of Properties already owned. There
12
<PAGE>
can be no assurance that the Company would be able to borrow on favorable terms,
if at all, if borrowing became necessary or desirable. Furthermore, the
incurrence of debt would entail certain additional risks for the Company, some
of which are summarized below. If the Company defaulted on secured indebtedness,
the lender could foreclose, and the Company could lose its investment in the
Property or Properties used as collateral.
The Company might obtain financing with variable rates and varying
maturities. Such rates normally provide cash flow benefits in an environment of
relatively low or declining interest rates, and a corresponding cash flow
detriment when interest rate increase. Alternatively, financings obtained by the
Company could have fixed rates and prepayment penalties.
The Company might obtain financing with "due-on-encumbrance" or "due-on-sale"
clauses in which future refinancing or sale of the Properties could cause the
maturity dates of the mortgages to be accelerated and the financing to become
due immediately. Thus, the Company could be required to sell its Properties on
an all-cash basis or the purchaser might be required to obtain new financing in
connection with the sale. It cannot be predicted whether the holders of
mortgages encumbering the Company's investment Properties will require such
acceleration, or whether other mortgage financing will be available. The
resolution of this issue would depend on the mortgage market, and on financial
and economic conditions existing at the time of the sale or refinancing. The
Company might obtain mortgages that involve balloon payments. Such mortgages
involve greater risks than mortgages with principal amounts amortized over the
term of the loan since the ability of the Company to repay the outstanding
principal amount at maturity may depend on the Company's ability to obtain
adequate refinancing or to sell the Property, which will in turn depend on
economic conditions in general and the value of the underlying Properties in
particular. There can be no assurance that the Company would be able to
refinance or repay any such mortgages at maturity. Further, a significant
decline in the value of the underlying Property could result in a loss of the
Property by the Company through foreclosure.
The Company does not intend to make distributions from borrowings or
refinancings. However, it is possible that the Company might, under certain
circumstances, find it necessary to borrow and distribute the borrowed funds to
comply with the distribution requirements for REITs under the Code. However, the
obligation to make principal payments on any such borrowings might adversely
affect the Company's ability to make the required distributions to maintain its
REIT status. See "Federal Income Tax Considerations -- Requirements for
Qualification as a REIT -- Annual Distribution Requirement." Since the REIT
distribution requirement is based on the Company's taxable income (with various
adjustments) rather than cash flow, the Company expects to be able to satisfy
the requirement without any borrowing. However, if such a borrowing were
necessary, the resulting distribution would not reflect a return on the
Shareholders' investments.
The Company's Bylaws prohibit the Company from incurring debt (secured or
unsecured) if such debt would result in aggregate debt exceeding 100% of "Net
Assets" (defined generally to mean assets at cost), before subtracting
liabilities, unless the excess borrowing is approved by a majority of the
Independent Directors and disclosed to the Shareholders as required by the
Bylaws. The Bylaws also prohibit the Company from allowing aggregate borrowings
to exceed 50% of the Company's "Adjusted Net Asset Value" (defined generally to
mean assets at fair market value), before subtracting liabilities, subject to
the same exception. In addition, the Bylaws provide that the aggregate
borrowings of the Company must be reasonable in relation to the Net Assets of
the Company and must be reviewed quarterly by the Directors. Except as set forth
in this paragraph, the Company is not limited in the amount of debt it can
incur.
PRIOR PERFORMANCE DIFFICULTIES OF CERTAIN AFFILIATES
Certain private partnerships previously organized by Affiliates of the
Advisor have experienced certain operating difficulties. These operating
Difficulties led to (1) filings by certain partnerships for reorganization under
Chapter 11 of the United States Bankruptcy Code, some of which filings ended in
foreclosures on partnership property, and (ii) other partnerships consenting to
negotiated foreclosures on their properties. Each such partnership owned a
single property, and the adverse business development affecting the partnership
therefore resulted in such partnership ceasing all cash distributions to
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<PAGE>
investors. See "The Advisor -- Prior Performance of Programs Sponsored by
Affiliates of the Advisor." The Advisor believes that all of the investment
vehicles experiencing such difficulties had investment objectives and policies
dissimilar to those of the Company, and that their difficulties are attributable
to a combination of factors (principally high leverage, changes in tax laws, a
general downturn in economic conditions and the unavailability of favorable
financing) which are not expected to be applicable to the Company. However,
prospective investors should consider the experience of the Advisor and its
Affiliates in evaluating an investment in the Company.
FEDERAL INCOME TAX RISKS
Failure to Maintain REIT Status. The Company intends to conduct its
operations in a manner that will permit it to qualify as a REIT for federal
income tax purposes. Although the Company has not requested, and does not expect
to request, a ruling from the Internal Revenue Service (the "Service") that it
will qualify as a REIT, it has received an opinion of its counsel, McGuire,
Woods, Battle & Boothe, L.L.P. that, based upon certain representations and
assumptions described in "Federal Income Tax Considerations," it does so
qualify. However, investors should be aware that opinions of counsel are not
binding upon the Service. Furthermore, both the validity of the opinion and the
continued qualification of the Company for treatment as a REIT will depend on
its continuing ability to meet various requirements concerning, among other
things, the ownership of its Shares, the nature of its assets, the sources of
its income and the amount of its distributions to Shareholders. Failure to meet
any of such requirements with respect to a particular taxable year could result
in termination of the Company's election to be a REIT, effective for the year of
such failure and the four succeeding taxable years.
To qualify as a REIT, the Company must distribute to the Shareholders an
amount equal to at least 95% of its "REIT taxable income" (plus certain other
items). In the event any Company expenditure, including a fee paid to the
Advisor, is disallowed for any reason, the asserted deductions could be
deferred, reduced or eliminated. Any retroactive increase in the Company's
taxable income resulting from the disallowance of a Company deduction could
result in (i) a failure of the Company to meet the income distribution
requirement, (ii) the imposition of Company-level taxation on additional amounts
of undistributed REIT income, or (iii) an increase in the amount of REIT income
on which an excise tax is imposed. However, if the Company makes distributions
in accordance with its stated policy, it does not expect that a
recharacterization of its expenses would have the effects described. See
"Federal Income Tax Considerations -- Requirements for Qualification as a REIT
- -- Annual Distribution Requirements."
In any year for which the Company failed to qualify as a REIT, it generally
would be subject to federal income taxation in the same manner as a regular
corporation. In such event, the Company would not be allowed a deduction for
earnings distributed to the Shareholders, thereby subjecting such earnings
(including gains from sales of Properties) to taxation at both the Company and
Shareholder levels. The resulting tax liability to the Company would reduce
substantially the amount of Company cash available for distribution to the
Shareholders. Although the Company would be eligible to re-elect REIT status
after five years, the burden of double taxation might cause the Company to
liquidate before that time. See "Federal Income Tax Considerations -- Federal
Income Taxation of the Company," "-- Requirements for Qualification as a REIT"
and "-- Federal Income Taxation of the Shareholders."
Uncertainties in and Possible Changes to the Tax Law. The absence of Treasury
Regulations and other administrative interpretations with respect to many
provisions of the Code, combined with the highly technical and complex nature of
the rules governing REITs, gives rise to uncertainty concerning various tax
aspects of REITs generally and the tax consequences of an investment in the
Company in particular. Furthermore, the Company cannot predict whether or what
legislative, administrative, or judicial changes or developments may take place
in the future, any of which might impact the Company adversely, and perhaps
retroactively. Potential investors should consult their tax advisors concerning
the potential impact of any such changes or developments.
IMMEDIATE DILUTION
Purchasers of the Shares offered hereby will experience immediate dilution in
the net tangible book value of the Shares from the public offering price.
See "Dilution."
14
<PAGE>
ENVIRONMENTAL PROBLEMS AND LIABILITIES
While the Company intends to exercise due diligence by securing a report from
a qualified environmental engineer prior to the acquisition of any Property,
there can be no assurance that hazardous substances or wastes will not be
discovered on Properties subsequent to acquisition by the Company. Federal law
imposes liability on any owner of property or predecessor in title for the
presence on the premises of improperly disposed hazardous substances. This
liability is without regard to fault for or knowledge of the presence of such
substances and may be imposed jointly and severally upon all succeeding
landowners from the date of the first improper disposal. The laws of the states
in which the Company may acquire Properties may have additional requirements. If
it is ever determined that hazardous substances are present on a Property, the
Company could be required to pay all costs of any necessary cleanup work,
although under certain circumstances claims against other responsible parties
could be made by the Company. The Company is unaware of any material
environmental problem on or affecting any of the Properties it owns as of the
date of this Prospectus.
COMPETITION FOR PROPERTIES AND TENANTS
The results of operations of the Company will depend upon the availability of
suitable opportunities for investment of its funds, which in turn depends to a
large extent on the type of investment involved, the condition of the financial
markets, the nature and geographical location of the Property, and other
factors, none of which can be predicted with certainty. The Company will be
competing for acceptable investments with other financial institutions,
including insurance companies, pension funds and other institutions, real estate
investment trusts, and limited partnerships that have investment objectives
similar to those of the Company. Many of these competitors have greater
resources than the Company, and may have greater experience than the Board of
Directors, the Advisor and its Affiliates.
In addition, when the Company owns a particular Property it will be competing
for tenants with many other Properties in the same market. Various competing
properties may be newer than the Company's Property, or may offer superior
amenities, a superior location, perceived superior management or other
advantages over the Company's Property. The adverse impact of competition may be
greater during times of local or general economic downturns. The general effect
of such competition may be a decrease in the occupancy rate at Company
Properties, a decrease in rental rates at Company Properties, or both, which in
turn will mean a decrease in Company income and lower, if any, distributions by
the Company to Shareholders.
The Company owns more than one Property in several cities. Generally, the
Company may acquire multiple Properties in cities, particularly where the cities
involved are perceived as being favorable rental markets. The ownership of
multiple Properties within a given city or rental market may offer some
operational economies for the Company. However, Properties located within the
same city or rental market area may, to a certain extent, compete with one
another for tenants. The Company does not plan to acquire multiple Properties in
any city or rental market if the Company believes that the Properties would be
engaged in competition with each other which could adversely affect the
operations of any Property.
UNINSURED LOSSES
The Advisor will arrange for comprehensive insurance, including fire,
liability, and extended coverage on all Properties. However, there are certain
types of losses (generally of a catastrophic nature) which may be either
uninsurable or not economically insurable. These losses generally include those
resulting from war, earthquakes and floods, as well as punitive damages. If any
such loss occurs and is not covered by insurance, the Company might suffer a
loss of capital invested and any profits which might be anticipated from the
Property in question. The Company from time to time will consider whether to
obtain earthquake and flood insurance for its Properties to the extent that it
is economically available.
REQUIRED RELIANCE ON MANAGEMENT
Shareholders will not have any active participation in management of the
Company or the investment of offering proceeds; rather, they must rely on the
management and acquisition expertise provided
15
<PAGE>
by the Board of Directors, the Advisor and its Affiliates. Thus, no person
should purchase any of the Shares offered hereby unless he is willing to entrust
all aspects of the management of the Company to the Board of Directors, the
Advisor and its Affiliates.
POSSIBLE CHANGES IN INVESTMENT OBJECTIVES AND POLICIES MAY NOT SERVE THE
INTERESTS OF CERTAIN SHAREHOLDERS
Subject to limited restrictions in the Company's Bylaws, the Articles of
Incorporation and applicable law, the Board of Directors has significant
discretion to modify the investment objectives and policies of the Company, as
stated in this Prospectus. See "Investment Objectives and Policies -- Changes in
Objectives and Policies." The Advisor believes that, since any such action by
the Board of Directors would be based upon the perceived best interests of the
Company and the Shareholders, the existence of such discretion to modify the
investment objectives and policies would generally be beneficial to the
Shareholders. However, the exercise of such discretion could result in the
Company adopting new investment objectives and policies which differ materially
from those described in this Prospectus.
RESPONSIBILITIES OF DIRECTORS, ADVISOR AND AFFILIATES -- POSSIBLE INADEQUACY
OF REMEDIES; DIRECTORS, ADVISOR AND AFFILIATES BENEFIT FROM EXCULPATION AND
INDEMNIFICATION PROVISIONS
The Advisor and the Directors are accountable to the Company and its
Shareholders as fiduciaries and consequently must exercise good faith and
integrity in handling the Company's affairs. This is a rapidly developing and
changing area of the law, and Shareholders who have questions concerning the
duties of the Directors and the Advisor should consult with their own counsel.
Virginia corporation law and the Articles of Incorporation of the Company
exculpate each Director and officer in certain actions by or in the right of the
Company from liability unless the Director or officer has engaged in willful
misconduct or a knowing violation of the criminal law or of any federal or state
securities laws. Further, the Advisory Agreement exculpates the Advisor from
liability unless the Advisor has engaged in gross negligence or willful
misconduct. The Articles of Incorporation and the Advisory Agreement,
respectively, also provide that the Company shall indemnify a present or former
Director or officer and the Advisor (and certain Affiliates) against expense or
liability in an action if the Directors (other than the indemnified party)
determine in good faith that the person to be indemnified was acting in good
faith within what he or it reasonably believed to be the scope of his or its
authority and for a purpose which he or it reasonably believed to be in the best
interests of the Company or its Shareholders and that such liability was not the
result of misconduct, bad faith, negligence, reckless disregard of duties or
violation of the criminal law on the part of the person to be indemnified. See
"Summary of Organizational Documents."
As a result of the exculpation and indemnification provisions of the
Company's Articles of Incorporation and the Advisory Agreement, a Shareholder
may have a more limited right of action than such Shareholder would otherwise
have had in the absence of such provisions. The exculpation and indemnification
provisions in the Articles of Incorporation and the Advisory Agreement have been
adopted to help induce the beneficiaries of such provisions to agree to serve on
behalf of the Company or the Advisor by providing a degree of protection from
liability for alleged mistakes in making decisions and taking actions. Such
exculpation and indemnification provisions have been adopted, in part, in
response to a perceived increase generally in shareholders' litigation alleging
director and officer misconduct.
In the opinion of the Securities and Exchange Commission, indemnification for
liabilities arising out of the Securities Act is against public policy and,
therefore, unenforceable.
The Company intends to purchase insurance policies under which Directors,
officers and (if feasible) other agents of the Company will be insured against
liability or loss arising out of actual or asserted misfeasance or nonfeasance
in the performance of their duties, to the extent such insurance is available at
reasonable rates.
ARBITRARY SHARE OFFERING PRICE
The per-Share offering price has been established arbitrarily by the Company.
Neither prospective investors nor Shareholders should assume that the per-Share
price reflects the intrinsic or realizable value of the Shares or otherwise
reflects the Company's value, earnings or other objective measures of worth.
16
<PAGE>
ADVISOR AND AFFILIATES MAY PURCHASE AND VOTE SHARES
As of the completion of the Second Offering, the Advisor and its Affiliates
own an aggregate of approximately 118,764 Shares (including Shares which could
be acquired by the exercise of options), which represent less than 1% of the
total number of Shares issued and outstanding. The Advisor and Affiliates of the
Advisor may purchase in this offering up to 2.5% of the total number of Shares
of the Company sold in this offering (113,636 Shares if the Maximum Offering
amount is sold), subject to the restrictions on accumulation of Shares contained
in the Company's Bylaws, which generally prohibit accumulation by any person or
entity of more than 9.8% of all the Company's outstanding Shares. Any purchase
of Shares in this offering by the Advisor or its Affiliates must be for
investment, and not for resale or distribution.
In addition to the foregoing, the Company has adopted two stock incentive
plans for the benefit of the Directors of the Company and certain employees of
the Company and of the Advisor and Affiliates of the Advisor. See "Management --
Stock Incentive Plans."
Any such purchaser would possess the same voting power per Share as any other
purchaser. While it is not expected that the Advisor and its Affiliates will
purchase a substantial number of Shares, they will be permitted to vote any
Shares purchased by them in the same manner as other Shareholders.
POTENTIAL DILUTION OF SHAREHOLDERS' INTERESTS
The Board of Directors is authorized, without Shareholder approval, to issue
additional Shares or to raise capital through the issuance of options, warrants
and other rights, on such terms and for such consideration as the Board of
Directors in its sole discretion may determine. See "Summary of Organizational
Documents -- Issuance of Securities." Any such issuance could result in dilution
of the equity of the Shareholders. Without limiting the generality of the
foregoing, the Board of Directors may, in its sole discretion, issue Shares or
other equity or debt securities of the Company, (1) to persons from whom the
Company purchases a Property, as part or all of the purchase price of the
Property, or (2) to the Advisor or its Affiliates in lieu of cash payments
required under the Advisory Agreement or other contract or obligation. The Board
of Directors, in its sole discretion, may determine the value of any Shares or
other equity or debt securities issued in consideration of property or services
provided, or to be provided, to the Company, except that while Shares are
offered by the Company to the public, the public offering price of such Shares
shall be deemed their value.
The Company has adopted two stock incentive plans for the benefit of the
Directors of the Company and certain employees of the Company and of the Advisor
and its Affiliates. See "Management -- Stock Incentive Plans." The effect of the
exercise of such options could be to dilute the value of the Shareholders'
investments to the extent of any difference between the exercise price of an
option and the value of the Shares purchased at the time of the exercise of the
option.
In addition, the Company expressly reserves the right to implement a dividend
reinvestment plan involving the issuance of additional Shares by the Company, at
an issue price determined by the Board of Directors.
ACCUMULATION RESTRICTIONS
The Company's Bylaws generally prohibit ownership of more than 9.8% of the
Company's outstanding Shares by one investor. See "Summary of Organizational
Documents -- Redemption and Restrictions on Transfer." That restriction is
designed to ensure that the Company does not violate certain share accumulation
restrictions imposed by the Code on REITs. The provisions restricting
concentrations of Share ownership also may have the effect of deterring the
acquisition of, or a change in, control of the Company. In addition, certain
states may impose investor suitability standards on the transfer of Shares.
JOINT VENTURE INVESTMENTS -- RISKS OF CONFLICTING INTERESTS AND IMPASSE
Under certain circumstances, the Company might participate with an entity
(including Affiliates of the Advisor) in jointly acquiring an investment
Property. Any joint venture investment of the Company would be subject to the
same conditions, limitations and restrictions applicable to a Company invest-
17
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ment not undertaken as a joint venture, and the use of a joint venture structure
would not itself be designed to alter or expand the investment objectives and
policies of the Company. Investment through a joint venture could, for example,
permit the Company to invest in a Property which is too large for the Company to
acquire by itself.
The investment by the Company through a joint venture could subject the
Company to risks not otherwise present, although the Company will endeavor to
structure any joint venture investment so as to minimize the number and
magnitude of risks not generally associated with a Company investment. Risks not
otherwise present could, however, include the possibility that the joint venture
participant will have economic interests different from the Company and that the
participant might be in a position to take actions contrary to the instructions
of the Company or contrary to the interests of the Company. In addition, in
joint venture investments there is a potential risk of impasse on decisions if
neither joint venture participant controls the venture. Conversely, if the
Company has a right of first refusal to purchase a joint venture participant's
interest, there is a potential risk that it may not have the resources to do so.
ESTIMATED USE OF PROCEEDS
The Company intends to invest the net proceeds of this offering in equity
ownership interests in existing residential apartment communities in the
mid-Atlantic and southeastern regions of the United States. Pending such
investment and to the extent the proceeds are not invested in real estate as
described herein, the proceeds may be invested in certain permitted types of
temporary investments. See "Investment Objectives and Policies -- General." All
proceeds of this offering received by the Company must be invested or committed
for investment in Properties or allocated to working capital reserves or used
for other proper Company purposes within the later of two years after
commencement of the offering or one year after termination of the offering; any
proceeds not invested or committed for investment or allocated to working
capital reserves or used for other proper Company purposes by the end of such
time period shall be returned to investors within 30 days after the expiration
of such period, but the Company may elect to return such proceeds earlier if,
and to the extent, required by applicable law (including to the extent necessary
to avoid characterization as an "investment company"). The proceeds of this
offering will be received and held in trust for the benefit of investors in
compliance with applicable securities laws, to be used only for the purposes set
forth herein.
As described under "Compensation," the Company's Bylaws prohibit total
Organizational and Offering Expenses from exceeding 15% of Total Contributions.
"Organizational and Offering Expenses" means, generally, all expenses incurred
in organizing the Company and offering and selling the Shares, including selling
commissions and fees, legal fees and accounting fees, and federal, state and
other regulatory filing fees. The Bylaws also prohibit the total of all
Acquisition Fees (defined generally as all fees and commissions paid by any
party in connection with the Company's purchase of real Property) and
Acquisition Expenses (defined generally as all expenses related to the selection
or acquisition of Properties by the Company) paid in connection with an
acquisition of a Property from exceeding 6% of the contract price for the
Property (unless such excess is approved by the Board of Directors, as described
therein). Any Organizational and Offering Expenses or Acquisition Fees and
Acquisition Expenses incurred by the Company in excess of the permitted limits
shall be payable by the Advisor immediately upon demand of the Company.
As indicated below, the Company expects that 86.5% of the gross offering
proceeds will be available for investment in Properties and 0.5% will be
allocated to the Company's working capital reserve. However, subject generally
to the limitation in the Company's Bylaws on permitted Organizational and
Offering Expenses, and Acquisition Fees and Acquisition Expenses, the percentage
of gross offering proceeds available for investment could be less.
As discussed under "Compensation," the Advisor and its Affiliates will be
entitled to reimbursement for expenses incurred by them in the operation of the
Company as well as, among other fees, a Real Estate Commission equal to 2% of
the proceeds of the offering used to pay each Property's gross purchase price
(which does not include amounts budgeted for repairs and improvements), which
constitutes an "Acquisition Fee."
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The following table reflects the intended application of the proceeds from
the sale of the Common Shares.
<TABLE>
<CAPTION>
% OF GROSS
AMOUNT PROCEEDS
-------------- ----------
<S> <C> <C>
Gross Proceeds (1)................................... $50,000,000 100.00%
Less:
Offering Expenses (2)............................... 500,000 1.00%
Selling Commissions (3)............................. 3,750,000 7.50%
Marketing Expense Allowance (3) .................... 1,250,000 2.50%
----------- ------
Net Proceeds after Offering Costs.................... $44,500,000 89.00%
Less Acquisition Fees and Expenses (4) .............. 1,000,000 2.00%
----------- ------
Proceeds Available for Investment and Working
Capital............................................. $43,500,000 87.00%
Less Working Capital Reserve (5) .................... 250,000 0.50%
------- ----
Net Amount Available for Investment in Properties
(6)................................................. $43,250,000 86.50%
=========== =====
</TABLE>
(1) The Shares are being offered on a "best-efforts" basis and there can be
no assurance that any Shares will be sold or that any proceeds will be
received.
(2) These amounts reflect the Company's estimate of Offering Expenses,
exclusive of the Selling Commissions and the Marketing Expense Allowance
payable to the Managing Dealer or the Selected Dealers. If such expenses
are greater than the amounts indicated, the amount of proceeds available
for investment will decrease, and if such expenses are less, the amount
available for investment will increase.
(3) Payable to the Managing Dealer or the Selected Dealers.
(4) These amounts include a Real Estate Commission payable to an Affiliate of
the Advisor in an amount equal to 2% of the proceeds of the offering used
to pay the purchase price of each Property acquired (which does not
include amounts budgeted for repairs and improvements) plus the Company's
estimates of other expenses and fees which will be incurred in connection
with Property acquisitions. As described under "Compensation," management
of the Company is considering the conversion of the Company to
"self-administered" status which, if undertaken would affect the fees
payable by the Company.
(5) Until used, amounts in the Company's working capital reserve, together
with any other proceeds not invested in Properties or used for other
Company purposes, will be invested in certain permitted temporary
investments, such as U.S. Government securities or similar highly liquid
instruments. See "Investment Objectives and Policies -- General."
(6) The investment Properties are expected to be existing residential
apartment communities in the mid-Atlantic and southeastern regions of the
United States. See "Investment Objectives and Policies."
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COMPENSATION
GENERALLY
The table below describes the compensation and reimbursement which will be
paid to the Advisor and its Affiliates by the Company. The officers of the
Company are not paid salaries by the Company. Such officers are officers of the
Advisor and its Affiliates, which entities are entitled to certain fees for
services rendered by them to the Company. Thus, the officers of the Company are,
in essence, compensated by the Advisor or its Affiliates.
The Company is an "externally-advised" or "externally-managed" REIT. As
described herein, the Advisor (Cornerstone Advisors, Inc.) oversees the ordinary
business of the Company pursuant to the Advisory Agreement. In addition,
Cornerstone Management Group, Inc. and Cornerstone Realty Group, Inc. (both
Affiliates of the Advisor) provide Property management services and Property
acquisition and disposition services to the Company. In exchange for their
services, the Advisor, Cornerstone Management Group, Inc. and Cornerstone Realty
Group, Inc. all receive certain fees and expense reimbursements from the
Company.
The officers and Directors of the Company have undertaken an evaluation of
whether it would be in the best interests of the Company and the Shareholders to
convert the Company into a "self-administered" or "self-managed" REIT. This
conversion, if undertaken, would involve transferring some or all of the
management and other services now being provided by other companies to employees
of the Company. If such conversion were implemented, the Company would no longer
pay fees (such as the Asset Management Fee, Real Estate Commissions and Property
Management Fees) to other companies for services assumed by employees of the
Company, but would itself bear the costs thereof (including salaries and wages
to such employees). Any such conversion would likely involve the payment of
consideration, either in Shares, cash or other property, from the Company to the
entities whose contracts with the Company were being terminated in connection
with such conversion, in recognition of such companies agreeing to the
termination of their agreements. Material developments, if any, pertain to the
possible conversion of the Company to "self-administered" or "self-managed"
status will be reported in supplements to this Prospectus or in appropriate
filings under the Securities Exchange Act of 1934.
The Company's Bylaws generally prohibit the Operating Expenses of the Company
(generally defined as all Company operating, general and administrative
expenses, but excluding depreciation and similar non-cash items and expenses of
raising capital, interest, taxes and costs related to asset acquisition,
operation and disposition) from exceeding in any year the greater of 2% of the
total Average Invested Assets of the Company (generally defined as the monthly
average of the aggregate book value of Company assets invested in real estate,
before deducting depreciation) or 25% of the Net Income of the Company
(generally defined as the revenues for any period, less expenses other than
depreciation or similar non-cash items) for such year. Unless the Independent
Directors conclude that a higher level of expenses is justified based upon
unusual and nonrecurring factors which they deem sufficient, the Advisor must
reimburse the Company for the amount of any such excess. The Advisor must make
such reimbursement within 120 days from the end of the Company's fiscal year.
The Advisor will be entitled to be repaid such reimbursements in succeeding
fiscal years to the extent actual Operating Expenses are less than the permitted
levels. In determining that unusual and nonrecurring factors are present, the
Independent Directors will be entitled to consider all relevant factors
pertaining to the Company's business and operations, and will be required to
explain their conclusion in written disclosure to the Shareholders. The Advisor
generally would expect to pay any required reimbursement out of compensation
received from the Company in the current or prior years. However, there can be
no assurance that the Advisor would have the financial ability to fulfill its
reimbursement obligations.
The Company's Bylaws further prohibit the total Organizational and Offering
Expenses (including Selling Commissions) from exceeding 15% of the Total
Contributions. Furthermore, the total of all Acquisition Fees and Acquisition
Expenses paid by the Company in connection with the purchase of a Property by
the Company shall be reasonable and shall in no event exceed an amount equal to
6% of the contract price for the Property, unless a majority of the Directors
(including a majority of the
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Independent Directors) not otherwise interested in the transaction approves the
transaction as being commercially competitive, fair and reasonable to the
Company. For purposes of the foregoing limitation, the "contract price for the
Property" means the amount actually paid or allocated to the purchase,
development, construction or improvement of the Property, exclusive of
Acquisition Fees and Acquisition Expenses. Any Organizational and Offering
Expenses or Acquisition Fees and Acquisition Expenses incurred by the Company in
excess of the permitted limits shall be payable by the Advisor immediately upon
demand of the Company.
The Company will pay David Lerner Associates, Inc. Selling Commissions equal
to 7.5% of the purchase price of the Shares sold by it and a Marketing Expense
Allowance equal to 2.5% of the purchase price of the Shares sold by it. If the
Maximum Offering is sold by the Managing Dealer, the Selling Commissions would
be $3,750,000 and the Marketing Expense Allowance would be $1,250,000.
<TABLE>
<CAPTION>
PERSON
RECEIVING TYPE OF AMOUNT OF
COMPENSATION (1) COMPENSATION COMPENSATION (2)
- --------------------------- ------------------------------------------- ----------------------------------------------
<S> <C> <C>
Cornerstone Realty Real Estate Commission for acquiring the 2% of the proceeds of the offering used to
Group, Inc. ("CRG") Company's Properties pay the purchase prices of the Properties
purchased by the Company. (3)
Operational Phase
Annual fee ranging from 0.1% of Total
Asset Management Fee for managing the Contributions to 0.25% of Total
The Advisor Company's day-to-day operations Contributions (payable quarterly) --
Currently, up to $625,000 per year;
a maximum of $750,000 per year if the
Maximum Offering is sold. (4)
Cornerstone Management Property Management Fee for managing the 5% of the monthly gross revenues of the
Group, Inc. ("CMG") Company's Properties Properties. (5)
The Advisor, CRG and Reimbursement for costs and expenses Amount is indeterminate.
CMG incurred on behalf of the Company, as
described in Note (6)
Disposition Phase
CRG Real Estate Commission for selling the Up to 2% of the gross sales prices of the
Company's Properties Properties sold by the Company. (7)
All Phases
The Advisor, CRG and
CMG Payment for Services and Property (8) Amount is indeterminate.
</TABLE>
- ----------
(1)As discussed in this Section and under "Conflicts of Interest," the
Advisor and its Affiliates will receive different types of compensation
for services rendered in connection with the acquisition, management and
disposition of Properties, as well as the management of the day-to-day
operations of the Company. As discussed under "Conflicts of Interest," the
receipt of such fees could result in potential conflicts of interest for
persons who participate in decision making on behalf of both the Company
and such other entities. Thus, for example, because Cornerstone Realty
Group, Inc., an Affiliate of the Advisor, will receive a 2% commission
upon each purchase by the Company of a Property, and a commission of 2%
upon each sale by the Company of a Property if certain conditions are met,
its compensation will increase in proportion to the number of Properties
purchased and sold by the Company and the Properties' purchase and sale
prices. On the other hand, Cornerstone Management Group, Inc., also an
Affiliate of the Advisor, will receive a management fee equal to 5% of the
monthly gross revenues of each Property owned by the Company. The
management fee would cease to be payable if the Property being managed
were sold. Since these entities receiving compensation are Affiliates of
the Advisor, which in turn will provide advice to the Company concerning
the acquisition, holding and dispo-
21
<PAGE>
sition of Properties, the Advisor and its principals could have a conflict
of interest in presenting investment advice to the Company. The Advisor's
Asset Management Fee is a percentage of total Contributions (that is,
total proceeds received from time to time by the Company from the sales of
its Shares). Accordingly, the Advisor has an incentive to see that sales
of Shares are closed as quickly as possible by the Company. Since the
Company pays compensation to the Advisor and certain of its Affiliates
there are potential conflicts of interest as described in "Conflicts of
Interests." The Advisor and its Affiliates do not intend to take any
action or make any decision on behalf of the Company which is based,
wholly or in part, upon a consideration of the compensation payable to
them as a consequence of such action or decision. In addition, the
Company's affairs will be directed by a Board of Directors, a majority of
whose members are Independent Directors. See "Management." Compensation
and reimbursements which would exceed specified limits or ceilings cannot
be recovered by the Advisor or its Affiliates through reclassification
into a different category.
(2)Except as otherwise indicated in this table (including these notes), the
specific amounts of compensation or reimbursement payable to the Advisor
and its Affiliates are not now known and generally will depend upon
factors determinable only at the time of payment. Compensation payable to
the Advisor and its Affiliates may be shared or reallocated among such
Affiliates in their sole discretion as they may agree.
(3)Under a Property Acquisition/Disposition Agreement with the Company,
Cornerstone Realty Group, Inc. has agreed to serve as the real estate
broker in connection with both the Company's purchases and sales of
Properties. In exchange for such services, such corporation will be
entitled to a fee from the Company of 2% of the gross purchase price
(which does not include amounts budgeted for repairs and improvements) of
each Property purchased by the Company; provided that if indebtedness is
assumed or incurred in connection with the acquisition the acquisition fee
that would have been payable with respect to the portion of the purchase
price represented by such indebtedness shall not be payable until such
time, if ever, that such indebtedness is repaid with the proceeds of this
Offering or other equity financing.
(4)"Total Contributions" means the gross offering proceeds which have been
received from time to time from the sale of the Shares. Under its Advisory
Agreement with Cornerstone Advisors, Inc., the Company is obligated to pay
to the Advisor an Asset Management Fee which is a percentage of Total
Contributions. The applicable percentage used to calculate the Asset
Management Fee is based on the ratio of Funds from Operations to Total
Contributions (such ratio being referred to as the "Return Ratio") for the
preceding calendar quarter. The per annum Asset Management Fee is
initially equal to the following with respect to each calendar quarter:
0.1% of Total Contributions if the Return Ratio for the preceding calendar
quarter is 6% or less; 0.15% of Total Contributions if the Return Ratio
for the preceding calendar quarter is more than 6% but not more than 8%;
and 0.25% of Total Contributions if the Return Ratio for the preceding
calendar quarter is above 8%. The Advisory Agreement has a current term
beginning as of July 1, 1996 and ending on June 30, 1997, and is
thereafter reviewed annually. Assuming the Maximum Offering ($50,000,000)
is sold, the annual Asset Management Fee would be between $300,000 and
$750,000. Under the Advisory Agreement, and in exchange for the Asset
Management Fee, the Advisor will seek to obtain, investigate, evaluate and
recommend Property investment opportunities for the Company, serve as
Property investment advisor and consultant in connection with investment
policy decisions made by the Directors and, subject to the direction of
the Directors, supervise the day-to-day operations of the Company. The
primary task of the Advisor will be to evaluate suitable Property
investments for the Company, and to make recommendations concerning
Property acquisitions and dispositions. The Bylaws require the Independent
Directors to monitor the Advisor's performance of the Advisory Agreement
and to determine at least annually that the amount of compensation the
Company pays the Advisor is reasonable, based on such factors as such
Independent Directors deem appropriate. See "The Advisor and Affiliates."
(5)Cornerstone Management Group, Inc., an Affiliate of the Advisor, is
expected to provide Property management services for each of the Company's
Properties and in exchange therefor will receive a monthly fee equal to 5%
of the monthly gross revenues of the Properties. Cornerstone Management
Group, Inc. is also expected to be responsible for the accounting and
financial reporting responsibilities for each of the separate Properties
acquired by the Company. Each Property management agreement will have an
initial term of two years and thereafter will be renewed automatically for
successive two-year terms until terminated as provided therein or until
the Property is sold. See "Investment Objectives and Policies --
Management of Properties." The Company believes that the monthly 5%
Property management fee it pays to Cornerstone Management Group, Inc. is
generally comparable with the management fees paid by other REITs which
engage separate Property management companies. However, such fee may
represent an expense which is greater than the management expenses of
self-administered REITs, which do not use an outside Property management
company.
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<PAGE>
(6)Cornerstone Realty Group, Inc. and its Affiliates will be reimbursed for
all direct costs of acquiring and operating the Properties and of goods
and materials used for or by the Company and obtained from entities that
are not Affiliated with the Advisor. These costs and expenses include, but
are not limited to, legal fees and expenses, travel and communication
expenses, expenses relating to Shareholder communications, costs of
appraisals, nonrefundable option payments on Property not acquired,
accounting fees and expenses, title insurance, compensation of on-site
management personnel and leasing agents (including any incentive
compensation), to the extent any of such persons are not employees of the
Company, maintenance and repair expenses, advertising and promotional
expenses, and all other fees, costs and expenses directly attributable to
the acquisition, ownership and operation of the Properties. In addition,
Cornerstone Management Group, Inc. will be reimbursed for salaries and
related expenses and overhead expenses associated with bookkeeping,
accounting and financial reporting services to the Properties. Operating
Expenses reimbursable to the Advisor or its Affiliates are subject to the
overall limitation on Operating Expenses discussed above, but the amount
of reimbursement is not otherwise limited.
(7)Under the Property Acquisition/Disposition Agreement described in note
(3), Cornerstone Realty Group, Inc. also will be entitled to a fee from
the Company in connection with the Company's sale of each Property equal
to 2% of the gross sales price of the Property if, and only if, the sales
price exceeds the sum of (1) the Company's cost basis in the Property
(consisting of the original purchase price plus any and all capitalized
costs and expenditures connected with the Property) plus (2) 10% of such
cost basis. If the sales price does not equal such amount, no fee is
payable, but Cornerstone Realty Group, Inc. is entitled to payment by the
Company of its "direct costs" incurred in marketing the Property, where
"direct costs" refers to a reasonable allocation of all costs, including
salaries of personnel, overhead and utilities, allocable to services in
marketing and selling such Property. Subject to the conditions applicable
generally to transactions between the Company and Affiliates of the
Advisor (see "Conflicts of Interest -- Transactions with Affiliates and
Related Parties"), Affiliates of the Advisor may render services to the
Company in connection with Company financings or refinancings, and would
be entitled to compensation for such services. As of the date of this
Prospectus, there are no specific agreements for any such services.
(8)The Advisor and its Affiliates may provide other services or property to
the Company under certain conditions, and will be entitled to compensation
or payment therefor. The conditions, which are summarized under "Conflicts
of Interest -- Transactions with Affiliates and Related Parties," include
the requirement that each such transaction be approved by the affirmative
vote of a majority of the Independent Directors. Currently, there are no
arrangements or proposed arrangements between the Company, on the one
hand, and the Advisor or its Affiliates, on the other hand, for the
provision of services or property to the Company or the payment of
compensation or reimbursement therefor. If any such arrangements arise in
the future, the terms of such arrangements, including the compensation or
reimbursement payable thereunder, will be subject to the restrictions in
the Company's Bylaws and also will be subject to the approval of a
majority of the Independent Directors. The Bylaws provide generally that a
transaction between the Company, on the one hand, and the Advisor or an
Affiliate, on the other hand, is permitted only if the transaction is in
all respects on such terms at the time of the transaction and under the
circumstances then prevailing, fair and reasonable to the Shareholders
and, in the case of a transaction involving the acquisition of property,
only if such acquisition is on terms generally prevailing for arms-length
transactions concerning comparable property and at a price to the Company
no greater than the cost of the property to the seller, unless substantial
justification for any excess exists and such excess is not unreasonable.
Subject to these general provisions, the amounts, forms and payment terms
for services or property rendered to the Company by the Advisor or its
Affiliates are not otherwise restricted. Such compensation, reimbursement
or payment could take the form of cash or property, including Shares.
COMPENSATION PAID TO ADVISOR AND AFFILIATES IN 1994 AND 1995
Cornerstone Advisors, Inc. earned an Asset Management Fee of $219,930 in
1995. Cornerstone Realty Group, Inc. earned real estate commissions aggregating
$1,302,550 during 1995. Cornerstone Management Group, Inc. was paid Property
management fees aggregating $1,022,998 in 1995. In addition, the Cornerstone
Companies were paid expense reimbursements aggregating $1,663,206 during 1995,
most of which were for salary reimbursements for persons employed to manage,
lease and maintain the Company's various Properties. Cornerstone Advisors, Inc.,
by Glade M. Knight, its sole shareholder, agreed to waive its asset management
fee and any related expenses for 1994 in partial consideration for the Shares
that were distributed to Mr. Knight by Cornerstone Realty Advisors, Inc. in
connection with the termination of the prior advisory agreement. See Note (1),
below. Cornerstone Realty Group, Inc.
23
<PAGE>
earned real estate commissions aggregating $349,880 during 1994. Cornerstone
Management Group, Inc. was paid Property management fees aggregating $581,520 in
1994. In addition, the Cornerstone Companies were paid expense reimbursements
aggregating $864,296 during 1994, most of which were for salary reimbursements
for persons employed to manage, lease and maintain the Company's Properties.
The staffs of the individual Properties owned by the Company were employees
of Cornerstone Management Group, Inc. through December 31, 1995. These employees
perform the leasing, collection and maintenance functions to run the Properties
on a day-to-day basis. Effective January 1, 1996, these employees were directly
employed by the Company, and not Cornerstone Management Group, Inc., and there
will no longer be reimbursement for salary expenses of these employees. Instead,
such salaries will be paid directly by the Company.
Messrs. Zuckerbrod and Taubenfeld, Directors of the Company, are principals
in the law firm of Zuckerbrod & Taubenfeld of Cedarhurst, New York, which has
acted as counsel to the Company in connection with the Company's acquisition of
its Properties since the Company began operations. This law firm will render
additional such services to the Company in 1996 and will receive compensation
for such services.
Mr. Grandis, who is a Director of the Company, is a Partner in the law firm
of McGuire, Woods, Battle & Boothe, L.L.P., which serves as general counsel to
the Company and certain of its Affiliates. Such representation is expected to
continue in 1996.
- ----------
(1)On May 13, 1993, the Company entered into a Advisory Agreement with
Cornerstone Realty Advisors, Inc. Under this Advisory Agreement,
Cornerstone Realty Advisors, Inc. agreed to serve as Advisor to the
Company in exchange for an Asset Management Fee equal to 1.0% per annum of
"Original Assets," defined as proceeds from the sales of Shares in the
Company. The initial term of the Advisory Agreement was due to expire in
September, 1995. The outstanding stock of Cornerstone Realty Advisors,
Inc. was owned 50% by Mr. Knight, 25% by Mr. Zuckerbrod and 25% by Mr.
Taubenfeld. By agreement with the Company's Board of Directors,
Cornerstone Realty Advisors, Inc. agreed to a waiver of its Asset
Management Fee for 1993. On August 30, 1994, the Company's arrangements
with respect to the Advisory Agreement were substantially restructured, as
described in the balance of this note (1). On August 30, 1994, the
Company's Board of Directors unanimously approved certain changes
involving the advisory services provided to the Company. The changes were
designed generally to enhance further the attractiveness of the Company to
prospective investors by generally decreasing fees payable by the Company
to the Advisor and to tie the advisory fees more directly to performance
and the interests of the shareholders.
Effective July 1, 1994, the Company purchased all of the assets of
Cornerstone Realty Advisors, Inc. (the sole material asset being the
existing Advisory Agreement) in exchange for the payment to Cornerstone
Realty Advisors, Inc. of 40,000 Shares. This transaction was approved and
effectuated in compliance with the provisions of the Company's Bylaws
applicable to transactions between the Company and the Advisor, including
the requirement that the transaction be approved by a majority of the
Independent Directors. The 40,000 Shares would have a purchase price to
the public of $440,000 (based upon the public offering price for the
Shares under the 1994 Prospectus), which is approximately the same as the
total Asset Management Fees which would have been due to Cornerstone
Realty Advisors, Inc. for the period ending December 31, 1994 had the
Advisory Agreement not be cancelled. Effective July 1, 1994, the Advisory
Agreement with Cornerstone Realty Advisors, Inc. was cancelled.
The 40,000 Shares issued by the Company to Cornerstone Realty Advisors,
Inc. were further distributed by Cornerstone Realty Advisors, Inc. in the
following amounts to the following persons: 15,000 Shares to Glade M.
Knight, 10,000 Shares to Martin Zuckerbrod, 10,000 Shares to Harry S.
Taubenfeld, 3,000 Shares to Stanley J. Olander, Jr., and 2,000 Shares to
Debra A. Jones.
Effective July 1, 1994, the Advisory Agreement with Cornerstone Realty
Advisors, Inc. was cancelled. Also, effective July 1, 1994, the Company
entered into a new Advisory Agreement with "Cornerstone Advisors, Inc.," a
Virginia corporation, wholly-owned by Glade M. Knight. The new Advisory
Agreement was in substantially the same form as the previous Advisory
Agreement except that (i) it had an initial term beginning as of July 1,
1994 and ending on June 30, 1995, and is thereafter reviewed annually and
(ii) the Asset Management Fee is based upon the ratio of Funds from
Operations to Total Contributions rather than simply being 1% or Original
Assets. The new Asset Management Fee, which was waived for the balance of
calendar year 1994 (in consideration for a portion of the 15,000 Shares
issued to Mr. Knight, as described above) is payable commencing January 1,
1995, and is calculated as follows: The Asset Management Fee is a
percentage of Total Contributions. The applicable percentage used to
calculate the Asset Management Fee is based on the ratio of Funds from
Operation to Total Contributions (such ratio being referred to as the
"Return Ratio") for the preceding calendar quarter. The per annum Asset
Management Fee equal to the following with respect to each calendar
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<PAGE>
quarter: 0.1% of Total Contributions if the Return Ratio for the preceding
calendar quarter is 6% or less; 0.15% of Total Contributions if the Return
Ratio for the preceding calendar quarter is more than 6% but not more than
8%; and 0.25% of Total Contributions if the Return Ratio for the preceding
calendar quarter is above 8%.
Mr. Knight is the sole shareholder, and a director, of the Advisor,
Cornerstone Realty Group, Inc. and Cornerstone Management Group, Inc. Mr.
Olander, who is also a Director of the Company, serves as a Director of
the Advisor and is an executive officer of the Advisor, Cornerstone Realty
Group, Inc. and Cornerstone Management Group, Inc.
COMPENSATION PAID TO DAVID LERNER ASSOCIATES, INC.
David Lerner, who, from August 3, 1992 to October 24, 1994 served as a
Director of the Company, owns all of the outstanding capital stock of David
Lerner Associates, Inc., which has served as Managing Dealer in the Company's
offer and sale to the public of its Shares. For its services, David Lerner
Associates, Inc. is entitled to Selling commissions equal to 7.5% of the
purchase price for the shares and a Marketing Expense Allowance equal to 2.5% of
the purchase price of the shares. As of the completion of the Second Offering
David Lerner Associates, Inc. had been paid a total of $18,750,000 in Selling
Commissions and $6,250,000 as a Marketing Expense Allowance. It is expected that
David Lerner Associates, Inc. will continue to provide such services and receive
such compensation from and after the date of this Prospectus.
CONFLICTS OF INTEREST
GENERAL
The Company may be subject to various conflicts of interest arising from its
relationship with the Advisor and its Affiliates and with certain Directors. The
Advisor and its Affiliates and the Directors are not restricted from engaging
for their own account in business activities of the type conducted by the
Company, and occasions may arise when the interests of the Company would be in
conflict with those of one or more of the Directors, the Advisor or their
Affiliates. The Advisor and the Directors are accountable to the Company and its
Shareholders as fiduciaries, and consequently must exercise good faith and
integrity in handling the Company's affairs.
The Advisor and its Affiliates will assist the Company in the acquisition,
organization, servicing, management and disposition of investments. At this
time, the Advisor will provide services exclusively to the Company, but the
Advisor may perform similar services for other parties, both Affiliated and
unaffiliated, in the future.
The receipt of various fees from the Company by the Advisor and its
Affiliates may result in potential conflicts of interest for persons who
participate in decision making on behalf of both the Company and such other
entities. Affiliates of the Advisor who participate in decision making on behalf
of the Company will attempt to resolve or eliminate such conflicts of interest
by determining what is in the best interests of the Company and the
Shareholders. In addition, the presence on the Board of Directors of Independent
Directors is intended to ameliorate or eliminate the potential impact of
conflicts of interest for persons who participate in decision making on behalf
of both the Company and the Advisor or its Affiliates.
The Directors, the Advisor and its Affiliates will also be subject to the
various conflicts of interest described below. As described below, certain
policies and procedures will be implemented to eliminate or ameliorate the
effect of potential conflicts of interest. By way of illustration, the Bylaws
place certain limitations on the terms of contracts between the Company and the
Advisor or its Affiliates designed to ensure that such contracts are not less
favorable to the Company than would be available from an unaffiliated party.
However, certain potential conflicts of interest (such as the potential conflict
of interest experienced by an individual who has executive or management
responsibilities with respect to multiple entities) are not easily susceptible
to resolution. Prospective Shareholders are entitled to rely on the general
fiduciary duties of the Directors and the Advisor, as well as the specific
policies and procedures designed to eliminate or ameliorate potential conflicts
of interest described below. The Advisor and its Affiliates believe that general
legal principles dealing with fiduciary and similar duties of corporate officers
and directors, combined with specific contractual provisions in the agreements
be-
25
<PAGE>
tween the Company, on the one hand, and the Advisor and its Affiliates, on the
other hand, will provide substantial protection for the interests of the
Shareholders. Thus, the Advisor and its Affiliates do not believe that the
potential conflicts of interest described herein will have a material adverse
effect upon the Company's ability to realize its investment objectives.
TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
The Board of Directors currently consists of seven members, a majority of
whom are Independent Directors. At all times, a majority of the Board of
Directors must be Independent Directors. The Directors who are not Independent
Directors are Affiliated with the Advisor. Under the Company's Bylaws, any
transaction (whether a sale or acquisition of assets, any borrowing or lending,
any agreement for the provision of property or services, or otherwise) between
the Company, on the one hand, and the Advisor or any Affiliate of the Advisor,
on the other hand (excluding only the entering into, and the initial term under,
the Advisory Agreement, the Property Acquisition/Disposition Agreement, and the
Property Management Agreement for each Property, each of which agreement is
described in this Prospectus) is permitted only if such transaction has been
approved by the affirmative vote of a majority in number of all of the
Independent Directors. In addition, under the Bylaws, any such transaction must
meet certain conditions, including that the transaction be in all respects fair
and reasonable to the Shareholders of the Company. If any such proposed
transaction involves the purchase of property, the purchase must be on terms not
less favorable to the Company than those prevailing for arm's-length
transactions concerning comparable property, and at a price to the Company no
greater than the cost of the asset to the seller unless a majority of the
Independent Directors determines that substantial justification for such excess
exists. Examples of substantial justification might include, without limitation,
an extended holding period or capital improvements by the seller which would
support a higher purchase price.
The Advisor and its Affiliates will receive compensation from the Company for
providing many different services. The fees payable and expenses reimbursable
are subject to the general limitation on Operating Expenses. See "Compensation."
The Board of Directors will have oversight responsibility with respect to any
such relationships and will attempt to ensure that they are structured to be no
less favorable to the Company than the Company's relationships with unrelated
persons or entities and are consistent with the Company's objectives and
policies.
COMPETITION BY THE COMPANY WITH AFFILIATES
Affiliates of the Advisor may form additional REITs, limited partnerships and
other entities to engage in activities similar to those of the Company, although
the Advisor and its Affiliates have no present intention of organizing any
additional REITs. However, until such time as more than 95% of the proceeds of
this offering are invested, the Advisor and its Affiliates shall present to the
Company any suitable investment opportunity before offering it to any other
Affiliated entity. The competing activities of the Advisor and its Affiliates
may involve certain conflicts of interest. For example, Affiliates of the
Advisor are interested in the continuing success of previously formed ventures
because they have fiduciary responsibilities to investors in those ventures,
they may be personally liable on certain obligations of those ventures and they
have equity and incentive interests in those ventures. Conflicts of interest
would also exist if Properties acquired by the Company compete with properties
owned or managed by Affiliates of the Advisor. Conflicts of interest may also
arise in the future if the Company and other ventures developed by Affiliates of
the Advisor seek to sell, finance or refinance Properties at the same time.
COMPETITION FOR MANAGEMENT SERVICES
Certain officers and directors of the Advisor are also officers or directors
of one or more entities Affiliated with the Advisor which engage in the
brokerage, sale, operation, or management of real estate. Affiliates of the
Advisor presently are acting as general partners in a number of limited
partnerships engaged in real estate investments. Accordingly, certain Directors
and the officers and directors of the Advisor may have conflicts of interest in
allocating management time and services between the Company and other entities.
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<PAGE>
LACK OF SEPARATE REPRESENTATION; RELATIONSHIP WITH CERTAIN LAW FIRMS
The Company may retain the same independent accountants as are retained by
the Advisor and Affiliates of the Advisor. The law firm of McGuire, Woods,
Battle & Boothe, L.L.P. which is passing on the legality of the Shares for the
Company and is advising it as to the Company's status as a REIT for federal
income tax purposes, may act as counsel to the Company in other matters.
McGuire, Woods, Battle & Boothe, L.L.P. also renders and may continue to render
legal services to the Advisor and its Affiliates; however, such counsel would
recommend the engagement of independent counsel for the Company, the Advisor or
such Affiliates in circumstances in which the applicable canons of ethics would
so require. Leslie A. Grandis, a partner in McGuire, Woods, Battle & Boothe,
L.L.P. is a Director of the Company. See "Management."
The law firm of Zuckerbrod & Taubenfeld (whose principals are Martin
Zuckerbrod and Harry S. Taubenfeld, Directors of the Company) is expected (but
not required) to be engaged by the Company to provide legal services in
connection with each Property acquisition. Although not currently contemplated,
the law firm of Zuckerbrod & Taubenfeld may act as counsel to the Company in
connection with certain other matters, and may receive compensation from the
Company for any such representation, on the condition that the terms of the
engagement, including the compensation, comply with the provisions in the
Company's Bylaws concerning transactions with Affiliates. The compensation
payable to Messrs. Zuckerbrod and Taubenfeld may present a conflict of interest
for them, as Directors of the Company, by providing them an incentive to vote in
favor of proposed Property acquisitions (or in favor of other proposals) in
order to obtain such compensation.
DAVID LERNER AS FORMER DIRECTOR
Mr. David Lerner, who is President and controlling shareholder of the
Managing Dealer, served as a Director of the Company from August 3, 1992 to
October 24, 1994 . Therefore, the relationship between the Company and the
Managing Dealer and its Affiliates may not be equivalent to the relationship
between the Company and an "independent sales agent" for the Shares.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The Company intends to invest in existing residential apartment communities
in the mid-Atlantic and southeastern regions of the United States. Pending such
investment, the proceeds of this offering may be invested in U.S. Government
securities, certificates of deposit from banks located in the United States
having a net worth of at least $50,000,000, bank repurchase agreements covering
the securities of the U.S. Government or U.S. governmental agencies issued by
banks located in the U.S. having a net worth of at least $50,000,000, bankers'
acceptances, prime commercial paper or similar highly liquid investments (such
as money market funds selected by the Company) or evidences of indebtedness. In
addition, to the extent the proceeds are not invested in real estate as
described herein, the Company has the ability to invest in such securities. All
proceeds of this offering received by the Company must be invested or committed
for investment in Properties or allocated to working capital reserves or used
for other proper Company purposes within the later of two years after
commencement of the offering or one year after termination of the offering; any
proceeds not invested or committed for investment or allocated to working
capital reserves or used for other proper Company purposes by the end of such
time period shall be returned to investors, within 30 days after the expiration
of such period, but the Company may elect to return such proceeds earlier if,
and to the extent, required by applicable law (including to the extent necessary
to avoid characterization as an "investment company").
The principal investment objectives of the Company are:
(i) to preserve and protect the capital of the Company;
(ii) to provide quarterly distributions to Shareholders, a portion of which
may constitute a nontaxable return of capital (rather than current
taxable income); and
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(iii) to provide long-term capital appreciation in the value of the Company's
investments.
The Company anticipates that achievement of such objectives will enable it to
provide the Shareholders with appreciation in the value of their Shares. There
can be no assurance that the Company will achieve such objectives. Attainment of
the objectives is contingent in part upon the Company's ability to acquire
suitable Properties. Unless required to maintain REIT status, the Company does
not intend to borrow or refinance to make distributions.
The Company's primary business objectives are to increase distributions per
Share and the value of its Properties by:
(i) increasing occupancy rates and rental income at Properties;
(ii) implementing expense controls; and
(iii) emphasizing regular maintenance and periodic renovations, including
additions to amenities.
The Company has in the past made, and in the future likely will make,
acquisitions of established apartment communities involved in foreclosure
proceedings when the Advisor and the Company believe the Property may have below
market-rate leases, correctable vacancy problems or other cash flow growth
potential. In suitable situations, the Company also may make acquisitions of
Properties from over-leveraged owners of such Properties and from governmental
regulatory authorities and lending institutions which have taken control of such
Properties, as well as mortgagees-in-possession and, possibly, through
bankruptcy reorganization proceedings.
In connection with the acquisition of Properties, the Company sets aside an
amount determined by it to be necessary to fund repairs and improvements which
the Company believes should be made at the Property, to make it competitive in
its market and, where appropriate, to permit rental increases.
The Company will seek to assure that its Properties remain attractive
residences for their tenants and are desirable locations for prospective
tenants. The maintenance, custodial and groundskeeping staff of Cornerstone
Management Group, Inc. performs regular maintenance and upkeep on the Properties
to preserve and enhance their practical and aesthetic attributes. The physical
appearance of, and tenant satisfaction with, each Property are evaluated on a
regular basis by the Company's executive officers.
The Company's management places strong emphasis on the marketing and
promotion of its Properties. Marketing plans focus on each Property's specific
needs for maximizing occupancy. Marketing programs include television, radio and
newspaper advertising, all designed to attract tenants in each market.
The Board of Directors may, in its sole discretion, issue Shares, or other
equity or debt securities of the Company, to sellers of Properties, as part
or all of the purchase price of the Property. See "Summary of Organizational
Documents -- Issuance of Securities."
INVESTMENT CRITERIA
The Advisor is charged with identifying and recommending to the Company
suitable investments. The Advisor will make such recommendations based upon such
relevant factors as (i) the potential for realizing capital appreciation; (ii)
current and projected cash flow and the ability to increase rental income
through capable management; (iii) neighborhood location, condition and design of
the Property; (iv) historical and projected occupancy rates; (v) prospects for
liquidity through sale, financing or refinancing; (vi) economic conditions in
the community; (vii) geographic location and type of Property in light of the
Company's diversification objectives; and (viii) the purchase price of the
Property as it relates to prices of comparable Properties in comparable
locations.
The Company's management believes there is substantial opportunity for growth
from acquisitions of additional multi-family Properties in the mid-Atlantic and
southeastern regions of the United States. Management believes that the current
real estate environment is conducive to opportunistic acquisitions of existing
multi-family Properties that meet the Company's investment criteria. In many
instances, such acquisitions may be made for less than the cost of new
construction. The extensive experience of the
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management personnel of the Company and the Advisor and its Affiliates in
operating multi-family properties in the mid-Atlantic and southeastern regions
is intended to assist the Company in the evaluation of specific markets and
Properties in this region.
The Company will acquire Properties in which the Advisor or an Affiliate has
an interest only if a majority of the Directors of the Company (including a
majority of the Independent Directors) approves the transaction as being fair
and reasonable to the Company and at a price no greater than the cost of the
Property to the Advisor or the Affiliate, or, if the price is in excess of such
cost, only if a majority of the Directors (including a majority of the
Independent Directors) finds that substantial justification for such excess
exists and such excess is not unreasonable. In no event shall the cost of any
such Property to the Company exceed its current appraised value.
Generally, the Advisor is not required to, and will not, advise the Company
on investments in securities, i.e., the temporary investment of offering
proceeds pending investment of such proceeds in real Property, as described in
"Investment Objectives and Policies -- General." It is expected that the Company
will make its own decisions with respect to such temporary securities
investments.
Cornerstone Realty Group, Inc., an Affiliate of the Advisor, will receive a
2% real estate commission upon each purchase by the Company of a Property. See
"The Advisor and Affiliates -- Cornerstone Realty Group, Inc."
TYPES OF INVESTMENTS
The Company intends to invest in existing residential apartment communities
in the mid-Atlantic and southeastern regions of the United States. The Company
does not intend to invest in undeveloped land except in connection with the
acquisition of an existing apartment community. The Company does not intend to
make or invest in any mortgage loans (except that the Company may hold purchase
money obligations secured by mortgages on Properties sold by it). Except in
connection with permitted joint venture investments (see "Joint Venture
Investments," below) and except with respect to permitted temporary investments
(see "General" above), the Company will not invest in securities of or interests
in other persons engaged in real estate activities. However, in certain limited
circumstances, the Board of Directors has the right (upon notice to all
Shareholders but without the need to obtain the consent of any Shareholder) to
restructure the Company's activities. See "Investment by Tax-Exempt Entities --
ERISA Considerations." See also "Changes in Objectives and Policies," below.
In addition, the Company's Bylaws prohibit it from engaging in certain
investment and other activities, including: (i) investing more than 10 percent
of the total assets of the Company in unimproved real property or mortgage loans
on unimproved real property; (ii) investing in commodities or commodity future
contracts or effecting short sales of commodities or securities, except when
done solely for hedging purposes; (iii) investing in or making mortgage loans on
property unless the Company obtains a mortgagee's or owner's title insurance
policy or commitment as to the priority of the mortgage or the condition of the
title; (iv) investing in contracts for the sale of real estate unless they are
recordable in the chain of title; (v) making or investing in mortgage loans,
including construction loans, on any property if the aggregate amount of all
mortgage loans outstanding on the property (at the time the Company makes or
invests in its mortgage loan), including the loans of the Company, would exceed
85 percent of the appraised value of the property; (vi) investing in junior
mortgage loans (provided that this and the foregoing limitations shall not apply
to the Company taking back secured debt in connection with the sale of any
property); (vii) issuing securities that are redeemable; (viii) issuing debt
securities unless the historical debt service coverage (in the most recently
completed fiscal year) as adjusted for known changes is sufficient properly to
service the higher level of debt or unless the cash flow of the Company (for the
last fiscal year) excluding extraordinary, nonrecurring items, is sufficient to
cover the debt service on all debt securities to be outstanding; (ix) investing
in the equity securities of any non-governmental issuer, including other REITs
or limited partnerships, for a period in excess of 18 months; (x) issuing equity
securities on a deferred payment basis or other similar arrangement; (xi)
incurring any indebtedness, secured or unsecured, if such indebtedness would
result in an aggregate amount of indebtedness in excess of 100 percent of Net
Assets, before subtracting liabilities (unless the excess borrowing is approved
by a majority of the Independent Directors and disclosed to the Shareholders as
required by
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the Bylaws); (xii) allowing aggregate borrowings of the Company to exceed 50
percent of the Adjusted Net Asset Value (before subtracting any liabilities) of
the Company unless the excess borrowing is similarly approved by the Independent
Directors and disclosed to the Shareholders; (xiii) engaging in any short sale
of or underwriting or distributing, as an agent, securities issued by others, or
engaging in trading, as compared with investment activities; and (xiv) acquiring
securities in any company engaging in activities or holding investments
prohibited by the above prohibitions, the Code or Virginia law.
DIVERSIFICATION
One of the Company's investment objectives is to own Properties in various
geographic locations in the mid-Atlantic and southeastern United States, thereby
minimizing the effects of changes in specific industries, local economic
conditions or similar risks. The extent of geographic diversification depends
upon the number of separate Properties which can be purchased and the number of
different "markets" in which they are located. As of the date of this
Prospectus, the Company owns 30 apartment complexes spread across 16 distinct
markets in four states. While this represents a certain degree of
diversification, the diversification is limited in both number of Properties and
their locations. Because there is no minimum number of Shares which must be sold
in the offering made by this Prospectus, there can be no assurance that the
Company will achieve substantial additional diversification in the future.
JOINT VENTURE INVESTMENTS
Some of the Company's investments may be made through partnerships or joint
ventures. The Company's partner or joint venturer could be an Affiliate of the
Advisor. While each such partnership or joint venture agreement may vary in
form, depending on negotiations, in no case will the co-venturer have any legal
right to take action which would prevent the Company from carrying on its
business as described in this Prospectus. Any joint venture investment of the
Company would be subject to the same conditions, limitations and restrictions
applicable to a Company investment not undertaken as a joint venture, and the
use of a joint venture structure would not itself be designed to alter or expand
the investment objectives and policies of the Company. Investment through a
joint venture could, for example, permit the Company to invest in a Property
which is too large for the Company to acquire by itself.
Joint venture arrangements may under certain circumstances involve risks not
otherwise present in investments directly in Properties themselves, including,
for example, the risk of impasse and risks associated with the possibility that
the co-venturer may at any time experience adverse business developments or have
economic or business interests or goals which are inconsistent with the economic
or business interests or goals of the Company.
There is no limitation on the percentage of the proceeds of the offering that
can be invested in joint ventures. In no event, however, will the Company
acquire or invest in limited partnership interests of any partnership.
BORROWING POLICIES
To maximize potential cash flow and minimize risk to the Company, the
Company generally intends to purchase its Properties either on an "all-cash" or
unleveraged basis or using the limited interim borrowing described under
"Business and Properties -- Properties Owned by the Company." The Company will
endeavor to repay any interim borrowing with proceeds from the sale of Shares
and thereafter to hold its Properties on an unleveraged basis. However, for the
purpose of flexibility in operations, the Company will have the right, subject
to the approval of the Board of Directors, to borrow. As of the date of this
Prospectus, there is no mortgage debt encumbering the Company's Properties.
One purpose of borrowing could be to permit the Company's acquisition of
additional Properties through the "leveraging" of Shareholders' equity
contributions. Alternatively, the Company might find it necessary to borrow to
permit the payment of operating deficits at Properties already owned.
Furthermore, although not anticipated, Properties may be financed or refinanced
if the Board of Directors deems it in the best interests of Shareholders
because, for example, indebtedness can be incurred on
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favorable terms and the incurring of indebtedness is expected to improve the
Shareholders' after-tax cash return on invested capital. See "Sale and
Refinancing Policies" below. See "Risk Factors -- Real Property Investment Risks
- -- Possible Borrowing; Debt Financing May Reduce Cash Flow and Increase Risk of
Default."
Loans obtained by the Company may be evidenced by promissory notes secured by
mortgages on the Company's Properties. In addition, the Company may grant other
forms of security to a lender, including a conditional assignment of leases and
rents of the Company's Properties. As a general policy, the Company would seek
to obtain mortgages securing indebtedness which encumber only the particular
Property to which the indebtedness relates, but recourse on such loans may
include all of the Company's assets. If recourse on any loan incurred by the
Company to acquire or refinance any particular Property includes all of the
Company's assets, the equity of the Company in its other Properties could be
reduced or eliminated through foreclosure on that loan.
Subject to the approval of the Board of Directors, the Company may borrow
from the Advisor or its Affiliates or establish a line of credit with a bank or
other lender. The Advisor and its Affiliates are under no obligation to make any
such loans, however. Any loans made by the Advisor or its Affiliates must be
approved by a majority of the Independent Directors as being fair, competitive
and commercially reasonable and no less favorable to the Company than loans
between unaffiliated lenders and borrowers under the same circumstances.
The Company's Bylaws prohibit the Company from incurring debt (secured or
unsecured) if such debt would result in aggregate debt exceeding 100% of "Net
Assets" (defined generally to mean assets at cost), before subtracting
liabilities, unless the excess borrowing is approved by a majority of the
Independent Directors and disclosed to the Shareholders as required by the
Bylaws. The Bylaws also prohibit the Company from allowing aggregate borrowings
to exceed 50% of the Company's "Adjusted Net Asset Value" (defined generally to
mean assets at fair market value), before subtracting liabilities, subject to
the same exception. In addition, the Bylaws provide that the aggregate
borrowings of the Company must be reasonable in relation to the Net Assets of
the Company and must be reviewed quarterly by the Directors.
MANAGEMENT OF PROPERTIES
Day-to-day Property management services for the Company's residential
Properties will be provided by Cornerstone Management Group, Inc., an Affiliate
of the Advisor, subject to review by the Board of Directors. For such services,
Cornerstone Management Group, Inc. will receive a monthly Property Management
Fee equal to 5% of the monthly gross revenues of the Properties. The Company
intends that Cornerstone Management Group, Inc. will also be responsible for the
accounting and financial reporting responsibilities for each of the Properties
the Company acquires. Cornerstone Management Group, Inc. will be reimbursed for
expenses, including salaries and related overhead expenses, associated with such
accounting and financial reporting responsibilities.
The Company will enter into a Property management agreement (the "Property
Management Agreement") with Cornerstone Management Group, Inc. with respect to
each of the Company's residential Properties at the time the Company acquires
each such Property. The agreement will have an initial term of two years and
thereafter will be renewed automatically for successive two-year terms until
terminated as provided therein or until the Property is sold. A copy of the form
of that agreement has been filed as an exhibit to the registration statement of
which this Prospectus is a part; reference is made to the agreement itself for a
complete statement of its provisions. See "Conflicts of Interest" and
"Compensation."
Depending on the location of the Company's real Property investments,
unaffiliated, independent property management companies may also render
day-to-day property management services pursuant to contracts with the Company.
Such contracts with the Company may provide for unaffiliated property managers
to receive either fixed or performance-based incentive fees for property
management services, subject to the condition that compensation to such property
managers must be fair, competitive and commercially reasonable. It is intended
that the management capabilities of the property managers will
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maximize rental revenues of specific Properties through renewing leases at
higher market rates; renovating and retenanting under-performing Properties; and
constructing additional rental space on the sites of existing Properties, where
appropriate.
Cornerstone Management Group, Inc. currently manages 30 apartment complexes
with an aggregate of 6,619 residential units. All of the apartment complexes
managed by Cornerstone Management Group, Inc. are owned by the Company.
Cornerstone Realty Group, Inc. (which, like Cornerstone Management Group,
Inc., is wholly owned by Glade M. Knight) currently manages four apartment
complexes with an aggregate of 690 residential units. All of the apartment
complexes managed by Cornerstone Realty Group, Inc. are owned by partnerships
which were sponsored by Cornerstone Realty Group, Inc. or its Affiliates.
RESERVES
A portion of the proceeds of this offering will be reserved to meet working
capital needs and contingencies associated with the Company's operations. The
Company will initially allocate to its working capital reserve not less than
0.5% of the proceeds of the offering. As long as the Company owns any
Properties, the Company will retain as working capital reserves an amount equal
to at least 0.5% of the proceeds of the offering, subject to review and
re-evaluation by the Board of Directors. If such reserves and any other
available income of the Company were insufficient to cover the Company's
operating expenses and liabilities, it would be necessary to obtain additional
funds by borrowing, refinancing Properties or liquidating the Company's
investment in one or more Properties.
SALE AND REFINANCING POLICIES
The Company is under no obligation to sell its investment Properties, and
currently anticipates that it will hold its Properties for an indefinite length
of time. However, sale may occur at any time if the Advisor deems it advisable
for the Company based upon current economic considerations, and the Board of
Directors concurs with such decision. In deciding whether to sell a Property,
the Advisor will also take into consideration such factors as the amount of
appreciation in value, if any, to be realized, federal, state and local tax
consequences, the possible risks of continued ownership and the anticipated
advantages to be gained for the Shareholders from sale of a Property versus
continuing to hold such Property.
Unless required to maintain REIT status, the Company does not intend to
borrow or refinance to make distributions. Although not anticipated, in some
cases it might be advantageous for the Company to incur mortgage indebtedness
on, or finance or refinance, a Property to further the Company's investment
objectives. If the original mortgage indebtedness, if any, on a Property has
been significantly reduced and/or if a particular Property has increased
substantially in value, then financing (or refinancing of existing
indebtedness), if achievable, may permit the Company to realize a portion of the
appreciation in value of the Property and retain the Property. See "Risk Factors
- -- Real Property Investment Risks -- Possible Borrowing; Debt Financing May
Reduce Cash Flow and Increase Risk of Default."
Under its Property Acquisition/Disposition Agreement with the Company,
Cornerstone Realty Group, Inc., an Affiliate of the Advisor, may receive a 2%
real estate commission upon each sale by the Company of a Property. It is also
possible that Cornerstone Realty Group, Inc., or an Affiliate, will render
services, and receive compensation, in connection with Company financings and
refinancings, although there are no specific agreements for such services as of
the date of this Prospectus. See "The Advisor and Affiliates -- Cornerstone
Realty Group, Inc."
CHANGES IN OBJECTIVES AND POLICIES
Subject to the limitations in the Articles of Incorporation, the Bylaws and
the Virginia Stock Corporation Act, the powers of the Company will be exercised
by or under the authority of, and the business and affairs of the Company will
be controlled by, the Board of Directors. The Board of Directors also has the
right and power to establish policies concerning investments and the right,
power and obligation to monitor the procedures, investment operations and
performance of the Company.
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In general, the Articles of Incorporation and the Bylaws can be amended only
with the affirmative vote of a majority of the outstanding Common Shares, except
that the Bylaws may be amended by the Directors if necessary to comply with the
REIT provisions of the Code or with other applicable laws and regulations. The
Bylaws contain certain restrictions on the activities of the Company and
prohibit the Company from engaging in certain activities. See "Types of
Investments."
Within the express restrictions and prohibitions of the Bylaws, the Articles
of Incorporation and applicable law, however, the Board of Directors has
significant discretion to modify the investment objectives and policies of the
Company, as stated in this Prospectus. The Company has no present intention to
modify any of such investment objectives and policies, and it is anticipated
that any such modification would occur only if business and economic factors
affecting the Company made the Company's stated investment objectives and
policies unworkable or imprudent. By way of illustration only, owing to a
significant change in economic conditions, the Board of Directors could elect to
acquire apartment communities outside of the mid-Atlantic and southeastern
regions of the United States, or to acquire one or more commercial Properties in
addition to residential Properties.
Thus, while this Prospectus accurately and fully discloses the current
investment objectives and policies of the Company, prospective Shareholders must
be aware that the Board of Directors, acting consistently with the Company's
organizational documents, applicable law and their fiduciary obligations, may
elect to modify or expand such objectives and policies from time to time. Any
such action by the Board of Directors would be based upon the perceived best
interests of the Company and the Shareholders.
DISTRIBUTION POLICY
The Company intends to make regular quarterly distributions to its
Shareholders. Federal income tax law requires that a REIT distribute annually at
least ninety-five percent (95%) of its REIT taxable income (which does not
include net capital gains). Under certain circumstances, the Company may be
required to make distributions in excess of cash available for distribution to
meet such distribution requirements. See "Federal Income Tax Considerations --
Requirements for Qualification as a REIT -- Annual Distribution Requirements"
and "Risk Factors -- Possible Borrowing; Debt Financing May Reduce Cash Flow and
Increase Risk of Default."
The timing and amounts of distributions to Shareholders are within the
discretion of the Board of Directors, although the Company will use its best
efforts to meet the distribution requirements established by the Code for REITs.
The Company's actual results of operations, and therefore the amount of cash
available for distribution to Shareholders, will be affected by a number of
factors, including the revenues received from the Company's Properties, the
operating expenses of the Company, and the Company's interest expense, if any.
The distribution policy of the Board of Directors from time to time will depend
on a number of factors, including the amount of cash available for distribution,
the Company's financial condition, any decision by the Board of Directors to
reinvest funds rather than to distribute them, the Company's capital and reserve
requirements, and such other factors as the Board of Directors deems relevant.
The distributions for the first, second, third and fourth quarters of 1995
were $.23 per Share, $.24 per Share, $.2425 per Share, and $.245 per Share,
respectively. Of the $.96 ($.9575) per Share distribution in 1995, 17% thereof
represented a return of capital and the balance represented ordinary dividend
income.
The first quarter distribution for 1996 was $.248 per Share. On an annual
basis, this distribution would be $.992 per Share. While it is anticipated that
a portion of the 1996 distributions will be characterized as a return of
capital, the exact percentage is unknown at this time and will not be known
until the final audit of the operations for the full calendar year is completed
by the Company's independent accountants.
The Company has in the past, and expects in the future, to include within the
acquisition budget for each Property it proposes to acquire amounts deemed
necessary for repairs and improvements required
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at the Property. Such amounts are anticipated to be funded with proceeds from
the sale of Shares. Thus, the Company anticipates that all net cash generated
from operations of the Properties will continue to be available for
distribution.
If the Company elects to incur financing in conjunction with the acquisition
of its Properties, such financing could have an adverse effect on the Company's
ability to maintain its level of distribution. See "Risk Factors -- Possible
Borrowing; Debt Financing May Reduce Cash Flow and Increase Risk of Default."
The Company anticipates that cash available for distributions before capital
expenditures will exceed earnings and profits due to non-cash expenses,
primarily depreciation and amortization, to be incurred by the Company.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes will be taxable to
shareholders as ordinary dividend income. Distributions in excess of such
earnings and profits generally will be treated as a return of capital, resulting
in a non-taxable reduction of the Shareholder's basis in his Shares to the
extent thereof, and thereafter as taxable gain. Distributions that are treated
as non-taxable reduction in basis will have the effect of deferring taxation
until the sale of such Shareholder's Shares.
BUSINESS AND PROPERTIES
BUSINESS
The Company has been established to provide both taxable and tax-exempt
investors with a professionally managed, diversified portfolio of real estate
equity interests consisting primarily of existing residential apartment
communities that have the potential for current cash flow and capital
appreciation. The Company currently anticipates that it will hold its investment
Properties for an indefinite length of time. The Company intends, by the end of
the first quarter in 1997, to use its best efforts to cause the shares to be
listed on a national securities exchange or quoted on the NASDAQ National Market
System, if the Board of Directors determines such action to be prudent. However,
there is no assurance when or that the Shares will be so listed or quoted, and
Shareholders may be required to hold their investment for an indefinite length
of time.
The Company has elected to be taxed as a REIT under the Code and intends to
qualify as such on a continuing basis. However, no assurance can be given that
it will so qualify. For years in which the Company qualifies as a REIT, it will
not be subject to federal income tax on that portion of its taxable income that
is distributed annually to Shareholders. See "Risk Factors -- Federal Income Tax
Risks -- Failure to Achieve or Maintain REIT Status" and "Federal Income Tax
Considerations."
The Company is an "externally-advised" or "externally-managed" REIT. As
described herein, the Advisor (Cornerstone Advisors, Inc.) oversees the ordinary
business of the Company pursuant to the Advisory Agreement. In addition,
Cornerstone Management Group, Inc. and Cornerstone Realty Group, Inc. (both
Affiliates of the Advisor) provide Property management services and Property
acquisition and disposition services to the Company. In exchange for their
services, the Advisor, Cornerstone Management Group, Inc. and Cornerstone Realty
Group, Inc. all receive certain fees and expense reimbursements from the
Company. See "Compensation" herein.
The officers and Directors of the Company have undertaken an evaluation of
whether it would be in the best interests of the Company and the Shareholders to
convert the Company into a "self-administered" or "self-managed" REIT. This
conversion, if undertaken, would involve transferring some or all of the
management and other services now being provided by other companies to employees
of the Company. If such conversion were implemented, the Company would no longer
pay fees to other companies for services transferred to employees of the
Company, but would itself bear the costs thereof (including salaries and wages
to such employees). Any such conversion would likely involve the payment of
consideration, either in Shares, cash or other property, from the Company to the
entities whose contracts with the Company were being terminated in connection
with such conversion, in recognition of
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such companies agreeing to the termination of their agreements. Material
developments, if any, pertain to the possible conversion of the Company to
"self-administered" or "self-managed" status will be reported in supplements to
this Prospectus or in appropriate filings under the Securities Exchange Act of
1934.
LEGAL PROCEEDINGS
Neither the Company nor the Properties are presently subject to any material
litigation nor, to the Company's knowledge, is any material litigation
threatened against the Company or the Properties, other than routine litigation
arising in the ordinary course of business and which is expected to be covered
by liability insurance.
REGULATION
General. Apartment community properties are subject to various laws,
ordinances and regulations, including regulations relating to recreational
facilities such as swimming pools, activity centers and other common areas. The
Company believes that under present laws, ordinances and regulations, each
Property has the necessary permits and approvals to operate its business.
Americans with Disabilities Act. The Properties and any newly-acquired or
developed multi-family Properties must comply with Title III of the Americans
with Disabilities Act ("ADA") to the extent that such Properties are "public
accommodations" or "commercial facilities" as defined by the ADA. Compliance
with the ADA requirements could require removal of structural barriers to
handicapped access in certain public areas of the Properties where such removal
is readily achievable. The ADA does not, however, consider residential
properties, such as multi-family properties, to be public accommodations or
commercial facilities, except to the extent portions of such facilities, such as
a leasing office, are open to the public. Although the Company believes that the
Properties substantially comply with all present requirements under the ADA and
applicable state laws, final regulations under the ADA have not yet been
promulgated. Noncompliance could result in imposition of fines or an award of
damages to private litigants. If required changes involve greater expenditures
than the Company currently anticipates, or if the changes must be made on a more
accelerated basis than it anticipates, the Company's ability to make expected
distributions could be adversely affected. The Company believes that its
competitors face similar costs to comply with the requirements of the ADA.
Fair Housing Amendments Act of 1988. The Fair Housing Amendments Act of 1988
(the "FHA") requires multi-family Properties first occupied after March 13, 1990
to be accessible to the handicapped. Noncompliance with the FHA could result in
the imposition of fines or an award of damages to private litigants. The Company
believes that it is in compliance with such law.
Rent Control Legislation. State and local rent control laws in certain
jurisdictions limit a property owner's ability to increase rents and to recover
from tenants increases in operating expenses and the costs of capital
improvements. Enactment of such laws has been considered from time to time in
other jurisdictions, although none of the jurisdictions in which the Company
presently operates has adopted such laws. The Company does not presently intend
to develop or acquire multi-family properties in markets that are either subject
to rent control or in which rent limiting legislation exists, although the
Company is not precluded from doing so.
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PROPERTIES OWNED BY THE COMPANY
The Company owns the following Properties as of the date of this Prospectus:
<TABLE>
<CAPTION>
EFFECTIVE
NUMBER OF DATE OF
APARTMENT ACQUISITION
NAME OF PROPERTY LOCATION UNITS BY COMPANY
- -------------------------------------- -------------------- --------------- --------------
<S> <C> <C> <C>
The Hollows .......................... Raleigh, NC 176 6-1-93
Polo Club (formerly La Vista) ....... Greenville, SC 365 6-3-93
Mayflower Seaside..................... Virginia Beach, VA 263 10-26-93
County Green ......................... Lynchburg, VA 180 12-1-93
Stone Ridge (formerly River Ridge) .. Columbia, SC 191 12-8-93
Wimbledon Chase (formerly Fountain
Head) ............................... Wilmington, NC 192 2-1-94
Harbour Club (formerly Birdneck Lakes) Virginia Beach, VA 214 5-1-94
Chase Mooring (formerly The Palms) .. Wilmington, NC 224 8-1-94
The Trestles.......................... Raleigh, NC 280 12-30-94
Wind Lake (formerly Sterling Pointe) . Greensboro, NC 299 4-1-95
Magnolia Run (formerly Edgewood) ..... Greenville, SC 212 6-1-95
Breckinridge.......................... Greenville, SC 236 6-21-95
Bay Watch Pointe (formerly Broad
Meadows)............................. Virginia Beach, VA 160 7-18-95
Hanover Landing (formerly Lemon Tree). Charlotte, NC 192 8-22-95
Mill Creek............................ Winston-Salem, NC 220 9-1-95
Glen Eagles........................... Winston-Salem, NC 166 10-1-95
Osprey Landing (formerly Summer Hill). Wilmington, NC 176 11-1-95
Tradewinds............................ Hampton, VA 284 11-1-95
Sailboat Bay (formerly The Lake) ..... Charlotte, NC 358 11-1-95
Meadows............................... Asheville, NC 176 1-31-96
West Eagle Greens (formerly Scarlett
Oaks)................................ Augusta, GA 165 3-1-96
Ashley Park........................... Richmond, VA 272 3-1-96
Arbor Trace (formerly Colonial
Ridge)............................... Virginia Beach, VA 148 3-1-96
Longmeadow............................ Charlotte, NC 120 4-1-96
Trophy Chase (formerly Westfield) .... Charlottesville, VA 185 4-1-96
Beacon Hill........................... Charlotte, NC 349 5-1-96
Meadow Creek.......................... Pineville, NC 250 6-1-96
Summer Walk (formerly Lakewood) ...... Concord, NC 160 5-1-96
Willow Creek.......................... Durham, NC 200 5-1-96
Lexington Towers...................... Richmond, VA 197 6-26-96
</TABLE>
36
<PAGE>
The following table sets forth basic information regarding the Properties:
<TABLE>
<CAPTION>
AS OF JUNE 21, 1996
--------------------------------------------------
APPROXIMATE AVERAGE AVERAGE AVERAGE ANNUAL
YEAR RENTABLE AVERAGE RENT PER RENT PER RENT PER
PROPERTY COMPLETED AREA UNIT SIZE UNIT SQUARE FOOT SQUARE FOOT OCCUPANCY
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
South Carolina
Polo Club....... 1972 295,000 807 $394 $0.49 $ 5.86 98%
Magnolia Run.... 1972 210,000 993 $483 $0.49 $ 5.84 97%
Breckinridge.... 1973 171,000 726 $425 $0.58 $ 7.02 86%
Stone Ridge..... 1975 200,000 1,047 $499 $0.48 $ 5.72 92%
Georgia
West Eagle Greens 1974 131,000 796 $412 $0.52 $ 6.21 92%
North Carolina .
Chase Mooring... 1968 194,000 867 $493 $0.57 $ 6.82 88%
Wimbledon....... 1976 157,000 818 $506 $0.62 $ 7.43 91%
Osprey Landing.. 1973 173,000 981 $487 $0.50 $ 5.96 86%
Sailboat Bay.... 1973 324,000 906 $517 $0.57 $ 6.85 71%
Meadow Creek.... 1984 215,000 860 $579 $0.67 $ 8.08 95%
Beacon Hill..... 1985 256,000 734 $543 $0.74 $ 8.88 93%
Hanover Landing. 1972 160,000 832 $480 $0.58 $ 6.93 89%
Long Meadow..... 1986 104,000 867 $565 $0.65 $ 7.83 99%
Summer Walk..... 1983 154,000 963 $528 $0.55 $ 6.58 92%
The Meadows..... 1974 188,000 1,068 $578 $0.54 $ 6.50 86%
Glen Eagles..... 1986/1990 158,000 952 $610 $0.64 $ 7.68 93%
Mill Creek...... 1984 197,000 897 $539 $0.60 $ 7.22 93%
Wind Lake....... 1985 217,000 727 $500 $0.69 $ 8.26 93%
Willow Creek.... 1984 192,000 960 $556 $0.58 $ 6.95 89%
Hollows......... 1974 159,000 903 $579 $0.64 $ 7.69 99%
Trestles........ 1987 217,000 776 $560 $0.72 $ 8.65 95%
Virginia ........
County Green.... 1976 180,000 1,000 $487 $0.49 $ 5.84 89%
Ashley Park..... 1988 208,000 765 $554 $0.72 $ 8.69 98%
Trophy Chase.... 1970 149,000 807 $459 $0.57 $ 6.82 86%
Baywatch Pointe. 1972 146,000 911 $563 $0.62 $ 7.42 91%
Harbour Club.... 1988 174,000 813 $547 $0.67 $ 8.08 94%
Arbor Trace..... 1985 125,000 850 $517 $0.61 $ 7.30 96%
Mayflower....... 1950 184,000 698 $646 $0.93 $11.11 99%
Tradewinds...... 1988 264,000 930 $569 $0.61 $ 7.35 97%
Lexington Towers 1965 107,000 725 $438 $0.67 $ 8.04 90%
</TABLE>
Additional information on these Properties and the markets in which they are
located is provided below. As of the date of this Prospectus, there is no
mortgage debt encumbering the Company's Properties although, as described below,
the Compnay has an unsecured line of credit. The Company believes that each of
the Company's Properties is and will continue to be adequately covered by
Property and liability insurance.
As described more specifically below with respect to each individual
Property, in connection with each Property acquisition, the Company has included
in its Property acquisition budget an amount of proceeds from the sales of
Shares deemed adequate to pay for any repairs and improvements necessary at the
Property proposed to be acquired. One of the purposes of such repairs and
improvements at the Properties is to increase the attractiveness of the
Properties to prospective tenants and thereby to increase both occupancy rates
and rental rates in the future.
As part of general marketing efforts, the Company's management agent,
Cornerstone Management Group, Inc., from time to time offers promotional
"give-backs" and similar rent concessions at certain of the Properties, the
effect of which can be, in any particular case, to reduce the rent realized with
respect
37
<PAGE>
to a particular tenant for a particular month. Such concessions are offered by
the Company, through its management agent, on a sporadic basis and are not
reflective of any specific practice or policy. The overall impact of such
concessions on effective rent is believed by the Company not to be material, and
is not expected to become material in the future. Accordingly, rental rates
referred to in this Prospectus do not reflect such concessions.
The Company owns more than one Property in several cities. Generally, the
Company may acquire multiple Properties in cities, particularly where the cities
involved are perceived as being favorable rental markets. The ownership of
multiple Properties within a given city or rental market may offer some
operational economies for the Company. However, Properties located within the
same city or rental market area may, to a certain extent, compete with one
another for tenants. The Company does not plan to acquire multiple Properties in
any city or rental market if the Company believes that the Properties would be
engaged in competition with each other which could adversely affect the
operations of any Property.
Each Property described below is managed by Cornerstone Management Group,
Inc. under a Property management agreement requiring payment by the Company of a
monthly management fee equal to five percent (5%) of the gross revenues of the
Property. For information on the amount of Property management fees and expense
reimbursements received by Cornerstone Management Group, Inc. from the Company,
see "Additional Information Concerning the Company -- Compensation to Advisor
and Affiliates" in this Supplement. In addition, in consideration of services
rendered to the Company in connection with the selection and acquisition of each
Property, the Company paid to Cornerstone Realty Group, Inc. a Property
acquisition fee of two percent (2%) of the purchase price of each Property, as
follows:
<TABLE>
<CAPTION>
NAME OF PROPERTY ACQUISITION FEE
- ----------------- ----------------
<S> <C>
The Hollows................ $ 84,000
Polo Club.................. 86,000
Mayflower Seaside.......... 152,683
Stone Ridge................ 66,500
County Green............... 76,000
Wimbledon Chase ........... 66,000
Harbour Club............... 105,000
Chase Mooring ............. 71,880
The Trestles............... 207,000
Wind Lake.................. 175,200
Magnolia Run............... 110,000
Breckinridge............... 112,000
Bay Watch Pointe........... 67,451
Hanover Landing............ 114,500
Mill Creek................. 171,000
Glen Eagles................ 146,000
Osprey Landing............. 87,500
Tradewinds................. 204,000
Sailboat Bay............... 182,000
Meadows.................... 124,000
West Eagle Greens.......... 80,000
Ashley Park................ 244,100 *
Arbor Trace................ 100,000
Longmeadow................. 100,500
Trophy Chase............... 74,200
Beacon Hill................ 268,144
Meadow Creek............... 222,000 *
Summer Walk................ 113,200 *
Willow Creek............... 166,900 *
Lexington Towers........... 120,000
Total.................... $3,897,758
</TABLE>
- ----------
* As of June 28, 1996 $90,000 of the fee attributable to Ashley Park had been
paid $29,687 of the fee attributable to Summer Walk had been paid, and none
of the fees attributable to Meadow Creek or Willow Creek had been paid. The
unpaid amounts are payable if and when financing incurred to purchase the
Properties is repaid with proceeds of the offering.
38
<PAGE>
Under a Unanimous Consent of Directors of the Company dated October 27, 1995
(the "Unanimous Consent"), the Company's Board of Directors authorized the
Company's officers to cause the Company to borrow up to $30 million principal
amount from time to time outstanding, on prevailing commercial terms from
suitable commercial lenders (and on either an unsecured or secured basis), to
permit Property acquisitions by the Company, as long as the offering and sale of
Shares is continuing and it is anticipated by the Company's officers that
proceeds from future sales of Shares will be sufficient to repay the amount of
the borrowing. This borrowing authorization is in substitution for, and not in
addition to, earlier similar borrowing authorizations. The borrowings authorized
by the Unanimous Consent are authorized by the Company's Bylaws. In addition,
the limitations on the borrowings adopted in the Unanimous Consent should not be
construed as limiting any of the Company's rights and powers generally provided
for in its Bylaws.
The Company believes that a line of credit facilitates the timely acquisition
of Properties by the Company and improves the regularity with which closings of
sales of Shares can be effected, without changing the Company's overall business
objective and policy of operating on an unleveraged or "debt-free" basis. The
Company believes that the rate at which Shares are sold is not necessarily
consistent with the manner in which prospective attractive Property acquisitions
become available to the Company. The use of interim borrowings, which are
designed to be repaid with subsequent sales of Shares, may permit the Company to
acquire Properties thought by management to be desirable, before Shares
representing the full purchase price of a particular Property have been sold.
Also, the use of such interim debt may have the effect of reducing the period of
time during which the investors' funds are held in escrow pending disbursement
to the Company, since the Company is no longer required to match exactly
proceeds from Share sales with Property purchase prices.
Pursuant to the authority granted by the Company's Board of Directors, in
November, 1995, the Company obtained a $20 million unsecured line of credit (the
"Unsecured Line of Credit") from First Union National Bank of Virginia. Under
the Unsecured Line of Credit, the Company could borrow up to $20 million,
principal amount from time to time outstanding, on an unsecured basis. The line
of credit matured, and any outstanding balance remaining unpaid thereunder was
due, on March 31, 1996, unless extended by the parties thereto. Pursuant to a
Unanimous Consent of Directors of the Company dated as of April 11, 1996, the
Company's Board of Directors authorized the Company's officers to increase the
amount of the Company's unsecured borrowings to up to $60 million (principal
amount from time to time outstanding). Pursuant to such authority the Company's
officers have renewed the Unsecured Line of Credit from First Union National
Bank of Virginia with an increased credit limit of $50 million (principal amount
from time to time outstanding). The terms of such renewed unsecured line of
credit (as so renewed, the "Unsecured Line of Credit") are the same as before,
except that the expiration date is March 31, 1997, unless extended by agreement
of the lender and the Company. The interest rate on the Unsecured Line of Credit
is one-month LIBOR plus 160 basis points. The conditions, limitations and risks
associated with the Company's utilization of the renewed line of credit are the
same as with the Unsecured Line of Credit which matured on March 31, 1996.
The Company presently intends to utilize such interim borrowings only if, and
to the extent that, it is anticipated that future sales of Shares will provide
funds necessary to repay such borrowings. However, there can be no assurance
that any such borrowings will, in fact, be repaid from future sales of Shares.
To the extent that Share sales are insufficient to repay any such borrowings,
the Company will have a remaining outstanding loan, which would entail the types
of risks and investment considerations described under "Risk Factors -- Possible
Borrowing; Debt Financing May Reduce Cash Flow and Increase Risk of Default" and
"Investment Objectives and Policies -- Borrowing Policies." The Company would
have a variety of potential means of addressing any such loan remaining
outstanding, including the repayment of such borrowing with cash from operations
or refinancing such borrowing with other debt, but such repayment and/or
refinancing would entail the types of effects on investors and the risks
described in such sections of the Prospectus.
As of June 17, 1996, the outstanding principal balance under the Unsecured
Line of Credit was $32,705,000. In addition, as described below under "Lexington
Towers Apartments," the Company has issued a $5.5 million promissory note
(secured by a letter of credit) payable in three years.
39
<PAGE>
(1) THE HOLLOWS APARTMENTS
RALEIGH, NORTH CAROLINA
On June 1, 1993, the Company purchased The Hollows Apartments, a 176-unit
apartment complex located west of Raleigh, North Carolina (the "Property"). The
seller was not Affiliated with the Company, the Advisor or their Affiliates. The
purchase price was $4,200,000, which the Company paid entirely in cash from the
proceeds of the Initial Offering, and title to the Property was conveyed to the
Company by Limited Warranty Deed.
Location. The following is based in part on information provided by the
Raleigh Chamber of Commerce. Raleigh is the state capital of North Carolina and
the seat of Wake County. The city is located approximately 150 miles southwest
of Richmond, Virginia, 380 miles northeast of Atlanta, Georgia, 140 miles east
of Charlotte, North Carolina, and 260 miles south of Washington, D.C. Raleigh
had a population of approximately 210,000 in 1991. The total population for Wake
County was 424,000 in 1991.
The Property is approximately three miles outside the beltline and five miles
west of downtown Raleigh, and can be reached by taking Route 70 west to
Duraleigh Road. Route 70 is characterized by extensive commercial development
consisting of strip shopping centers, motels, restaurants, office buildings and
automobile dealerships. The neighborhood in the vicinity of the Property is
principally residential, consisting of multifamily rental properties,
condominiums and townhouse developments and middle to upper-income single family
housing.
The economy of the Raleigh area is diversified. Raleigh's largest employer is
the State of North Carolina, which employs approximately 18,870 persons. Other
major employers include IBM with 10,000 employees, and the Wake County Public
Schools with approximately 9,000 employees. A contributing factor to Raleigh's
growth has been the Research Triangle, a 5,800 acre research and development
center which employs more than 15,000 people in over 30 government and
industrial firms. These firms are complemented by the resources of the three
major universities that form the Triangle: Duke University in Durham, the
University of North Carolina in Chapel Hill, and North Carolina State
University. Raleigh was ranked by Forbes Magazine in December, 1992 as the sixth
best city in the country in which to do business.
Description of the Property. The Property consists of a 176-unit apartment
complex located on approximately 19 acres of land. The apartment complex was
constructed in 1974. The unit mix and rents being charged new tenants as of June
1, 1996 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR MONTHLY
QUANTITY TYPE SQUARE FOOTAGE RENTAL
- ---------- ------------------------ ---------------- -----------
<S> <C> <C> <C>
28 1 Bedroom, 1 Bath "A" 663 $510
40 1 Bedroom, 1 Bath "B" 767 530
36 2 Bedrooms, 1 Bath 858 605
40 2 Bedrooms, 2 Baths 1,050 660-680
32 3 Bedrooms, 2 Baths 1,150 730-750
</TABLE>
Leases at the Property generally are for terms of one year or less. Average
rental rates increased steadily over five years preceding the Company's purchase
of the Property. As a typical example, a two bedroom, one bath unit rented for
$385 in 1989, $419 in 1990, $429 in 1991, $439 in 1992 and $465 in 1993. The
average effective annual rental per square foot of the Property for 1991, 1992,
1993, 1994 and 1995 was $6.17, $6.39, $6.89, $7.21 and $7.36, respectively.
The apartment units are contained in 22 two-story buildings, for a combined
total of approximately 159,000 square feet of net rentable area. There are four
ground level and four second floor units in each of the buildings. In addition
to the 22 residential buildings, the Property has a freestanding clubhouse which
also contains an exercise facility, rental office and maintenance shop. There
are also three laundry buildings placed about the Property. The buildings are
all of wood stud frame with clapboard siding. All
40
<PAGE>
buildings have A-frame roofs with composition shingles, with the exception of
the clubhouse which has a flat roof with tar and gravel covering. The buildings
are slab on grade with second floor units having lightweight concrete floors.
All second floor units have balconies constructed of pressure treated wood.
Parking areas are asphalt, and walkways and curbs are concrete.
The Property features a clubhouse with fireplace, an exercise room, two
swimming pools, a tennis court, a volleyball court and a small playground area.
There are approximately 457 parking spaces. The Property is well-landscaped,
with a duck pond and meandering stream.
All apartments have wall-to-wall carpet, mini-blinds, cable television
hook-ups, individually controlled ceiling mounted electric forced warm air
furnaces with central air conditioning and electric hot water heater. All
kitchens are equipped with a double stainless steel sink, garbage disposal,
refrigerator/freezer, electric range and dishwasher. Bathrooms were originally
designed with full ceramic tile tubs and shower stalls. A significant number of
the tub areas have now been covered with fiberglass sheeting over tile.
Each apartment is individually metered for electricity consumption, and
tenants pay costs for heating, air conditioning, hot water, cooking and
illumination. The Company provides cold water, sewer, common-area electricity
and refuse collection.
The Company has spent approximately $953,000 in the completion of repairs and
improvements at the Property. The completed repairs and improvements include the
replacement of all exterior siding, reroofing of all buildings, exterior
painting, parking lot repair, and clubhouse renovation, including new office
furnishings, a new fitness center and a renovated club facility, together with
certain improvements to apartment unit interiors.
Competition for the Property includes numerous apartment developments in the
Raleigh area. There are at least nine apartment complexes in the neighborhood of
the Property which compete directly with the Property for tenants. Many of the
complexes enjoy high occupancy rates and offer locations or amenities equal or
superior to those of the Property. Cornerstone Management Group, Inc. estimates
that occupancy in nearby competing projects now averages approximately 97%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 93% in 1991 and 95% in 1992. Occupancy during
1993, 1994 and 1995 averaged 96%, 96% and 98%, respectively. On June 1, 1996,
the Property was 100% occupied. The majority of the residents are under 35 years
of age with incomes of under $25,000. The largest work-related fields are "trade
persons", "sales" and "professional."
The 1995 real estate tax rate applicable to the Property was approximately
$1.174 per $100 of assessed value, and the real estate taxes for 1995 were
$57,589. The assessed value was $4,680,511. The basis of the depreciable real
Property portion of the Property for federal income tax purposes ($5,288,688 at
year-end 1995) is being depreciated over 27.5 years on a straight-line basis,
and the basis of the personal Property portion is being depreciated in
accordance with the modified accelerated cost recovery system of the Code.
Amounts to be spent by the Company on repairs and improvements will be treated
for tax purposes as permitted by the Code based upon the nature of the
expenditures.
(2) POLO CLUB APARTMENTS
GREENVILLE, SOUTH CAROLINA
On June 3, 1993, the Company purchased the La Vista Apartments, a 365-unit
apartment complex located in Greenville, South Carolina (the "Property"). The
seller is not Affiliated with the Company, the Advisor or their Affiliates. The
purchase price was $4,300,000, which the Company paid entirely in cash from the
proceeds of the Initial Offering, and title to the Property was conveyed to the
Company by Limited Warranty Deed. The Company changed the name of the Property
to "Polo Club."
Location. The following is based in part on information provided by the
Greenville Chamber of Commerce. Greenville, South Carolina is in Greenville
County, and is located approximately 100 miles northwest of Columbia, South
Carolina, 100 miles southwest of Charlotte, North Carolina, and 145 miles
41
<PAGE>
northeast of Atlanta, Georgia. With a county-wide population of 320,000 in 1990,
Greenville County is the most populous county in South Carolina. The Greenville
metropolitan statistical area, which includes Greenville, Spartanburg, Anderson,
Pickens and Cherokee, had a population of 830,600 in January of 1993.
The Property is located just off of Poinsette Highway (U.S. 276) at 357
Hillandale Road, in northwest Greenville. Development along Poinsette Highway is
a mixture of commercial usage, including restaurants, gas stations, automobile
dealerships and strip shopping centers. The single family development near the
Property consists primarily of middle income housing. The Property is less than
two miles from Furman University, and approximately 10 miles from downtown
Greenville via Poinsette Highway.
The economy of the Greenville area is diversified, with an emphasis on
manufacturing. Greenville's largest employer is the School District, which
employs approximately 6,200 persons. Other major employers include Michelin
Tire, with 4,200 employees, and the Greenville hospital system, with over 4,500
employed. BMW has recently announced plans to construct a manufacturing plant in
Greenville which will employ approximately 6,500.
Description of the Property. The Property consists of a 365-unit apartment
complex located on approximately 20 acres of land. The apartment complex was
constructed in 1972. The unit mix and rents being charged new tenants as of June
1, 1996 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR MONTHLY
QUANTITY TYPE SQUARE FOOTAGE RENTAL
- ---------- --------------------------------- ---------------- -----------
<S> <C> <C> <C>
5 Efficiency 475 $325
118 1 Bedroom, 1 Bath 675 360-390
52 1 Bedroom, 1 Bath 675 360-390
10 2 Bedrooms, 1 Bath 920 410
120 2 Bedrooms, 1.5 Baths (garden) 940 450-470
60 2 Bedrooms, 1.5 Baths (townhouse) 975 475-510
</TABLE>
Leases at the Property generally are for terms of one year or less. Rental
increases for the five years preceding the Company's purchase of the Property
were modest. As a typical example, a one-bedroom, one-bath unit rented for $280
in 1989, $280 in 1990, $300 in 1991, $300 in 1992 and $300 in 1993. The average
effective annual rental per square foot of the Property for 1991, 1992, 1993,
1994 and 1995 was $5.67, $5.85, $5.85, $6.26 and $6,68, respectively.
The apartment units are contained in 32 two-story buildings and one
three-story building, for a combined total of approximately 295,000 square feet
of net rentable area. In addition to the 33 residential buildings, the Property
has a freestanding clubhouse which also houses the rental office and a
maintenance workshop. There are three separate laundry facilities at the
Property. The buildings are all of wood stud frame and brick veneer
construction. All buildings have flat roofs with tar and gravel covering and
mansards, with the exception of the clubhouse roof which is pitched and covered
with composition shingles. Some building units are constructed on crawl spaces
while others feature concrete slab construction. Parking areas are asphalt, and
walkways and curbs are concrete. All second and third floor units have wood
balconies.
The Property features a clubhouse with fireplace, two swimming pools,
sunbathing area, one lighted tennis court and a basketball court. There are
approximately 538 parking spaces. The Property is well-landscaped, with mature
trees and shrubbery, and adjoins the 18-hole Hillandale Golf Course.
All apartments have wall-to-wall carpeting in the living areas, except for
vinyl floors in the kitchen and bath. All kitchens are equipped with
refrigerator/freezer, electric range and oven, dishwasher and garbage disposal.
Each apartment is equipped with a smoke detector, cable television hook-up,
water heater, and an individually controlled forced air heating and central air
conditioning unit.
Each apartment is individually metered for electricity consumption, and
tenants pay costs for heating, air conditioning, hot water, cooking and
illumination. The Company provides cold water, sewer, common-area electricity
and refuse collection.
42
<PAGE>
Prior to the Company's purchase of the Property, there had been a
considerable amount of deferred maintenance at the Property. The Company has
addressed the maintenance items by spending approximately $2,141,000 of the
proceeds of the Initial Offering for repairs and improvements. Such items
include replacement of mansards, repair and replacement of roofs not previously
replaced, renovation of the clubhouse, new carpet and appliances in the
apartments as needed, and certain landscaping improvements, and the
modernization of interiors of apartment units.
Competition for the Property includes numerous apartment developments in the
Greenville area. There are at least five apartment complexes in the neighborhood
of the Property which compete directly with the Property for tenants. Many of
the complexes enjoy high occupancy rates and offer locations or amenities equal
or superior to those of the Property. Cornerstone Management Group, Inc.
estimates that occupancy in nearby competing projects now averages approximately
95%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 77% in 1991 and 79% in 1992. Occupancy during
1993, 1994 and 1995 averaged 89%, 92% and 94%, respectively. On June 1, 1996,
the Property was 97% occupied. The majority of the residents are under 45 years
of age with incomes of under $20,000. The largest work-related fields are as
"trade persons," "sales," "professional" and "clerical".
Before purchase by the Company, the Property was owned by a lender that
obtained the Property through foreclosure. However, the Company believes that
operating difficulties at the Property experienced by the previous owner were
attributable to ineffective management and the magnitude of the debt service
obligations of the former owner and that these factors will have no application
to the Company and its ownership and operation of the Property. The Company has
no debt service obligations with respect to the Property. Furthermore, the
Company believes that repairs and improvements made at the Property, together
with Property marketing and management activities exceeding those of the
previous owner will result in substantially improved operating results for the
Property.
The 1995 real estate tax rate applicable to the Property is equivalent to
$27.71 for each $100 of assessed value, with "assessed value" being defined as
6% of appraised value. Real estate taxes for 1995 were $75,472. The appraised
value is $4,100,000. The basis of the depreciable real Property portion of the
Property for federal income tax purposes ($6,427,607 of year-end 1995) is being
depreciated over 27.5 years on a straight-line basis. The basis of the personal
Property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
upon the nature of the expenditures.
(3) MAYFLOWER SEASIDE APARTMENTS
VIRGINIA BEACH, VIRGINIA
On October 26, 1993, the Company purchased the Mayflower Seaside Apartments,
a 263-unit apartment complex located in Virginia Beach, Virginia (the
"Property"). The Company purchased the Property from a seller which was
unaffiliated with the Company, the Advisor or their Affiliates. The purchase
price was $7,634,144, which the Company paid entirely from the proceeds of the
Initial Offering, and title to the Property was conveyed to the Company by
Limited Warranty Deed.
Location. The following is based in part on information provided by the
Virginia Beach Chamber of Commerce. The City of Virginia Beach, Virginia is
located in the southeast corner of the state along the Atlantic Ocean, and
shares a common border with Norfolk, Virginia. With a present population of
approximately 400,000, Virginia Beach is the largest and fastest growing city in
Virginia and the 11th fastest growing city in the United States. Virginia Beach
is one of 12 municipalities which comprise the Norfolk/Virginia Beach/Newport
News Metropolitan Statistical Area (MSA). This MSA has a population exceeding
1.4 million, making it the 34th largest MSA in the U.S.
The area has a broad-based economic structure with several key employment
sectors. Virginia Beach is perhaps best known for its Atlantic Ocean shoreline
and its well-known resort strip. Nearly 21,000 people are employed in tourist
related jobs. The estimated 2.5 million annual tourists contribute approximately
$500 million in hotel and restaurant sales to the local community.
43
<PAGE>
The other primary employer in the area is the military, with approximately
35,000 armed service and civilian employees. The area received a boost from
recent military cutbacks when Norfolk was named the east coast "Super Base" for
the Navy. This facility is the largest naval base in the world. The effect of
the national base closings has been positive for the Virginia Beach/Norfolk
area, which has absorbed soldiers from various bases that were on the closing
list. This trend is expected to continue throughout the 1990's.
The balance of the economic base is in industry and agriculture.
The Property is located in the heart of the Virginia Beach resort area. The
area immediately surrounding the Property consists of extensive motel,
commercial and retail development. The Property is readily accessible from
Interstate 64 and Route 44, the primary limited-access corridor in Virginia
Beach. The Norfolk International Airport is approximately a 15 minute drive from
the Property.
Description of the Property. The Property consists of a 16-story high rise on
approximately 2.1 acres of land located across the street from the Atlantic
Ocean. The building has 263 units and an adjacent parking deck. The main
structure was constructed in 1950, and underwent substantial renovation in 1986.
The parking deck was added at the time of the renovation. The Property also
includes an adjacent retail building as well as retail space on the basement
level of the main building. The retail space is leased to a variety of tenants
including three restaurants, a florist, a hair dresser and a gift shop.
The Property offers 12 unit sizes to accommodate a variety of family sizes.
The unit mix and rents being charged new tenants as of June 1, 1996 are as
follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR MONTHLY
QUANTITY TYPE SQUARE FOOTAGE RENTAL
- ---------- ------------------------ ---------------- ---------------
<S> <C> <C> <C>
62 Studio (5 Sizes) 360 $ 465-550
26 1 Bedroom 475 570-625
86 1 Bedroom -- large 700 655-755
7 1 Bedroom -- deluxe 900 720-750
2 1 Bedroom -- 2 bath 725 600-650
36 2 Bedroom 875 755-840
35 2 Bedroom -- ocean view 875 795-855
3 3 Bedroom 1225 880-920
1 4 Bedroom 1800 1,216
3 Penthouse 2000 1,400-1,600
1 Penthouse 3000 1,700
1 Penthouse 4198 2,150
</TABLE>
The above units provide for a combined total of approximately 184,000 square
feet of net rentable area.
Leases at the Property generally are for terms of one year or less. Average
rental rates for the last five years preceding the Company's purchase of the
Property increased gradually. As a typical example, a one bedroom, one bath unit
rented for $505 in 1989, $535 in 1990, $550 in 1991, $600 in 1992 and $645 in
1993. The average effective annual rental per square foot of the Property for
1991, 1992, 1993, 1994 and 1995 was $11.64, $11.64, $11.64, $11.83 and $12.04,
respectively.
The main building is constructed on a piled foundation with structural
concrete floor decks and brick veneer over steel frame. The roof is flat with a
modified bitument rubber sheathing. Windows are wood sash, double hung. The
retail building is one story and built on concrete piers on concrete footings.
The floor is a four inch slab. The exterior is concrete block with a variation
of brick veneer and stucco on the front facade. The parking deck is concrete,
and a supplemental parking lot is gravel. Walkways and curbs are concrete. The
penthouse apartments have balconies.
The Property features a swimming pool, hot tub, sunbathing area, and a
meeting room. Illuminated parking is available in the adjoining parking deck at
an extra fee per month. There are a total of approximately 287 parking spaces.
The Property is lightly landscaped with mature shrubbery.
44
<PAGE>
All apartments have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. All kitchens are equipped with
refrigerator/freezer, electric range and oven, dishwasher and garbage disposal.
Each apartment is equipped with a smoke detector, cable television hook-up, and
individually controlled forced air heating and central air conditioning unit.
The Company supplies all utilities, excluding telephone and cable service.
The Company spent approximately $1,060,000 of the proceeds of the Initial
Offerings for repairs and improvements, including the renovation of the tower
lobby, relocation and renovation of the office, construction and furnishing of
the fitness center and recreation area, construction of a new indoor pool, and
certain improvements to apartment unit interiors. The renovation of the tower
lobby included refurnishing, construction of a new reception counter and new
marble and carpeting on the floors.
Competition for the Property includes other high rise and garden apartment
buildings. There are at least six apartment complexes in the neighborhood of the
Property which compete directly with the Property for tenants. Many of the
competing Properties enjoy high occupancy rates and offer locations or amenities
equal or superior to those of the Property. Cornerstone Management Group, Inc.
estimates that occupancy in nearby competing projects now averages approximately
96%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 95% in 1991 and 95% in 1992. Occupancy during
1993, 1994 and 1995 averaged 92%, 95% and 95%, respectively. On June 1, 1996,
the Property was 100% occupied. The majority of the residents are either white
collar or retired, representing approximately one-third each of the tenant mix.
The remaining residents are blue collar, military, and public service employees.
The Company purchased the Property from a lender that obtained the Property
through foreclosure. The Company believes that the Property historically has
been generally well run, that the cash flow difficulties experienced by the
prior owner have been attributable to the magnitude of its debt service
obligations, and that this factor will have no application to the Company, since
the Company has no debt service obligation with respect to the Property. The
purchase price paid by the Company was equal to approximately 50% of the prior
owner's mortgage debt on the Property.
The 1995 real estate tax rate applicable to the Property was approximately
$1.18 per $100 of assessed value, and the real estate taxes for 1995 were
$79,522. The assessed value was $6,693,732. The basis of the depreciable
residential real Property portion of the Property ($8,819,334 at year-end 1995)
is being depreciated over 27.5 years on a straight-line basis. The basis of the
personal Property portion will be depreciated in accordance with the modified
accelerated cost recovery system of the Code. Amounts to be spent by the Company
on repairs and improvements will be treated for tax purposes as permitted by the
Code based upon the nature of the expenditures.
(4) STONE RIDGE APARTMENTS
COLUMBIA, SOUTH CAROLINA
On December 8, 1993, the Company purchased the River Ridge Apartments, a
191-unit apartment complex located in Columbia, South Carolina (the "Property").
The Property was renamed the "Stone Ridge Apartments." The Company purchased the
Property from a seller which was unaffiliated with the Company, the Advisor or
their Affiliates. The purchase price was $3,325,000, which the Company paid
entirely from the proceeds of the Initial Offering, and title to the Property
was conveyed to the Company by limited warranty deed.
Location. The following is based in part on information provided by the
Columbia Chamber of Commerce. The City of Columbia, South Carolina is located in
the center of the state, about 80 miles south of Charlotte, North Carolina and
80 miles northeast of Augusta, Georgia. The Property is located in Columbia near
the intersection of Greystone Boulevard and Interstate 126. Interstates 26 and
20 are within a one-mile drive from the Property, and downtown Columbia is
approximately four miles northeast of the Property on Interstate 126. The area
immediately around the Property consists of a mix of high-end multifamily,
residential, commercial and retail development.
45
<PAGE>
The population of the Columbia metropolitan area is approximately 500,000,
and the South Carolina Department of Commerce projects that the population will
grow by approximately 24.7% by the year 2010. Columbia is the state capital and
home to the University of South Carolina. The single largest employer in
Columbia is the state government. Columbia is also home to Fort Jackson, an Army
installation, which has recently stepped up its operation as a regional recruit
training center.
The economy of Columbia is broad-based, with several key employment sectors,
the largest being government at 29.6%, with wholesale and retail trade at 21.0%,
services at 16.9% and manufacturing at 14.2%. The balance of the economic base
is in finance, construction and transportation.
Description of the Property. The Property consists of 191 garden and
townhouse apartments in 12 buildings of two and three stories, situated on
approximately 14.65 acres.
Since its construction in 1975, the interiors of the apartments had been
reasonably well maintained and were in relatively good condition. Before its
acquisition by the Company, the Property suffered from a moderate amount of
deferred maintenance. The Company has expended approximately $1,950,000 in
repairs and improvements, including new roofing, new siding, renovation of the
clubhouse/fitness center, parking lot repair and the modernization of apartment
units. The source of the funds for the completed repairs and improvements was
the proceeds of the Initial Offering.
The Property offers five unit sizes to accommodate a variety of family sizes.
The unit mix and rents being charged new tenants as of June 1, 1996 are as
follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
QUANTITY TYPE SQUARE FOOTAGE MONTHLY RENTAL
- ---------- ------------------- ---------------- ---------------
<S> <C> <C> <C>
22 1 Br/1 Bath 748 $460
22 1 Br/1 Bath/Twnhs 748 440
46 2 Br/2 Bath 1087 530-560
93 2 Br/2 Bath/Twnhs 1140 530-560
8 3 BR/2.5 Bath/Twnhs 1280 675
</TABLE>
The units provide for a combined total of just under 200,000 square feet of
net rentable area.
Leases at the Property generally are for terms of one year or less. Average
rental rates for the last five years preceding the Company's purchase of the
Property increased steadily. As a typical example, a one bedroom, one bath unit
rented for $355 in 1989, $370 in 1990, $385 in 1991, $390 in 1992 and $410 in
1993. The average effective annual rental per square foot at the Property for
1991, 1992, 1993, 1994 and 1995 was $5.52, $5.52, $5.52, $5.55 and $5.79,
respectively.
The buildings are wood frame with a combination of brick veneer and wood
siding built on either concrete slabs or concrete and block foundations. Roofs
are flat with rubber membrane surfacing. Windows are single hung with aluminum
frames. The parking lot is asphalt. Walkways are either asphalt or wooden, and
curbs are concrete. All units have either a patio or balcony.
The Property features an outdoor swimming pool, sunbathing area, two tennis
courts, a clubhouse and laundry facilities. There are a total of approximately
310 parking spaces in a lighted parking lot. The Property is well-landscaped
with mature trees and shrubs.
All apartments have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. All kitchens are equipped with a frost-free
refrigerator/freezer, electric range and oven, dishwasher and garbage disposal.
Each apartment is equipped with a smoke detector, cable television hook-up, and
individually controlled forced-air heating and central air conditioning unit.
There are washer and dryer connections in the two and three bedroom townhouse
apartments. The Company pays for cold water, sewer and common area electric
service. The tenants pay for their electric service, including heat, air
conditioning, hot water and cooking.
Competition for the Property includes other garden and townhouse communities
in the area. There are at least six apartment complexes in the neighborhood of
the Property which compete directly with the Property for tenants. Many of the
competing Properties enjoy high occupancy rates and offer locations or amenities
equal or superior to those of the Property. Cornerstone Management Group, Inc.
estimates that occupancy in nearby competing projects now averages approximately
94%.
46
<PAGE>
According to information provided by the seller, physical occupancy at the
Property averaged approximately 86% in 1991 and 86% in 1992. Occupancy during
1993, 1994 and 1995 averaged 88%, 85% and 93%, respectively. On June 1, 1996,
the Property was 89% occupied. The residents are comprised primarily of students
and white and blue collar workers.
The 1995 real estate tax rate applicable to the Property was approximately
$2.12 per $100 of assessed value, and the real estate taxes for 1995 were
$62,614. The assessed value was $3,677,167. The basis of the depreciable
residential real Property portion of the Property ($5,340,562 at year-end 1995)
is being depreciated over 27.5 years on a straight-line basis. The basis of the
personal Property portion will be depreciated in accordance with the modified
accelerated cost recovery system of the Code. Amounts to be spent by the Company
on repairs and improvements will be treated for tax purposes as permitted by the
Code based upon the nature of the expenditures.
(5) COUNTY GREEN APARTMENTS
LYNCHBURG, VIRGINIA
On December 15, 1993, the Company purchased the County Green Apartments, a
180-unit apartment complex located in Lynchburg, Virginia (the "Property"). The
purchase price was $3,800,000 and was paid entirely from the proceeds of the
Initial Offering. The Property was conveyed to the Company by limited warranty
deed.
The Company purchased the Property from a limited partnership in which Glade
M. Knight, an Affiliate of the Company and the Advisor, effectively served as a
general partner. Companies owned and controlled by Mr. Knight also managed the
Property since 1983. All of the distributable cash received from the Company as
a result of this purchase was distributed to the limited partners of the seller
as a partial return of their equity. Mr. Knight, in his capacity as a general
partner of the seller, did not receive any cash from the proceeds of the sale.
The seller made the decision to sell based on the conclusion that, as a result
of the Tax Reform Act of 1986, the limited partners had maximized the value of
their investment in the Property.
Pursuant to the Bylaws of the Company, the purchase from an Affiliate was
approved by a majority of the Company's Independent Directors, with the vote of
directors in favor of purchase being unanimous. The Company also obtained
independent appraisals and engineering reports in accordance with its standard
practice and Bylaws. The appraised value was not less than the purchase price of
the Property.
Location. The following is based in part on information provided by the
Lynchburg Chamber of Commerce. The City of Lynchburg, Virginia is located in
central Virginia approximately 100 miles west of the City of Richmond. The
Property is located in the southeastern sector of Lynchburg, in an area
consisting of single and multi-family development. It is readily available to
shopping and employment via the Lynchburg Expressway and U.S. Routes 460 and 29.
The population of the Lynchburg area is approximately 200,000, and is projected
to increase by approximately 10% during the 1990s.
The economy of Lynchburg is a diverse mix of manufacturing and service
industries. Routes 460 and 29 connect to Interstates 81 and 64, respectively,
making Lynchburg a transportation hub within the state. As a result, the city is
the home to over 20 trucking terminals, two major rail line stations and an
Amtrak station. The city is also served by Lynchburg Regional Airport, which
provides direct commercial service to many metropolitan areas.
47
<PAGE>
Description of the Property. The Property consists of 22 two and three story
buildings located on approximately 21.11 acres of land. The Property was built
in 1976 and has been generally well maintained. The Property offers four
relatively spacious floor plans to accommodate a mix of family sizes. The unit
mix and rents being charged new tenants as of June 1, 1996 are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR MONTHLY
QUANTITY TYPE SQUARE FOOTAGE RENTAL
- ---------- ------------ ---------------- ---------
<S> <C> <C> <C>
52 1 Bedroom 750 $450
92 2 Bedroom 1110 500
4 2 Bedroom 1110 475
32 3 Bedroom 1300 600
</TABLE>
The units provide for a combined total of approximately 180,000 square feet
of net rentable area.
Leases at the Property generally are for terms of one year or less. Average
rental rates for the last five years preceding the Company's purchase of the
Property increased steadily. As a typical example, a one bedroom, one bath unit
rented for $320 in 1989, $330 in 1990, $340 in 1991, $350 in 1992 and $360 in
1993. The average effective annual rental per square foot of the Property for
1991, 1992, 1993, 1994 and 1995 was $5.53, $5.53, $5.53, $5.53 and $5.94,
respectively.
The buildings are built on concrete slabs and are of wood frame construction
covered with a combination of wood siding and cedar shake. Roofs are pitched and
covered with composition shingles. All apartments have patios or balconies. The
parking lot is asphalt and walkways and curbs are concrete. The Property is
adequately landscaped with mature trees and shrubbery. The Company has spent
approximately $890,000 of the proceeds from the Initial Offering on the repair
and improvement of the Property, including roof replacement, carpeting repairs
and apartment unit modernization.
The Property features an outdoor swimming pool, sunbathing area, two tennis
courts and a laundry facility. There are a total of approximately 286 parking
spaces in the lighted parking lot.
All apartments have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. All kitchens are equipped with
refrigerator/freezer, electric range and oven, dishwasher and garbage disposal.
Each apartment is equipped with a smoke detector, cable television hook-up, and
individually controlled forced air heating and central air conditioning unit.
The Company pays for cold water, sewer and common area electric service. The
tenants pay for their electric service, including heat, air conditioning, hot
water and cooking.
Competition for the Property includes other garden and townhouse properties.
There are at least five apartment complexes in the neighborhood of the Property
which will compete directly with the Property for tenants. Many of the competing
Properties enjoy high occupancy rates and offer locations or amenities equal or
superior to those of the Property. Cornerstone Management Group, Inc. estimates
that occupancy in nearby competing projects now averages approximately 94%.
Physical occupancy at the Property averaged approximately 92% in 1991 and 94%
in 1992. Occupancy averaged 96%, 96% and 95% in 1993, 1994 and 1995,
respectively. On June 1, 1996, the Property was 81% occupied. The majority of
the residents are white collar, representing 50% of the tenant mix. The
remaining residents are approximately 25% blue collar and 25% retired.
The 1995 real tax rate applicable to the Property was approximately $1.13 per
$100 of assessed value, and the real estate taxes for 1995 were $49,972. The
assessed value was $4,422,300. The basis of the depreciable residential real
Property portion of the Property ($4,921,858 at year-end 1995) is being
depreciated over 27.5 years on a straight-line basis. The basis of the personal
Property portion will be depreciated in accordance with the modified accelerated
cost recovery system of the Code. Amounts to be spent by the Company on repairs
and improvements will be treated for tax purposes as permitted by the Code based
upon the nature of the expenditures.
48
<PAGE>
(6) WIMBLEDON CHASE APARTMENTS
WILMINGTON, NORTH CAROLINA
On February 25, effective February 1, 1994, the Company purchased the
Fountain Head Apartments, a 192-unit apartment complex having an address of
601-D Plum Nearly Lane, Wilmington, North Carolina (the "Property"). The
Property was renamed "Wimbledon Chase Apartments." The Company purchased the
Property from a seller which was unaffiliated with the Company, the Advisor or
their Affiliates. The purchase price was $3,300,000, which the Company paid
entirely from the proceeds of the Initial Offering, and title to the Property
was conveyed to the Company by limited warranty deed.
Location. The following is based in part on information provided by the
Wilmington Chamber of Commerce. The City of Wilmington, North Carolina, is
located on the Atlantic Ocean in the southeast corner of the state, about 100
miles southeast of Raleigh, North Carolina on Interstate 40. The Property is
centrally located within the city limits of Wilmington, approximately three
miles from downtown Wilmington. The Property is readily accessible from
Interstate 40 and from the major arteries of Kerr Avenue and College Avenue. The
area immediately around the Property consists primarily of a mix of single
family and multifamily development.
The greater Wilmington area (encompassing New Hanover and Brunswick counties)
is the fastest growing area in the Carolinas. Wilmington is the largest
metropolitan area in southeastern North Carolina and is the service hub for
seven surrounding counties. This service area has an aggregate population of
approximately 500,000.
The area has a broad-based economic structure with several key employment
sectors. Wilmington is the home to the University of North Carolina at
Wilmington which has over 8,000 students. The area has a diverse industrial base
and an impressive list of major national employers such as General Electric,
Corning and DuPont. Several textile mills are also located within the area.
Tourism generates more than $400 million annually.
Wilmington has become a major film-making community and is the home to
Carolco Studios. Since 1985 more than 60 feature films and 25 commercials have
been filmed in Wilmington. The studio provides employment to more than 500 local
residents. Some of the recent productions that have been filmed in Wilmington
include "Teenage Mutant Ninja Turtles," "Rambling Rose," "Billy Bathgate," "Amos
& Andrew," "Super Mario Brothers," the television series "The Young Indiana
Jones Chronicles" and the 1992-93 season of "Matlock."
Wilmington is accessible by land, sea and air. A major boost to the economy
was the completion of Interstate 40 which linked the area with Raleigh and gave
it direct access to Interstate 95. The city is served by the New Hanover
International Airport which was built on a 1,500 acre site, three miles north of
Wilmington, in 1991. Over 377,000 passengers were processed through the terminal
in 1991.
Wilmington is also a port city with an active import and export trade as well
as cargo and storage facilities. In addition, several cruise ships sail between
the Port of Wilmington and Bermuda.
Description of the Property. The Property consists of 192 garden apartments
in 16 three-story buildings situated on approximately 13.2 acres. The Property
was built in 1976. The Company spent approximately $1,635,000 from the proceeds
of the Initial Offering on the replacement of siding, roof replacement, tennis
court renovation, clubhouse renovation, modernization of the apartment units,
and other improvements.
49
<PAGE>
The Property offers four unit sizes to accommodate a variety of family sizes.
The unit mix and rents currently being charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR MONTHLY
QUANTITY TYPE SQUARE FOOTAGE RENTAL
- ---------- ------------- ---------------- ----------
<S> <C> <C> <C>
48 Studio 520 $ 450
48 One Bedroom 760 525
48 Two Bedroom 970 595-605
48 Two Bedroom 1020 615-625
</TABLE>
The units provide for a combined total of approximately 157,000 square feet
of net rentable area.
Leases at the Property generally are for terms of one year or less. Average
rental rates for the last five years preceding the Company's purchase of the
Property increased gradually. As a typical example, a one bedroom unit rented
for $320 in 1989, $330 in 1990, $340 in 1991, $360 in 1992 and $375 in 1993. The
average effective annual rental per square foot of the Property for 1991, 1992,
1993, 1994 and 1995 was $4.31, $5.40, $5.51, $5.82 and $6.27, respectively.
The buildings are wood frame with cedar siding and are built on concrete
slabs. Roofs are pitched with asphalt shingles. Windows are single hung with
aluminum frames. The parking lot is asphalt and walkways are concrete. All units
have either a patio or balcony.
The Property features an outdoor swimming pool, two clay tennis courts,
volleyball court and a combination office/clubhouse. The clubhouse is in need of
renovation and is not currently being used. The Property also has laundry
facilities. There are a total of approximately 306 parking spaces in a lighted
parking lot. The Property is adequately landscaped with mature trees and shrubs.
All apartments have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. All kitchens are equipped with a
refrigerator/freezer, electric range and oven, dishwasher and garbage disposal.
Each apartment is equipped with a smoke detector and individually controlled
forced-air heating and central air conditioning unit. The Company supplies cold
water, sewer and common area electric service. The tenants pay for their
electric service, including heat, air conditioning, hot water, cooking and
lights.
Competition for the Property includes other garden apartment properties in
the area. There are at least six apartment complexes in the neighborhood of the
Property which will compete directly with the Property for tenants. Many of the
competing Properties enjoy high occupancy rates and offer locations or amenities
equal or superior to those of the Property. Based on a recent telephone survey,
Cornerstone Management Group, Inc. estimates that occupancy in nearby competing
projects now averages approximately 98%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 87% in 1991, 98% in 1992, and 94% in 1993.
Occupancy averaged 90% in 1994 and 95% in 1995. On June 1, 1996, the Property
was 93% occupied. A majority of the residents are employed in a combination of
blue and white collar positions.
The Company believes that, except for the deferred maintenance, the Property
historically has been generally well run, and that the Property's good location
combined with the planned improvements to its appearance give the Property good
potential for rent increases. The Company purchased the Property from a lender
that obtained the Property through foreclosure. The Company believes that the
cash flow difficulties experienced by the prior owner were attributable to the
magnitude of the debt service obligations, and that this factor will have no
application to the Company and its proposed operation of the Property since the
Company has no debt service obligation with respect to the Property. The
purchase price paid by the Company was equal to approximately 66% of the prior
owner's mortgage debt on the Property.
The 1995 real estate tax rate applicable to the Property was approximately
$1.21 per $100 of assessed value, and the real estate taxes for 1995 were
$53,810. The assessed value was $4,447,141. The basis of the depreciable
residential real Property portion of the Property ($5,084,166 at year-end 1995)
is
50
<PAGE>
being depreciated over 27.5 years on a straight-line basis. The basis of the
personal Property portion will be depreciated in accordance with the modified
accelerated cost recovery system of the Code. Amounts to be spent by the Company
on repairs and improvements will be treated for tax purposes as permitted by the
Code based upon the nature of the expenditures.
(7) HARBOUR CLUB APARTMENTS
VIRGINIA BEACH, VIRGINIA
As of May 1, 1994, the Company purchased the Birdneck Lakes Apartments, a
214-unit apartment complex having an address of 226 Birch Lake Crescent,
Virginia Beach, Virginia (the "Property"). The Company purchased the Property
from a seller which was unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $5,250,000, which the Company paid entirely
from the proceeds of the Initial Offering, and title to the Property was
conveyed to the Company by limited warranty deed. The Company renamed the
Property "Harbour Club Apartments."
Location. The Property is located in Virginia Beach, Virginia. A description
of Virginia Beach is set forth herein under the description of the "Mayflower
Seaside Apartments."
The Property is located approximately 1.1 miles from the ocean front. The
area immediately surrounding the Property consists of extensive motel,
commercial and retail development and single family housing. The Property is
readily accessible from Interstate 64 and Route 44, the primary limited-access
corridor in Virginia Beach. The Norfolk International Airport is approximately a
15 minute drive from the Property.
Description of the Property. The Property consists of 214 garden apartments
in 20 two-story buildings situated on approximately 13 acres. Since its
construction, which was completed in two phases in 1987 and 1988, the Property
has been well maintained and is in good condition. The Company has spent
approximately $285,000 of the proceeds of the Initial Offerings for office
renovation, renovation of the interiors of several apartment units and common
area hallway renovation, repair of the common area security doors, exterior trim
carpentry and painting and additional landscaping.
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR MONTHLY
QUANTITY TYPE SQUARE FOOTAGE RENTAL
- ---------- -------------------------- ---------------- ---------
<S> <C> <C> <C>
13 1 Bedroom, 1 Bath (up) 900 $ 490
2 1 Bedroom, 1 Bath (down) 900 480
41 2 Bedrooms, 1 Bath (up) 900 530
38 2 Bedrooms, 1 Bath (down) 900 520
20 2 Bedrooms, 1 Bath (up) 900 530
20 2 Bedrooms, 1 Bath (down) 900 520
26 3 Bedrooms, 2 Baths (up) 1,100 650
26 3 Bedrooms, 2 Baths (down) 1,100 640
14 3 Bedrooms, 2 Baths (up) 1,100 650
14 3 Bedrooms, 2 Baths (down) 1,100 640
</TABLE>
The units provide for a combined total of approximately 174,000 square feet
of net rentable area.
Leases at the Property generally are for terms of one year or less. Average
rental rates for the last five years preceding the Company's purchase of the
Property generally increased gradually. As a typical example, a two bedroom unit
rented for $470 in 1989, $480 in 1990, $490 in 1991, $495 in 1992 and $495 in
1993. The average effective annual rental per square foot of the Property for
1991, 1992, 1993, 1994 and 1995 was $7.94, $8.10, $8.10, $8.57 and $9.01,
respectively.
The buildings are wood frame with aluminum siding and are built on concrete
slabs. Roofs are pitched with composition shingles. Windows are aluminum frames,
dual pane. The parking lot is asphalt and walkways are concrete. All units have
either a patio or balcony.
51
<PAGE>
The Property features an outdoor swimming pool, tot lot, laundry facilities
and a rental office. Many of the units have washer/dryer hookups. There are a
total of approximately 383 parking spaces in a lighted parking lot. The Property
is adequately landscaped with mature trees and shrubs.
All apartments have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. All kitchens are equipped with a frost free
refrigerator/freezer, electric range and oven, dishwasher and garbage disposal.
Each apartment is equipped with a smoke detector, cable television hook-ups and
individually controlled forced-air heating and central air conditioning unit.
Second floor apartments have cathedral ceilings. The Company supplies cold
water, sewer and common area electric service. The tenants pay for their
electric service, including heat pumps, air conditioning, hot water, cooking and
lights.
Competition for the Property includes other garden apartment properties in
the area. There are at least five apartment complexes in the neighborhood of the
Property which will compete directly with the Property for tenants. Many of the
competing Properties enjoy high occupancy rates and offer locations or amenities
equal or superior to those of the Property. Cornerstone Management Group, Inc.
estimates that occupancy in nearby competing projects now averages 97%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 89% in 1991, 90% in 1992, and 93% in 1993.
Occupancy averaged 93% in 1994 and 91% in 1995. On June 1, 1996, the Property
was 92% occupied. A majority of the residents are either white collar or
military. Of the remaining residents, approximately 10% are blue collar and the
remaining are in service industries.
The Company believes that the Property historically has been generally well
run, and that the Property's good location combined with the planned
improvements to its appearance give the Property good potential for rent
increases. The Company purchased the Property from a lender that obtained the
Property through foreclosure. The Company believes that the cash flow
difficulties experienced by the prior owner were attributable to the magnitude
of the debt service obligations, and that this factor will have no application
to the Company and its proposed operation of the Property since the Company has
no debt service obligation with respect to the Property. The purchase price paid
by the Company was equal to approximately 77% of the prior owner's mortgage debt
on the Property.
The 1995 real estate tax rate applicable to the Property was approximately
$1.18 per $100 of assessed value, and the real estate taxes for 1995 were
$85,112. The assessed value was $7,164,305. The basis of the depreciable
residential real Property portion of the Property ($5,672,670 at year-end 1995)
is being depreciated over 27.5 years on a straight-line basis. The basis of the
personal Property portion will be depreciated in accordance with the modified
accelerated cost recovery system of the Code. Amounts to be spent by the Company
on repairs and improvements will be treated for tax purposes as permitted by the
Code based upon the nature of the expenditures.
(8) CHASE MOORING APARTMENTS
WILMINGTON, NORTH CAROLINA
On August 10, 1994, effective August 1, 1994, the Company purchased The Palms
Apartments, a 224-unit apartment complex having an address of 3417 Wilshire
Blvd., Wilmington, North Carolina (the "Property"). The Company purchased the
Property from a seller which is unaffiliated with the Company, the Advisor and
their Affiliates. The purchase price was $3,594,000, which the Company paid
entirely from the proceeds of the offering, and title to the Property was
conveyed to the Company by general warranty deed. The Company renamed the
Property "Chase Mooring."
Location. The City of Wilmington, North Carolina is described herein under
the description of "Wimbledon Chase Apartments."
The Property is centrally located within the city limits of Wilmington,
approximately 1.5 miles from Wimbledon Chase Apartments. The Property is readily
accessible from US Highway 132 and from Wilshire Boulevard and Wrightsville
Avenue. The area immediately around the Property consists primarily of a mix of
single family and multifamily development.
52
<PAGE>
Description of the Property. The Property consists of 224 garden apartments
in 28 two-story buildings situated on approximately 16 acres. Since its
construction in 1968, the interiors of the apartments have been reasonably well
maintained, and underwent extensive carpet and appliance replacement in the
hands of the former owner. The Company has expended approximately $845,000 for
the construction of new parking areas, exterior carpentry repair, painting and
hallway renovation and other improvements.
The Property offers five unit sizes to accommodate a variety of family sizes.
The unit mix and rents currently being charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR MONTHLY
QUANTITY TYPE SQUARE FOOTAGE RENTAL
- ---------- ----------------- ---------------- ---------
<S> <C> <C> <C>
42 One Bedroom/Den 850 $480
127 Two Bedroom 850 525
24 Two Bedroom/Den 904 550
27 Three Bedroom 925 600
4 Three Bedroom/Den 974 650
</TABLE>
The units provide for a combined total of approximately 194,000 square feet
of net rentable area.
Leases at the Property generally are for terms of one year or less. Average
rental rates for the last five years have increased gradually. As a typical
example, a one bedroom unit rented for $340 in 1990, $345 in 1991, $350 in 1992,
$355 in 1993 and $364 in 1994. The average effective annual rental per square
foot of the Property for 1991, 1992, 1993, 1994 and 1995 was $4.40, $4.25,
$4.90, $4.95 and $5.78, respectively.
The buildings are wood frame with brick veneer and vinyl siding and are built
on concrete slabs. Roofs on 11 buildings are pitched and covered with asphalt
shingles. The roofs on the remaining 17 buildings are flat with a membrane
covering. All of the flat roofs have been recently replaced and are guaranteed
for 15 years. Windows are double hung with aluminum frames. The parking lot is
asphalt and walkways are concrete. There are a total of approximately 250
parking spaces in a lighted parking lot.
The Property features an outdoor swimming pool, and also laundry facilities
in each building. All apartments have wall-to-wall carpeting in the living areas
and vinyl floors in the kitchen and bath. All kitchens are equipped with a
refrigerator/freezer, electric range and oven and most units have dishwashers.
Each apartment is equipped with a smoke detector and individually controlled
forced-air heating and central air conditioning unit. The owner of the Property
supplies cold water, sewer and common area electric service. The tenants pay for
their electric service, including heat, air conditioning, hot water, cooking and
lights.
Competition for the Property includes other garden apartment properties in
the area. There are at least six apartment complexes in the neighborhood of the
Property which will compete directly with the Property for tenants. Many of the
competing Properties enjoy high occupancy rates and offer locations or amenities
equal or superior to those of the Property. Based on a recent telephone survey,
Cornerstone Management Group, Inc. estimates that occupancy in nearby competing
projects now averages approximately 94%.
The Company believes that the Property historically has been generally well
run. According to information provided by the seller, physical occupancy at the
Property has averaged approximately 80% in 1991, 88% in 1992, and 93% in 1993.
Occupancy averaged 98% in 1994 and 93% in 1995. On June 1, 1996, the Property
was 86% occupied. A majority of the residents are employed in a combination
of blue and white collar positions.
53
<PAGE>
The 1995 real estate tax rate applicable to the Property was approximately
$1.21 per $100 of assessed value, and the real estate taxes for 1995 were
calculated to be $44,537. The assessed value was $3,680,805. The basis of the
depreciable residential real Property portion of the Property ($4,586,234 at
year-end 1995) is being recovered over 27.5 years on a straight-line basis. The
basis of the personal Property portion will be recovered in accordance with the
modified accelerated cost recovery system of the Code. Amounts to be spent by
the Company on repairs and improvements will be treated as permitted by the Code
based upon the nature of the expenditures.
(9) THE TRESTLES APARTMENTS
RALEIGH, NORTH CAROLINA
On December 30, 1994, the Company purchased The Trestles Apartments, a
280-unit apartment complex having an address of 3008 Calvary Drive, Raleigh,
N.C. (the "Property"). The Company purchased the Property from a seller which is
unaffiliated with the Company, the Advisor and their Affiliates. The purchase
price was $10,350,000. On an interim basis, $5,000,000 of the total funds needed
to acquire the Property were borrowed funds. The borrowing was repaid in
February, 1995 with proceeds from the sale of Shares. The balance of the amount
required for the purchase of the Property came from the closing of the sale of
Shares. Title to the Property was conveyed to the Company by limited warranty
deed.
Location. The City of Raleigh, North Carolina is described herein under the
description of "The Hollows Apartments."
The Property is located on the south side of Calvary Drive in northeast
Raleigh. The primary thoroughfare in the area is Capital Boulevard (U.S. Highway
1) which intersects with Calvary Drive two-tenths of one mile east of the
Property. Capital Boulevard provides quick access to major east/west corridors
and to the Raleigh Beltline (I-440) three miles south of the Property. Downtown
Raleigh is six miles and a ten minute drive on Capital Boulevard. The Raleigh
Beltline and Interstate 40 form Raleigh's belt loop providing convenient access
to other key thoroughfares, the Raleigh/Durham Airport, and the Research
Triangle Park.
The neighborhood immediately surrounding the Property consists of a
combination of single family housing, apartment communities, neighborhood
shopping centers, and commercial businesses. According to the Raleigh News and
Observer, a 65 acre shopping area, which will reportedly contain 534,000 square
feet of shopping space, is currently being developed directly across Calvary
Drive from the Property, and, in addition, another 123 acres are being developed
into a 1.2 million square foot regional shopping mall within one mile of the
Property. The estimated cost of this development is $123 million and it is
anticipated to open in late 1997.
Description of the Property. The Property consists of 280 garden style
apartments in 15 two- and three-story buildings situated on approximately 14.8
acres. The Company believes that since its construction in 1987, the complex has
been well-maintained and is in good condition. The Company has expended
approximately $485,000 in the completion of certain improvements to the
Property, including renovation of the clubhouse, some landscaping and other
minor refurbishments.
The Property offers four unit sizes to accommodate a variety of family sizes.
The unit mix and rents currently being charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- -------------------- -------------- -----------
<S> <C> <C> <C>
96 1 bedroom/1 bath 600 $488-504
64 1 bedroom/1 bath 740 541-562
80 2 bedrooms/1.5 baths 880 604-640
40 2 bedrooms/2 baths 1,049 667-682
</TABLE>
The units provide for a combined total of approximately 217,000 square feet
of net rentable area.
54
<PAGE>
Leases at the Property generally are for terms of one year or less. Average
rental rates for the last five years have increased gradually. As a typical
example, a one bedroom unit rented for $350 in 1991, $385 in 1992, $400 in 1993,
$485 in 1994, and $485 in 1995. The average effective annual rental per square
foot at the Property for 1991, 1992, 1993, 1994, and 1995 was $6.31, $6.47,
$6.86, $7.74, and $8.20, respectively.
All buildings are wood frame with a combination of brick veneer and cedar
siding. The buildings are slab on grade with second and third floor units having
plywood covered with lightweight concrete floors. Access to the upper floor
units is by metal pan exterior stairs leading to a lightweight concrete
deck-walkway. Balconies are constructed of pressure treated wood. Roofs are
A-frame construction with composition shingles. The parking lot is asphalt and
walkways are concrete. All units have either a patio or balcony.
The Property features two outdoor swimming pools, a tennis court, a jacuzzi,
a three-acre lake with a picnic area, and a combination office/clubhouse. There
are two laundry facilities on the Property. There are a total of approximately
424 parking spaces in a lighted parking lot. The Property is well landscaped
with trees and shrubs.
All apartments have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen. All kitchens are equipped with a double stainless steel
sink, garbage disposal, frost-free refrigerator, electric range and dishwasher.
Bathrooms have full ceramic tile tubs. Each apartment is equipped with
mini-blinds, a cable television hook-up, an individually controlled electric
forced warm air furnace with central air conditioning and an electric hot water
heater.
There are a number of variations in the interior finish of the units. All of
the 104 upper level units feature a vaulted ceiling. Approximately 26% of the
units have washer and dryer connections. Fireplaces are contained in
approximately 21% of the units. Each of these additional amenities carries a
premium to the basic rental rates. Additional rent is also obtained from those
units which feature a pool or lake view. The owner of the Property supplies cold
water, sewer, common-area electric service and trash collection. The tenants pay
for their electric service and cable television.
Competition for the Property includes other garden apartment properties in
the area. There are at least six apartment complexes in the neighborhood of the
Property which will compete directly with the Property for tenants. Many of the
competing Properties enjoy high occupancy rates and offer locations or amenities
equal or superior to those of the Property. Rents at the competing Properties
are generally equivalent to those at the Property. Based on a recent telephone
survey, Cornerstone Management Group, Inc. estimates that occupancy in nearby
competing projects now averages approximately 93%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 92% in 1991, 94% in 1992, 95% in 1993, and 96%
in 1994. Physical occupancy averaged 95% during 1995. On March 21, 1996, the
Property was 91% occupied. Two of the occupied units are furnished to members of
the on-site staff at reduced rental rates and one unit is used as a maintenance
shop.
The Company believes that the Property historically has been generally well
run. The Company purchased the Property from a lender that obtained the Property
through foreclosure. The Company believes that the cash flow difficulties
experienced by the prior owner were attributable to the nature of the prior
owner's debt service obligations, and that these factors will have no
application to the Company and its proposed operation of the Property.
The 1995 real estate tax rate applicable to the Property was approximately
$1.174 per $100 of assessed value, and the real estate taxes for 1995 were
calculated to be $89,909 (including an additional charge of $15 per apartment
unit under a community waste reduction program). The assessed value was
$7,300,604. The basis of the depreciable residential real Property portion of
the Property (approximately $7,659,000) will be depreciated over 27.5 years on a
straight-line basis. The basis of the personal Property portion will be
depreciated in accordance with the modified accelerated cost recovery system of
the Internal Revenue Code (the "Code"). Amounts to be spent by the Company on
repairs and improvements will be treated for tax purposes as permitted by the
Code based upon the nature of the expenditures.
55
<PAGE>
(10) WIND LAKE APARTMENTS
GREENSBORO, NORTH CAROLINA
On April 7, 1995, effective April 1, 1995, the Company purchased the Sterling
Pointe Apartments, a 299-unit apartment complex having an address of 3822 Mizell
Road, Greensboro, North Carolina (the "Property"). The Company has changed the
name of the Property to "Wind Lake Apartments."
The Company purchased the Property from a seller which is unaffiliated with
the Company, the Advisor and their Affiliates. The purchase price was $8,775,000
(including $15,000 of the seller's closing costs), all of which was ultimately
paid from the proceeds from the sale of Shares. On an interim basis, $4,500,000
of the total funds needed to acquire the Property was borrowed under an
unsecured line of credit. The borrowed amount was repaid in April, 1995 from
proceeds from sales of Shares. Title to the Property was conveyed to the Company
by limited warranty deed.
Location. The following is based in part on information provided by the
Greensboro Chamber of Commerce. The Greensboro-Winston/Salem-Highpoint MSA, a
seven county area, currently has a population in excess of 1.1 million people
and has grown in excess of 19% over the past 10 years. Steady growth in
population is expected through 2010.
In 1994, 1,453 jobs were created by firms new to Greensboro while 1,235 jobs
were created by existing firms which expanded their operations. Recently, job
growth has increased significantly in the services sector, although
manufacturing continues to represent the largest proportion of employment, at
29%. The unemployment rate is currently approximately 3.5%, which is below the
national average. Principal employers in the area are R.J. Reynolds, Bauman Gray
Baptist Hospital, Sara Lee, Sears, US Air and Cone Mills.
Description of the Property. The Property consists of 299 studio and one and
two bedroom garden style apartments in 16 buildings situated on approximately
23.7 acres of land. Since its construction in 1985, the interiors and exteriors
of the apartments have been reasonably well maintained. The Company has expended
approximately $180,000 in the completion of certain improvements, including
swimming pool repair and hallway renovation. The Company believes that the
Property is in good condition.
The Property offers three unit sizes to accommodate a variety of family
sizes. The unit mix and rents currently being charged new tenants are as
follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- --------------------------------- -------------- ----------
<S> <C> <C> <C>
13 studio 479 $425
50 1 bedroom, 1 bath 617 465
50 1 bedroom, 1 bath, FP 617 475
15 1 bedroom, 1 bath lake view 617 475
15 1 bedroom, 1 bath, FP, lake view 617 475
63 2 bedrooms, 1 bath 824 540
13 2 bedrooms, 1 bath, FP 824 565
15 2 bedrooms, 1 bath, lake view 824 575
50 2 bedrooms, 1 bath, FP 824 575
15 2 bedrooms, 1 bath, FP, lake view 824 575
</TABLE>
The units provide a combined total of approximately 217,000 square feet of
net rentable area.
Leases at the Property generally are for terms of one year or less. Average
rental rates for the last five years have both increased and decreased. As a
typical example, a two bedroom unit rented for $430 in 1990, $440 in 1991, $420
in 1992, $430 in 1993, $455 in 1994, and $540 in 1995. The average effective
annual rental per square foot at the Property for 1991, 1992, 1993, 1994, and
1995 was $6.66, $6.74, $6.89, $7.26, and $8.10, respectively.
56
<PAGE>
The buildings are wood frame with vinyl siding and are built on concrete
slabs. Roofs are pitched with asphalt shingles. Windows are metal frame and
double pane. All units have either a patio or balcony.
The Property features an indoor swimming pool, fitness center, jacuzzi, two
lighted tennis courts, an enclosed racquetball court and an office/clubhouse.
The Property also has laundry facilities in each building.
All apartments have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. All kitchens are equipped with a
refrigerator/freezer, electric range/oven, dishwasher and garbage disposal. Each
apartment is equipped with a smoke detector, cable television hook-up and
individually controlled forced-air heating and central air conditioning unit.
Nearly half of the units have a fireplace. The owner of the Property supplies
cold water, sewer and common area electric service. The tenants pay for all
other utilities, including electricity for heating/cooling, cooking and lights.
Competition for the Property includes other garden apartment properties in
the area. There are at least eight apartment complexes in the neighborhood of
the Property which will compete directly with the Property for tenants. Many of
the competing Properties enjoy high occupancy rates and offer locations or
amenities equal or superior to those of the Property. Rents at the competing
Properties are generally higher than those at the Property. Based on a recent
telephone survey, Cornerstone Management Group, Inc. estimates that occupancy in
nearby competing projects now averages approximately 94%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 85% in 1991, 85% in 1992, 90% in 1993, and 91%
in 1994. Physical occupancy averaged 90% during 1995 (based in part on
information provided by the seller). On March 21, 1996, the Property was 85%
occupied. A majority of the residents are students or employed in a combination
of blue and white collar positions.
The 1995 real estate tax rate applicable to the Property was approximately
$1.174 per $100 of assessed value, and the real estate taxes for 1994 were
calculated to be $85,709. The assessed value was $8,698,310. The basis of the
depreciable residential real Property portion of the Property (approximately
$7,708,800) will be depreciated over 27.5 years on a straight-line basis. The
basis of the personal Property portion will be depreciated in accordance with
the modified accelerated cost recovery system of the Code. Amounts to be spent
by the Company on repairs and improvements will be treated for tax purposes as
permitted by the Code based upon the nature of the expenditures.
(11) MAGNOLIA RUN APARTMENTS
GREENVILLE, SOUTH CAROLINA
On June 29, 1995, effective June 1, 1995, the Company purchased the Edgewood
Apartments, a 212-unit apartment complex having an address of 151 Century Drive,
Greenville, South Carolina (the "Property"). The Company has changed the name of
the Property to "Magnolia Run Apartments." A description of Greenville can be
found herein under the heading "Polo Club Apartments."
The Company purchased the Property from a seller which is unaffiliated with
the Company, the Advisor and their Affiliates. The purchase price was
$5,500,000, which the Company paid entirely from the proceeds from the sale of
Shares, and title to the Property was conveyed to the Company by limited
warranty deed.
Location. The Property is centrally located within the northeastern quadrant
of Greenville. The immediate area surrounding the Property consists of single
family and multifamily development and office/mixed use. The Property has direct
access to I-385 within one mile of the site and is convenient to major
employers, shopping and downtown. I-85 is readily accessible from I-385.
Description of the Property. The Property consists of 212 garden and
townhouse apartment units in 16 three-story buildings situated on approximately
12 acres.
57
<PAGE>
Since its construction in 1972, the interiors of the apartments have been
reasonably well maintained. Approximately half of the appliances are original
but are in good repair. Most of the appliances which have not been replaced have
been repainted. The Company anticipates that it will replace the majority of the
appliances in the next three years, as needed.
The Company has repaved the parking lot and improved the landscaping. About
half of the roofs and some exterior trim needed replacement and have been
replaced, while the vinyl siding is in good condition. The Company has repaired
and upgraded the leasing office and club facility for residents. Other minor
improvements designed to improve the Property's appeal to prospective tenants
have been completed. The Company has spent approximately $582,000 for the
foregoing improvements. The Company believes that the Property is in good
condition.
The Property offers five unit sizes to accommodate a variety of family sizes.
The unit mix and rents currently being charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ----------------------------- -------------- ----------
<S> <C> <C> <C>
72 1 bedroom, 1 bath 788 $420
44 2 bedrooms, 2 baths TH 1,050 515
64 2 bedrooms, 2 baths 1,131 595
24 2 bedrooms, 2.5 baths TH 1,280 595
8 3 bedrooms, 2.5 baths, FP, TH 1,550 695
</TABLE>
The units provide for a combined total of approximately 210,000 square feet
of net rentable area.
Leases at the Property generally are for terms of one year or less. Average
rental rates for the last five years have increased gradually. As a typical
example, a one bedroom unit rented for $340 in 1991, $340 in 1992, $350 in 1993,
$350 in 1994, and $390 in 1995. The average effective annual rental per square
foot at the Property for 1991, 1992, 1993, 1994, and 1995 was $5.09, $5.26,
$5.52, $5.70, and $6.32, respectively.
The buildings are wood frame on block foundation with crawl space. The
exteriors are covered with vinyl siding, and roofs are pitched with asphalt
shingles. Windows are single hung with aluminum frames. The parking lot is
asphalt and walkways are concrete. All units have either a patio or balcony.
The Property features an outdoor swimming pool, two tennis courts and a
combination office/clubhouse. The Property also has centralized laundry
facilities in addition to washer/dryer hookups in the larger units. There are a
total of approximately 252 parking spaces in a lighted parking lot. The Property
is adequately landscaped with mature trees and shrubs.
All apartments have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. All kitchens are equipped with a
refrigerator/freezer, electric range and oven, dishwasher and garbage disposal.
Each apartment is equipped with a smoke detector and individually controlled
forced-air heating and central air conditioning unit. Eight of the units contain
fireplaces and 64 contain built-in china cabinets. The owner of the Property
supplies cold water, sewer and common-area electric service. The tenants pay for
their electric service, including heat, air conditioning, hot water, cooking and
lights.
Competition for the Property includes other garden apartment properties in
the area. There is one apartment complex in the immediate neighborhood of the
Property which will compete directly with the Property for tenants, and many
others within one mile. Many of the competing Properties enjoy high occupancy
rates and offer locations or amenities equal or superior to those of the
Property. Rents at the competing Properties are generally higher than those at
the Property. Based on a recent telephone survey, Cornerstone Management Group,
Inc. estimates that occupancy in nearby competing projects now averages
approximately 92%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 91% in 1991, 91% in 1992, 92% in
1993, and 92% in 1994. Physical occupancy averaged
58
<PAGE>
99% during 1995 (based in part on information provided by the seller). On March
21, 1996, the Property was 95% occupied. A majority of the residents are
employed in a combination of blue and white collar positions. Due to the larger
size of the units the majority of the tenants are families or multi-tenant
households.
The Company believes that, except for the deferred maintenance, the Property
historically has been generally well run, and that the Property's good location
combined with the improvements to its appearance give the Property good
potential for rent increases.
The 1995 real estate tax rate applicable to the Property was approximately
$1.78 per $100 of assessed value, and the real estate taxes for 1995 are
expected to be $83,532. The assessed value was $4,473,000. The basis of the
depreciable residential real Property portion of the Property (approximately
$5,005,000) will be depreciated over 27.5 years on a straight-line basis. The
basis of the personal Property portion will be depreciated in accordance with
the modified accelerated cost recovery system of the Code. Amounts to be spent
by the Company on repairs and improvements will be treated for tax purposes as
permitted by the Code based upon the nature of the expenditures.
(12) BRECKINRIDGE APARTMENTS
GREENVILLE, SOUTH CAROLINA
On June 21, 1995, the Company purchased the Breckinridge Apartments, a
236-unit apartment complex having an address of 230 Pelham Road, Greenville,
South Carolina (the "Property"). A description of Greenville can be found herein
under the heading "Polo Club Apartments."
The Company purchased the Property from a seller which is unaffiliated with
the Company, the Advisor and their Affiliates. The purchase price was
$5,600,000, which the Company paid entirely from the proceeds from the sale of
Shares, and title to the Property was conveyed to the Company by limited
warranty deed.
Location. The Property is centrally located within the northeastern quadrant
of Greenville. The immediate area surrounding the Property consists of
multifamily development, office/mixed use and convenience shopping. The Property
has direct access to I-385 within one mile of the site and is convenient to
major employers, shopping and downtown. I-85 is readily accessible from I-385.
Description of the Property. Constructed in 1973, the Property consists of
236 garden style apartments in 16 two-story buildings situated on approximately
12 acres. The Property has been substantially rehabilitated in the past three
years with over $800,000 spent on improvements by prior owners. Completed
exterior renovations include wood replacement as needed, exterior painting and
replacement of all except two roofs. New signs have been installed, the grounds
have been relandscaped and the parking lot has been repaved. Generally, the
Property has excellent visibility and curb appeal.
The interiors of the apartments have been reasonably well maintained and are
in relatively good condition. Within the last three years over half of the
carpets have been replaced, over $50,000 has been expended on wallpaper
replacement, approximately $17,000 has been spent on appliance replacement, and
at least $115,000 has been expended on additional interior replacements. The
Company has spent approximately $350,000 in the completion of improvements at
the Property, including replacement of one roof, minor interior renovations to
the clubhouse, and other minor improvements. The Company believes that the
Property is in good condition.
59
<PAGE>
The Property offers four unit sizes to accommodate a variety of family sizes.
The unit mix and rents currently being charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------- -------------- ----------
<S> <C> <C> <C>
96 1 bedroom, 1 bath 530 $420
80 1 bedroom, 1 bath 720 465
28 2 bedrooms, 1 bath 1,020 580
32 2 bedrooms, 2 baths 1,075 599
</TABLE>
The units provide for a combined total of approximately 171,000 square feet
of net rentable area.
Leases at the Property generally are for terms of one year or less. Average
rental rates for the last five years have increased gradually. As a typical
example, a two bedroom unit that rented for $335 in 1991, rented for $389 in
1992, $425 in 1993, $450 in 1994, and $580 in 1995. The average effective annual
rental per square foot at the Property for 1991, 1992, 1993, 1994, and 1995 was
$5.78, $5.83, $5.88, $6.73, and $6.90, respectively. The Company and Cornerstone
Management Group, Inc. believe that the substantial rental rate increases
implemented following the Company's acquisition of the Property are reasonable
and appropriate in light of the improvements made to the Property, more
effective Property management and improved marketing of the Property. However,
there can be no assurance that increased rental rates will not result in
increased vacancy rates.
The buildings are wood frame on a concrete slab foundation. The exteriors are
covered with a combination of brick veneer and wood siding, and roofs are
pitched with asphalt shingles. Windows are single hung with aluminum frames. The
parking lot is asphalt and walkways are concrete. All units have an exterior
entrance and a small porch.
The Property features a large clubhouse, exercise room with two saunas, a
swimming pool, two tennis courts and a rental office. The Property also has
centralized laundry facilities in addition to washer/dryer hookups in the larger
units. There are a total of approximately 327 parking spaces in a lighted
parking lot.
All apartments have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. All kitchens are equipped with a
refrigerator/freezer, electric range and oven, dishwasher and garbage disposal.
Each apartment is equipped with a smoke detector and individually controlled
forced-air heating and central air conditioning unit. The owner of the Property
supplies cold water, sewer and common area electric service. The tenants pay for
their electric service, including heat, air conditioning, hot water, cooking and
lights.
Competition for the Property includes other garden apartment properties in
the area. There are at least 10 apartment complexes in the neighborhood of the
Property which will compete directly with the Property for tenants. Many of the
competing Properties enjoy high occupancy rates and offer locations or amenities
equal or superior to those of the Property. Rents at the competing Properties
are generally lower than those at the Property. Based on a recent telephone
survey, Cornerstone Management Group, Inc. estimates that occupancy in nearby
competing projects now averages approximately 95%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 78% in 1991, 65% in 1992, 75% in 1993, and 93%
in 1994. Physical occupancy averaged 95% during 1995 (based in part on
information provided by the seller). On March 21, 1996, the Property was
approximately 90% occupied. A majority of the residents are employed in a
combination of blue and white collar positions.
The Company believes that the Property historically has been generally well
run since a foreclosure in 1992. The Company purchased the Property from a
lender that obtained the Property through foreclosure in 1992. The Company
believes that the cash flow difficulties experienced by the prior owner were
attributable to the nature of the debt service obligations, and that these
factors will have no application to the Company and its proposed operation of
the Property.
60
<PAGE>
The 1995 real estate tax rate applicable to the Property was approximately
$1.78 per $100 of assessed value, and the real estate taxes for 1995 are
calculated to be $59,498. The assessed value was $3,344,000. The basis of the
depreciable residential real Property portion of the Property (approximately
$4,088,000) will be depreciated over 27.5 years on a straight-line basis. The
basis of the personal Property portion will be depreciated in accordance with
the modified accelerated cost recovery system of the Code. Amounts to be spent
by the Company on repairs and improvements will be treated for tax purposes as
permitted by the Code based upon the nature of the expenditures.
(13) BAY WATCH POINTE APARTMENTS
VIRGINIA BEACH, VIRGINIA
On July 18, 1995, the Company purchased the Broad Meadows Apartments, a
160-unit apartment complex having an address of 5414 Catina Arch, in Virginia
Beach, Virginia (the "Property"). The Company has changed the name of the
Property to "Bay Watch Pointe Apartments." A description of Virginia Beach can
be found herein under the heading "Mayflower Seaside Apartments."
The Company purchased the Property from a seller which is unaffiliated with
the Company, the Advisor and their Affiliates. The purchase price was
$3,372,525, which the Company paid entirely from the proceeds from the sale of
Shares, and title to the Property was conveyed to the Company by a limited
warranty deed.
Location. The Property is located in the northern portion of the City of
Virginia Beach, off of Wesleyan Drive. The immediate neighborhood consists of
other multi-family housing developments, commercial and retail development and
some single-family housing. The Property is near Cypress Pointe, which is a
planned development under construction which will contain shopping centers,
single-family housing and an 18-hole golf course. The Property is readily
accessible from Interstate 64 and Route 44, which is the metropolitan Virginia
Beach area primary limited access corridor. The Norfolk International Airport is
an approximately five-minute drive from the Property.
Description of the Property. The Property was built in 1972, and consists of
160 garden and townhouse style apartments located in 20 buildings on 11.7 acres.
The Company believes that the Property has generally been well maintained and
is in good condition, although, at the time of the purchase by the Company,
there was substantial deferred maintenance which required attention. The Company
has spent approximately $750,000 in the completion of certain improvements to
the Property, including new exterior siding, painting, new patio design and the
renovation of the clubhouse.
The unit mix and rents currently being charged to new tenants at the Property
are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- --------------------- -------------- ----------
<S> <C> <C> <C>
20 1 bedroom, 1 bath 587 $480
96 2 bedrooms, 1.5 baths 860 560
32 3 bedrooms, 1.5 baths 1,147 675
12 4 bedrooms, 1.5 baths 1,229 775
</TABLE>
The apartment units provide for a combined total of approximately 146,000
square feet of net rentable space.
Leases at the Property generally are for terms of one year or less. Average
rental rates for the last five years have increased gradually. As a typical
example, a two bedroom unit that rented for $471 in 1991, rented for $486 in
1992, $500 in 1993, $510 in 1994, and $560 in 1995. The average effective annual
rental per square foot at the Property for 1991, 1992, 1993, 1994, and 1995 was
$6.60, $6.79, $6.92, $7.03, and $7.22, respectively.
61
<PAGE>
The buildings are wood frame on a concrete slab foundation. The exteriors are
a combination of brick veneer and wood siding. Roofs are pitched and covered
with asphalt composition shingles. Windows are single hung with aluminum frames.
The parking lot is paved and walkways are concrete. Units have an exterior
entrance.
The Property has an outdoor swimming pool, centralized laundry facilities and
a rental office. There are approximately 330 parking spaces.
All apartments have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. All kitchens are equipped with a
refrigerator/freezer, electric range and oven, dishwasher and garbage disposal.
Apartment units have cable television hook-ups and individually-controlled
heating and air conditioning units. The owner of the Property supplies hot and
cold water, gas heat and sewer service. The tenant pays for electricity for air
conditioning, cooking and lights.
Competition for the Property includes numerous other apartment properties in
the area. There are at least five apartment complexes in the neighborhood of the
Property which will compete directly with the Property for tenants. Many of the
competing Properties enjoy high occupancy rates and offer locations or amenities
equal or superior to those of the Property. Rents at the competing Properties
are generally lower than those at the Property. Based on a recent telephone
survey, Cornerstone Management Group, Inc. estimates that occupancy in nearby
competing projects now averages approximately 90%.
Based in part on information provided by the seller, physical occupancy at
the Property averaged 89% during 1995. Information with respect to earlier
periods is not available. On March 21, 1996, the Property was 83% occupied. The
tenants of the Property are employed in a variety of white-collar, blue-collar
and military positions.
The Company purchased the Property from the Federal Deposit Insurance
Corporation (the "FDIC"), which acquired the Property through foreclosure in May
of 1994. The Company believes that the operational difficulties experienced by
the owner which lost the Property in foreclosure were attributable to the nature
of such owner's debt service obligations. Because the Company intends to own the
Property on a debt-free basis, the Company believes that these factors will have
no application to the Company's proposed operation of the Property.
The 1995 real estate tax rate applicable to the Property was approximately
$1.18 per $100 of assessed value, and the real estate taxes for 1995 are
calculated to be $42,860. The assessed value was $3,632,256. The basis of the
depreciable residential real Property portion of the Property (approximately
$2,596,845) will be depreciated over 27.5 years on a straight-line basis. The
basis of the personal Property portion will be depreciated in accordance with
the modified accelerated cost recovery system of the Code. Amounts to be spent
by the Company on repairs and improvements will be treated for tax purposes as
permitted by the Code based upon the nature of the expenditures.
(14) HANOVER LANDING APARTMENTS
CHARLOTTE, NORTH CAROLINA
On August 22, 1995, the Company purchased the Lemon Tree Apartments, a
192-unit apartment complex having an address of 5920 Monroe Road, in Charlotte,
North Carolina (the "Property"). The Company has changed the name of the
Property to "Hanover Landing Apartments." The Company purchased the Property
from a seller which is unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $5,725,000, which the Company paid entirely
from the proceeds from the sale of Shares, and title to the Property was
conveyed to the Company by limited warranty deed.
Location. Some of the following information was obtained from the Mecklenburg
County Chamber of Commerce. Charlotte is the most populous city in North
Carolina and the county seat of Mecklenburg County. It is located 225 miles
northeast of Atlanta, Georgia and 350 miles southwest of Washington, D.C. As of
1995, Charlotte and Mecklenburg County had an aggregate population in excess of
442,750, and the greater Charlotte trading area, known as Metrolina, had a
population in excess of 1.3 million.
62
<PAGE>
The area holds the largest supply of business capital between Philadelphia
and Dallas, with $43 billion in assets held by banks headquartered in Charlotte.
Charlotte is the third largest financial center in the U.S. (behind New York and
San Francisco) with two of the nation's 10 largest banks. First Union and
NationsBank have their executive headquarters in Charlotte. One reason for
Charlotte's high employment rate is the continued attraction of new business to
Charlotte. Although distribution and finance are the primary areas of activity
and growth, there are more than 950 manufacturing firms in Mecklenburg County.
Charlotte's geographic location and diversified economic base have accounted
for its growth as a distribution and transportation hub. The Charlotte area is
served by Interstate Highways I-85 and I-77 and U.S. Highways 21, 29 and 74.
Additionally, plans are underway for construction of I-285 and the Independence
Expressway, which will connect the major expressways. There are 10 major
commercial airlines serving the area, with 184 flights to and from Charlotte
daily. The Charlotte/Douglas International Airport is the nation's 23rd largest
airport in terms of passenger boardings, and provides direct and non-stop
service to over 100 cities daily.
The Charlotte area is home to an extensive higher education system. Charlotte
is the location of one branch of the University of North Carolina and there are
25 other colleges and universities within the Metrolina area. They collectively
represent an enrollment of over 90,000 persons.
The immediate area surrounding the Property consists of other multi-family
housing, commercial and retail development, and single-family housing. The
Property is convenient to shopping areas. The Property is readily accessible
from Interstates 85 and 77, which are the principal interstate highways in the
area.
Description of the Property. The Property was built in 1972, and consists of
192 garden style apartments located in 16 buildings arranged in four courtyards
on approximately 14 acres.
The Company believes that the Property has generally been well maintained and
is in good condition, although, at the time of purchase by the Company, there
was some deferred maintenance which required attention. Between 1993 and the
date of the Company's purchase of the Property, approximately 85% of the
apartment interiors were renovated with the installation of new carpet, new
vinyl and new appliances, as needed. The Company has spent approximately
$390,000 in the completion of improvements to the Property, including roof
replacement, exterior wood repair, exterior painting, mansard repair and
clubhouse renovation.
The unit mix and rents currently being charged to new tenants at the Property
are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- --------------------- -------------- ----------
<S> <C> <C> <C>
80 1 bedroom, 1 bath 689 $450
48 2 bedrooms, 1.5 baths 860 510
48 2 bedrooms, 1.5 baths 954 540
16 3 bedrooms, 2 baths 1,095 600
</TABLE>
The apartment units provide for a combined total of approximately 160,000
square feet of net rentable area.
Leases at the Property generally are for terms of one-year or less. Average
rental rates for the last five years have increased gradually. As a typical
example, a 2-bedroom unit that rented for $390 in 1991, rented for $405 in 1992,
$405 in 1993, $435 in 1994, and $500 in 1995. The average effective annual
rental per square foot at the Property for 1991, 1992, 1993, 1994, and 1995 was
$5.39, $5.63, $5.63, $5.63, and $6.78, respectively. The Company and Cornerstone
Management Group, Inc. believe that the substantial rental rate increases
implemented following the Company's acquisition of the Property are reasonable
and appropriate in light of the improvements made to the Property, more
effective Property management and improved marketing of the Property. However,
there can be no assurance that increased rental rates will not result in
increased vacancy rates.
63
<PAGE>
The buildings are wood frame with flat roofs and mansards covered with cedar
shake shingles. Exteriors are a combination of brick veneer and wood siding.
Windows are single-pane aluminum frame. The parking lot is asphalt and walkways
are concrete.
The Property has an outdoor swimming pool and four laundry facilities, each
consisting of four coin-operated washers and four coin-operated dryers.
There is a rental office.
All apartments have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. All kitchens are equipped with a
refrigerator/freezer, electric range and oven, dishwasher and garbage disposal.
Apartment units have cable television hook-ups and individually-controlled
heating and air conditioning units. The owner of the Property supplies hot and
cold water, gas heat and sewer service. The tenant pays for electricity for air
conditioning, cooking and lights.
Competition for the Property includes numerous other apartment properties in
the area. There are at least five apartment complexes in the neighborhood of the
Property which will compete directly with the Property for tenants. Many of the
competing Properties enjoy high occupancy rates and offer locations or amenities
equal or superior to those of the Property. Rents at the competing Properties
are generally higher than those at the Property. Based on a recent telephone
survey, Cornerstone Management Group, Inc. estimates that occupancy in nearby
competing projects now averages approximately 94%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 70% in 1991, 70% in 1992, 70% in 1993, and 80%
in 1994. Physical occupancy averaged 95% during 1995 (based in part on
information provided by the seller). The Company believes that the low occupancy
in 1993 was largely due to numerous units being unavailable for rent because of
renovations being made throughout the year. On March 21, 1996, the Property was
94% occupied. The tenants of the Property primarily are students or employed in
a variety of white-collar and blue-collar positions.
The Company purchased the Property from a former lender which acquired the
Property by deed in lieu of foreclosure in 1993. The Company believes that the
operational difficulties experienced by the owner which conveyed the Property by
deed in lieu of foreclosure were attributable to the nature of such owner's debt
service obligations. Because the Company intends to own the Property on a
debt-free basis, the Company believes that these factors will have no
application to the Company's proposed operation of the Property.
The 1995 real estate tax rate applicable to the Property was approximately
$1.233 per $100 of assessed value, and the real estate taxes for 1995 are
calculated to be $55,503. The assessed value was $4,501,470. The basis of the
depreciable residential real Property portion of the Property (approximately
$4,923,500) will be depreciated over 27.5 years on a straight-line basis. The
basis of the personal Property portion will be depreciated in accordance with
the modified accelerated cost recovery system of the Code. Amounts to be spent
by the Company on repairs and improvements will be treated for tax purposes as
permitted by the Code based upon the nature of the expenditures.
(15) MILL CREEK APARTMENTS
WINSTON-SALEM, NORTH CAROLINA
On September 22, 1995, effective September 1, 1995, the Company purchased the
Mill Creek Apartments, a 220-unit apartment complex having an address of 5771
Stone Mill Drive, Winston-Salem, North Carolina (the "Property"). The Company
purchased the Property from a seller which is unaffiliated with the Company, the
Advisor and their Affiliates. The purchase price was $8,550,000, all of which
was ultimately paid entirely from the proceeds from the sale of Shares. On an
interim basis, $5,500,000 of the total funds needed to acquire the Property were
borrowed funds obtained from a line of credit, and were repaid from sales of
Shares in October, 1995. Title to the Property was conveyed to the Company by
limited warranty deed.
64
<PAGE>
Location. The following is based in part on information provided by the
Winston-Salem Chamber of Commerce. The Greensboro/Winston-Salem/High Point MSA,
a seven county area, currently has a population in excess of 1.1 million people
and has grown in excess of 19% over the past 10 years. Steady growth in
population is expected through 2010.
The Greensboro/Winston-Salem/High Point MSA is the second most populous MSA
in North Carolina. Winston-Salem is the fourth most populous city in North
Carolina. The MSA is located roughly between Atlanta and Washington, D.C., along
Interstate 85. Winston-Salem is in Forsyth County, which is approximately 25
miles west of Greensboro and 20 miles northwest of High Point.
Principal employers in the area are RJR/Nabisco, Bauman Gray Hospital,
Baptist Hospital, Sara Lee, USAir and Wachovia Corporation.
The general area surrounding the Property consists of other multi-family
housing, commercial and retail development and single family housing. The
neighborhood includes the Madison Park office park, in which are located offices
of the USAir Reservations Center and several Sara Lee divisions. More than 2,000
employees work in the office park.
The Property is located in the northwest section of Winston-Salem. Owing to a
large number of major employment centers in the area, the area has recently been
one of the faster growing parts of the city. There are many shopping and dining
establishments within two miles of the Property, including notably the Super
K-Mart Center, located approximately one mile from the Property, which is a
combination retail goods, grocery store and fast food development.
The Property is readily accessible from Interstates 40 and 77, as well as
State Highway 52, which are the major thoroughfares in the area. The downtown
area and the Piedmont/Triad International Airport are each approximately five
miles from the Property.
Description of the Property. The Property consists of 220 one, two and three
bedroom garden style apartments in 25 buildings situated on approximately 17
acres of land. The Property was constructed in 1984.
The Company believes that the Property is in good condition. The Company has
expended approximately $81,000 for minor improvements, including carpet and
appliance replacement and clubhouse renovation.
The Property offers three unit types to accommodate a variety of family
sizes. The unit mix and rents currently being charged new tenants are as
follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------- -------------- ----------
<S> <C> <C> <C>
60 1 bedroom, 1 bath 710 $497
128 2 bedrooms, 2 baths 940 584
32 3 bedrooms, 3 baths 1,075 656
</TABLE>
The apartment units provide a combined total of approximately 197,000 square
feet of net rentable area.
Leases at the Property generally are for terms of one year or less. Average
rental rates for the last five years have generally increased. As an example, a
one bedroom apartment rented for $365 in 1992, $390 in 1993, $440 in 1994, and
$497 in 1995. The average effective annual rental per square foot at the
Property for 1991, 1992, 1993, 1994, and 1995 was $6.36, $6.12, $6.60, $7.44,
and $7.64, respectively.
The buildings are wood frame and brick construction. Roofs are "A" type and
consist of plywood sheathing beneath tar felt and asphalt/fiberglass shingles.
Windows are double pane, double glazed with aluminum frames and screens.
65
<PAGE>
The Property's common areas include a clubhouse and leasing office, laundry
room, maintenance office, swimming pool, tennis courts, play area and ample
paved parking.
All apartments have wall-to-wall carpeting in the dining room, living room,
bedrooms and hallways, and vinyl floors in the kitchen, laundry room, bathrooms
and the foyer of the main entrance. All units have washer/dryer connections, and
are equipped with smoke detectors, cable television hook-ups, and individually
controlled forced-air heating and central air conditioning units. Each kitchen
has a refrigerator/freezer, electric range and oven, dishwasher and garbage
disposal. The owner of the Property supplies cold water, sewer service and trash
removal. The tenants pay for all of their utilities, including electricity for
heating/cooling, cooking, hot water and lights.
There are at least 12 apartment properties in the area that compete with Mill
Creek. All offer similar amenities and have rents that are equal to or in excess
of those at the Property. Based on a recent telephone survey, Cornerstone
Management Group, Inc. estimates that occupancy in nearby competing projects now
averages approximately 92%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 90% in 1991, 90% in 1992, 90% in 1993, and 90%
in 1994. Physical occupancy averaged 92% during 1995 (based in part on
information provided by the seller). On March 21, 1996, the Property was 92%
occupied. A majority of the residents are employed in white collar positions and
the major employers of the Property's residents are Sara Lee Corporation, US
Air, RJR/Nabisco and Baptist Hospital.
The 1995 real estate tax rate applicable to the Property was approximately
$1.32 per $100 of assessed value, and the real estate taxes for 1995 were
calculated to be $84,665. The assessed value was $6,431,600. The basis of the
depreciable residential real Property portion of the Property (currently
estimated at approximately $7,182,000) will be depreciated over 27.5 years on a
straight-line basis. The basis of the personal Property portion will be
depreciated in accordance with the modified accelerated cost recovery system of
the Internal Revenue Code (the "Code"). Amounts to be spent by the Company on
repairs and improvements will be treated for tax purposes as permitted by the
Code based upon the nature of the expenditures.
(16) GLEN EAGLES APARTMENTS
WINSTON-SALEM, NORTH CAROLINA
On October 26, 1995, effective October 1, 1995, the Company purchased the
Glen Eagles Apartments, a 166-unit apartment complex having an address of 700
Braehill Boulevard, Winston-Salem, North Carolina (the "Property"). The Company
purchased the Property from a seller which is unaffiliated with the Company, the
Advisor and their Affiliates. The purchase price was $7,300,000, all of which,
less $2,300,000, was paid from the proceeds from the sale of Shares. At the
request of the seller, $2,300,000 of the purchase price was represented by an
unsecured interest-free promissory note which was due and paid in full on
January 3, 1996 using proceeds from the sale of Shares. Title to the Property
was conveyed to the Company by limited warranty deed.
Location. For a description of the Winston-Salem area, see above under "Mill
Creek Apartments."
The immediate neighborhood surrounding the Property consists of single family
and multifamily developments. The Property is located in the northwest section
of Winston-Salem. There are many shopping and dining establishments within two
miles of the Property. The Property is readily accessible from Interstates 40
and 77, as well as State Highway 52.
Description of the Property. The Property consists of 166 one, two and three
bedroom garden style apartments in 15 buildings situated on approximately 17
acres of land. The Property was built in two phases. The first phase consists of
74 units which were constructed in 1986. The second phase consists of 92 units
constructed in 1990.
66
<PAGE>
The Company believes that the Property is in good condition. Approximately
$80,000 has been budgeted by the Company for minor repairs including
refurbishing of the clubhouse and power washing the stairwells. To date,
approximately $29,000 of the budgeted amount has been spent.
The Property offers nine unit types to accommodate a variety of family sizes.
The unit mix and rents currently being charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------------- -------------- ----------
<S> <C> <C> <C>
24 1 bedroom, FP 630 $495
12 1 bedroom, W/D 725 545
24 2 bedrooms, standard 976 615
32 2 bedrooms, split 1,010 640
8 2 bedrooms, standard 1,030 640
8 2 bedrooms, split 1,030 640
12 2 bedrooms, split w/FP 1,030 665
2 bedrooms, standard w/FP 1,030 665
24 3 bedrooms 1,176 745
</TABLE>
The apartment units provide a combined total of approximately 158,000 square
feet of net rentable area.
Leases at the Property generally are for terms of one year or less. Average
rental rates for the last five years have gradually. As an example, rent on a
two bedroom standard unit was $520 in 1992, $570 in 1993, $575 in 1994 and $640
in 1995. The average effective annual rental per square foot at the Property for
1991, 1992, 1993, 1994, and 1995 was $6.24, $6.36, $6.96, $7.08, and $7.55,
respectively. The Company and Cornerstone Management Group, Inc. believe that
the substantial rental rate increases implemented following the Company's
acquisition of the Property are reasonable and appropriate in light of more
effective Property management and improved marketing of the Property. The
Company also believes that the completion of its planned repairs may also help
support the rent increases. However, there can be no assurance that increased
rental rates will not result in increased vacancy rates.
The buildings are of wood frame construction. Roofs are "A" type and consist
of plywood sheathing beneath tar, felt and fiberglass shingles. All buildings
have gutters and downspouts. The exteriors are either wood or masonite lapboard
siding. Windows are double pane, doubled glazed with aluminum frames and
screens.
The Property's common areas include a clubhouse and leasing office, a laundry
room, a swimming pool and two tennis courts. There is ample paved parking.
All apartments have wall-to-wall carpeting in the dining room, living room,
bedrooms and hallways, and vinyl floors in the kitchen and bathrooms. Each
apartment unit is equipped with a smoke detector, cable television hook-up, and
individually controlled heating and air conditioning unit. There are 58 units
with fireplaces. All kitchens are equipped with a refrigerator/freezer, electric
range and oven, a dishwasher and garbage disposal. The owner of the Property
provides cold water, sewer service and trash removal. The tenants pay for all of
their utilities, including electricity for heating/cooling, cooking, hot water
and lights.
There are at least eight properties in the area which compete with Glen
Eagles. All of these Properties are of similar age and construction. Rents are
generally at the same level as or above those at Glen Eagles. Based on a recent
telephone survey, Cornerstone Management Group, Inc. estimates that occupancy in
nearby competing projects now averages approximately 95%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 90% in 1990, 90% in 1991, 90% in 1992, 91% in
1993, and 93% in 1994. Physical occupancy
67
<PAGE>
averaged 97% during 1995 (based in part on information provided by the seller).
On March 21, 1996, the Property was 92% occupied. A majority of the residents
are employed in white collar positions and the major employers of the Property's
residents are the Bauman Gray School of Medicine, Wachovia, US Air and Baptist
Hospital.
The 1995 real estate tax rate applicable to the Property was approximately
$1.32 per $100 of assessed value, and the real estate taxes for 1995 were
calculated to be $74,898. The assessed value was $5,689,100. The basis of the
depreciable residential real Property portion of the Property (currently
estimated at approximately $6,205,000) will be depreciated over 27.5 years on a
straight-line basis. The basis of the personal Property portion will be
depreciated in accordance with the modified accelerated cost recovery system of
the Code. Amounts to be spent by the Company on repairs and improvements will be
treated for tax purposes as permitted by the Code based upon the nature of the
expenditures.
(17) OSPREY LANDING APARTMENTS
WILMINGTON, NORTH CAROLINA
On November 9, 1995, effective November 1, 1995, the Company purchased the
Summer Hill Apartments, a 176-unit apartment complex having an address of 2019-E
Fall Drive, Wilmington, North Carolina (the "Property"). The Company has changed
the name of the Property to "Osprey Landing Apartments." The Company purchased
the Property from a seller which is unaffiliated with the Company, the Advisor
and their Affiliates. The purchase price was $4,375,000, all of which was
ultimately paid with proceeds from the sale of Shares. Title to the Property was
conveyed to the Company by limited warranty deed.
Location. For a description of the greater Wilmington, North Carolina area,
see "Wimbledon Chase Apartments" herein.
The Property is centrally located within the city limits of Wilmington. The
immediate area surrounding the Property consists principally of single family
and multi-family development. The Property is readily accessible from Interstate
40 and from other major traffic arteries in the area. The Property provides easy
access to major shopping centers in the area, such as Long Leaf Mall and
Independence Mall, and to downtown Wilmington and Carolina Beach.
The Property is located directly across the street from Greenfield Lake. This
location offers a degree of privacy and seclusion as a result of the natural
park areas and jogging trails surrounding the lake. The Property is located less
than two miles from the New Hanover Regional Medical Center and numerous medical
office facilities in the area. The Property also is in close proximity to many
employment centers.
Description of the Property. The Property consists of 176 one, two and three
bedroom townhouse apartments in 24 two-story buildings situated on approximately
13 acres of land. The Property was constructed in 1973.
The Company believes that the Property is generally in good condition.
Approximately $528,000 has been budgeted by the Company for repairs and
improvements, including paving, roof replacement, siding replacement, interior
upgrading and clubhouse renovation. To date, the Company has expended
approximately $278,000 of the budgeted amount.
The Property offers three unit types. The unit mix and rents currently being
charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- --------------------- -------------- ----------
<S> <C> <C> <C>
32 1 bedroom, 1 bath 770 $480
96 2 bedrooms, 1.5 baths 940 530
48 3 bedrooms, 2.5 baths 1,205 630
</TABLE>
68
<PAGE>
The apartment units provide a combined total of approximately 173,000 square
feet of net rentable area.
Leases at the Property generally are for terms of one year or less. Average
rental rates for the last five years have generally increased. As an example, a
two bedroom apartment rented for $335 in 1991, $355 in 1992, $375 in 1993, $382
in 1994, and $500 in 1995. The average effective annual rental per square foot
at the Property for 1991, 1992, 1993, 1994, and 1995 was $4.07, $4.32, $4.56,
$4.68, and $5.47, respectively. The Company believes that rental rates at the
Property can be increased significantly over historical levels because of more
efficient management and the contemplated completion of significant planned
repairs and improvements at the Property. However, there can be no assurance
that increased rental rates will not result in increased vacancy rates.
The buildings are all two-story townhouses with wood frame construction on
concrete slabs. The exteriors are covered with T-111 plywood siding. The
majority of the roofs are pitched with asphalt shingles. All of the roofs at the
Property were originally flat and covered with tar and gravel. As these roofs
began to leak, they were replaced with a pitched truss roof system. All of this
work has been done in the past three years. There remain four roofs to be
completed, at a cost of approximately $13,000 per roof, which is included in the
Company's repair and improvement budget referred to above.
The Property's common areas include an outdoor swimming pool, playground,
laundry facilities, an office/clubhouse and ample paved parking. The clubhouse
is in need of renovation and is not currently being used. The cost of renovation
is also included in the Company's repair and improvement budget.
All apartments have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and baths. All kitchens are equipped with a
refrigerator/freezer, electric range and oven, dishwasher and garbage disposal.
There are blinds for all windows and all units have cable television hookups.
Each apartment has an individually controlled heating and air conditioning unit.
One and three bedroom units are equipped with a pass-through serving bar. The
owner of the Property supplies cold water, sewer and trash removal. The tenants
pay for all of their utilities including electricity for heating/cooling,
cooking, hot water and lights.
There are at least six apartment properties in the area that compete with the
Property. All offer similar amenities and have rents that are generally higher
when compared to those of the Property. Based on a recent telephone survey,
Cornerstone Management Group, Inc. estimates that occupancy in nearby competing
projects new averages approximately 90%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 90% in 1991, 91% in 1992, 90% in 1993, and 91%
in 1994. Physical occupancy averaged 92% during 1995 (based in part on
information provided by the seller). On March 25, 1996, the Property was 90%
occupied. The tenants are a mix of blue collar and white collar workers.
The 1995 real estate tax rate applicable to the Property was approximately
$1.21 per $100 of assessed value, and the real estate taxes for 1995 were
calculated to be $57,804. The assessed value was $4,777,218. The basis of the
depreciable residential real Property portion of the Property (currently
estimated at about $3,981,250) will be depreciated over 27.5 years on a
straight-line basis. The basis of the personal Property portion will be
depreciated in accordance with the modified accelerated cost recovery system of
the Code. Amounts to be spent by the Company on repairs and improvements will be
treated for tax purposes as permitted by the Code based on the nature of the
expenditures.
(18) TRADEWINDS APARTMENTS
HAMPTON, VIRGINIA
On November 10, 1995, effective November 1, 1995, the Company purchased the
Tradewinds Apartments, a 284-unit apartment complex having an address of 2
Tradewinds Quay, Hampton, Virginia (the "Property"). The Company purchased the
Property from a seller which is unaffiliated with the Company, the Advisor and
their Affiliates. The purchase price was $10,200,000. The purchase price was
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borrowed on an interim basis under the Company's unsecured line of credit. The
borrowed amount was subsequently repaid with proceeds from the sale of Shares in
November, 1995 and January, 1996. Title to the Property was conveyed to the
Company by limited warranty deed.
Location. The following is based in part upon information provided by the
Hampton Roads Chamber of Commerce. The Hampton Roads area of southeast Virginia
is defined generally by twelve jurisdictions included in the Norfolk/Virginia
Beach/Newport News metropolitan statistical area. The area comprises
approximately 18,000 square miles and includes approximately 1.4 million people,
which represents over 22% of the total population of the Commonwealth of
Virginia. According to the Chamber of Commerce, the area is the 27th largest
population area in the United States.
The region is served by a major airport, three major rail lines, an
interstate highway system and the nation's largest port, making the region
accessible to all parts of the United States and overseas markets. Interstate 64
is the major traffic artery in the area. Richmond, the capital of the
Commonwealth of Virginia, is approximately 100 miles west of Hampton Roads. The
area's airport, Norfolk International Airport, is the largest airport in the
region, with 200 direct flights to and from 40 major cities, serving 2.5 million
passengers a year. There is also a second airport on the peninsula known as the
Newport News/ Williamsburg International Airport.
The overall economy of the region is diversified, with major economic
activity in the shipbuilding and port-related areas. Other major employment
activities include agribusiness, defense contracting, distribution,
manufacturing and research and development. The federal government provides a
stimulus of approximately $5 billion per year into the local economy through
military spending and ancillary business activities. Direct military spending
through the four major branches of the armed services, the Coast Guard and NASA
greatly impacts the region, as do the activities of defense contractors,
engineers, scientists, technicians and research and development firms serving
the military complex. The region's largest employer is the federal government,
with 265,000 workers.
The region has generally benefitted from the recent military base closings,
as personnel from other installations have been relocated to the region. Army,
Navy and Air Force bases employ more than 140,000 military personnel and 56,000
civilians. The military accounts for approximately 17% of area employment.
The Property is located off of Newton Road in Hampton, Virginia. The general
area consists of other multi-family housing, commercial and retail development
and single family housing. The immediate area surrounding the Property is
occupied by Langley Research and Development Park and Hampton Roads Business
Center. The Hampton Roads Business Center is the proposed future home to Gateway
2000, a national computer company with approximately 800 employees. This company
is expected to move its headquarters to Hampton in 1996.
The Property is convenient to many employment centers, shopping facilities,
schools and transportation. The Property is within a mile and a half of Langley
Air Force Base and within a mile of NASA's Research Center. It is also near the
new Sentara Medical Facility. The Property is readily accessible from Interstate
64. The Property is generally located in a transitional area between the densely
populated older section of Hampton and new bedroom communities just to the north
in Poquoson County and York County.
Description of the Property. The Property consists of 284 garden style
apartments in 16 three-story buildings situated on approximately 13 acres of
land. The Property was constructed in 1988.
The Company believes that the Property is generally in good condition.
Approximately $71,000 has been budgeted by the Company for repairs and
improvements, including clubhouse redecoration and paving repair. To date, the
Company has expended approximately $27,000 of the budgeted amount.
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<PAGE>
The Property offers three unit types. The unit mix and rents currently being
charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------- -------------- ----------
<S> <C> <C> <C>
96 1 bedroom, 1 bath 772 $479-499
132 2 bedrooms, 2 baths 942 560-580
56 3 bedrooms, 2 baths 1,169 670-698
</TABLE>
The apartments provide a combined total of approximately 264,000 square feet
of net rentable area.
Leases at the Property generally are for terms of one year or less. Average
rental rates for the last five years have generally increased. As an example, a
two bedroom apartment rented for $455 in 1990, $480 in 1991, $525 in 1992, $525
in 1993, $525 in 1994, and $570 in 1995. The average effective annual rental per
square foot at the Property for 1991, 1992, 1993, 1994, and 1995 was $6.24,
$6.60, $6.84, $6.84, and $7.15, respectively.
The buildings are wood frame construction on concrete slabs. Roofs are
pitched and covered with asphalt shingles. Exteriors are covered with vinyl
siding and drivit. Windows are dual-paned and double glazed with aluminum frames
and screens.
The Property's common areas include a clubhouse/leasing office, laundry
facility, maintenance office, outdoor swimming pool, exercise room, indoor
jacuzzi, tennis courts and ample paved parking.
All apartments have wall-to-wall carpeting in the living areas, and vinyl
floors in the kitchen, laundry room, bathrooms and the foyer of the main
entrance. There are washer/dryer connections in all units. Each unit is equipped
with a cable television hookup, and individually controlled heating and air
conditioning unit. All kitchens have a refrigerator/freezer, electric range and
oven, dishwasher and garbage disposal. The owner of the Property supplies cold
water, sewer service and trash removal. The tenants pay for all of their
utilities, including electricity for heating/cooling, cooking, hot water and
lights.
There are at least nine apartment properties in the area which compete with
the Property. All offer similar amenities and have rents that are generally
higher when compared with those of the Property. Based on a recent telephone
survey, Cornerstone Management Group, Inc. estimates that occupancy in nearby
competing projects now averages approximately 94%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 92% in 1991, 93% in 1992, 92% in 1993, and 87%
in 1994. Physical occupancy averaged 89% during 1995 (based in part on
information provided by the seller). On March 25, 1996, the Property was 90%
occupied. The majority of the tenants are employed in military positions. The
major employers include the United States Navy, the United States Air Force and
NASA/Langley Research Center. Another significant employer is Virginia Power.
The 1995 real estate tax rate applicable to the Property was approximately
$1.23 per $100 of assessed value, and the real estate taxes for 1995 were
calculated to be $123,369. The assessed value was $10,030,000. The basis of the
depreciable residential real Property portion of the Property (currently
estimated at about $8,772,000) will be depreciated over 27.5 years on a
straight-line basis. The basis of the personal Property portion will be
depreciated in accordance with the modified accelerated cost recovery system of
the Code. Amounts to be spent by the Company on repair and improvements will be
treated for tax purposes as permitted by the Code based upon the nature of the
expenditures.
(19) SAILBOAT BAY APARTMENTS
CHARLOTTE, NORTH CAROLINA
On November 9, 1995, effective November 1, 1995, the Company purchased The
Lake Apartments, a 358-unit apartment complex having an address of 5417
Albemarle Road, Charlotte, North Carolina (the "Property"). The Company has
changed the name of the Property to "Sailboat Bay Apartments."
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<PAGE>
The Company purchased the Property from a seller which is unaffiliated with the
Company, the Advisor and their Affiliates. The purchase price was $9,100,000. Of
such amount, $2,850,000 was paid in cash at closing from the proceeds from the
sale of Shares. The balance of $6,250,000 was borrowed funds obtained on an
interim basis under the Company's unsecured line of credit. This borrowed amount
was subsequently repaid in November, 1995 with proceeds from the sale of Shares.
Title to the Property was conveyed to the Company by limited warranty deed.
Location. For description of the Charlotte, North Carolina area, see "Hanover
Landing Apartments" herein.
The neighborhood surrounding the Property includes other multi-family
housing, commercial and retail development, and single-family housing. The
Property is convenient to major shopping areas. The Property is readily
accessible from Interstates 85 and 77. The downtown area is approximately 4.5
miles from the Property and Charlotte/Douglas International Airport is
approximately six miles from the Property.
Description of the Property. The Property consists of 358 studio and one and
two bedroom garden style apartments in 24 buildings situated on approximately 27
acres of land. The Property was constructed during 1972 and 1973.
The Company believes that the Property is generally in good condition.
Approximately $1,645,000 has been budgeted by the Company for improvements and
repairs including clubhouse renovation, exterior siding, stairway replacement,
roof replacement and perimeter fencing. To date, the Company has expended
approximately $755,000 of the budgeted amount.
The Property offers a wide variety of studio, one bedroom and two bedroom
unit types. The unit mix and rents currently being charged new tenants are as
follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- --------------------------- -------------- ----------
<S> <C> <C> <C>
9 Studio 610 $435
12 Studio 635 450
28 Studio 635 450
12 One bedroom, one bath 815 485
28 One bedroom, one bath 815 485
13 One bedroom, one bath 835 495
28 One bedroom, one bath 835 495
6 One bedroom, one bath 880 490
14 One bedroom, one bath 880 490
20 Two bedrooms, one bath 890 530
72 Two bedrooms, one bath 955 550
10 Two bedrooms, one bath, FP 1,045 590
40 Two bedrooms, two baths 1,010 575
36 Two bedrooms, two baths 1,030 585
10 Two bedrooms, two baths, FP 1,155 635
20 Two bedrooms, two baths, FP 1,155 650
</TABLE>
The apartment units provide a combined total of approximately 324,000 square
feet of net rentable area.
Leases at the Property generally are for terms of one year or less. Average
rental rates for the last five years have generally remained constant or
decreased, until the Company acquired the Property and increased the rent in
December of 1995. As an example, a studio apartment rented for $365 in 1991,
$365 in 1992, $299 in 1993, $299 in 1994, and $425 in 1995. The average
effective annual rental per square foot at the Property for 1991, 1992, 1993,
1994, and 1995 was $5.90, $5.90, $5.69, $5.68, and $6.67, respectively. The
average rental rates declined in 1994 and 1995 as a result of deferred
maintenance at the Property and general market conditions in the area. The
Company believes that rental rates at the
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<PAGE>
Property can be increased significantly over historical levels because of more
efficient management, contemplated completion of significant planned repairs and
improvements at the Property and improved market conditions. However, there can
be no assurance that increased rental rates will not result in increased vacancy
rates.
The buildings are wood frame on concrete slabs. Roofs are pitched and covered
with composition shingles. Exteriors are a combination of brick veneer and wood
siding.
The Property's common areas include an outdoor swimming pool, sand volleyball
court, tennis courts, laundry facilities and a spacious clubhouse with a
racquetball court, exercise room and rental office. There is also a small lake
on site. There is ample paved parking.
All apartments have wall-to-wall carpeting in the living areas, and vinyl
floors in the kitchen and baths. All units have cable television hookups and
individually controlled heating and air conditioning systems. All kitchens are
equipped with a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. The owner of the Property supplies cold water, sewer service
and trash removal. The tenants pay for all of their utilities, including
electricity for heating/cooling, cooking, hot water and lights.
Within approximately the last two years, the former owners partially
renovated 26 units. The renovations included new dishwashers, ranges and
refrigerators. In addition, 46 units received new appliances, new carpet and
reconditioned cabinets. The total expenditures by the former owner were
approximately $150,000.
There are at least six apartment properties in the area which compete with
the Property. All offer similar amenities and have rents that are generally
equal to or above those of the Property. Based on a recent telephone survey,
Cornerstone Management Group, Inc. estimates that occupancy in nearby competing
projects now averages approximately 93%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 92% in 1991, 90% in 1992, 81% in 1993, and 84%
in 1994. Physical occupancy averaged 85% during 1995 (based in part on
information provided by the seller). On March 21, 1996, the Property was 75%
occupied. The Company believes that the recent decrease in the Company's
occupancy is temporary in nature, and due to a combination of an elimination of
tenants deemed unqualified and the need to relocate tenants as improvements are
made to apartment units. The residents at the Property are a mixture of white
collar and blue collar workers and students.
The 1995 real estate tax rate applicable to the Property was approximately
$1.34 per $100 of assessed value, and the real estate taxes for 1995 were
calculated to be $108,057. The assessed value was $8,094,110. The basis of
depreciable residential real Property portion of the Property (currently
estimated at about $7,098,000) will be depreciated over 27.5 years on a
straight-line basis. The basis of the personal Property portion will be
depreciated in accordance with the modified accelerated cost recovery system of
the Code. Amounts to be spent by the Company on repairs and improvements will be
treated for tax purposes as permitted by the Code based upon the nature of the
expenditures.
(20) THE MEADOWS APARTMENTS
ASHEVILLE, NORTH CAROLINA
On January 31, 1996, the Company purchased the Meadows Apartments, a 176-unit
apartment complex having an address of 13 Ascension Court, Asheville, North
Carolina (the "Property"). The Company purchased the Property from a seller
which is unaffiliated with the Company, the Advisor and their Affiliates. The
purchase price was $6,200,000. At closing $900,000 of the purchase price was
paid in cash from the proceeds from the sale of Shares, and the balance was
borrowed on an interim basis under the Company's unsecured line of credit. This
borrowing was subsequently repaid in February, 1996 with proceeds from the sale
of Shares. Title to the Property was conveyed to the Company by limited warranty
deed.
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<PAGE>
Location. The following is based in part upon information provided by the
Asheville Chamber of Commerce. The Property is located in North Carolina, in the
City of Asheville and Buncombe County, which collectively have a population of
approximately 250,000. Asheville is located approximately 115 miles from
Charlotte, North Carolina, and 65 miles from Greenville, South Carolina.
The City of Asheville and Buncombe County are served by a number of
nationally recognized companies and organizations in the health care, education
and manufacturing sectors. Some of the major employers in the area include
Champion International (a manufacturer of paper and paperboard), GE Lighting
Systems, Westinghouse Electric and ITT Automotive. In addition, Memorial Mission
Hospital and St. Joseph Hospital are major area employers.
The major highways serving the area are Interstates 40, 26 and 240. The
Asheville Regional Airport is centrally located within the metropolitan area and
approximately five miles from the Property. Also, Asheville is home to the
University of North Carolina at Asheville, with enrollment of approximately
3,200 students.
The Property is located on Leicester Highway, in the west side of Asheville,
within the city limits. The area surrounding the Property is well-developed,
with various retail centers as well as single-family residences. The Property is
located approximately two miles from the city's central business district, and
is convenient to employment centers, shops and restaurants located there.
Description of the Property. The Property consists of 176 garden-style
apartments in 16 two-story and three-story buildings located on approximately 18
acres of land. The Property was constructed in 1974.
The Company believes that the Property is generally in good condition.
However, approximately $88,000 has been budgeted by the Company for repairs and
improvements, including powerwashing the exterior siding and clubhouse
renovation.
The Property offers five unit types. The unit mix and rents currently being
charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- ------------------------- -------------- ----------
<S> <C> <C> <C>
36 1 bedroom, 1 bath 728 $495
50 2 bedrooms, 1.5 baths 1,001 590
10 2 bedrooms, 1.5 baths, FP 1,001 615
70 3 bedrooms, 2 baths 1,267 690
10 3 bedrooms, 2 baths, FP 1,267 715
</TABLE>
The apartments provide a combined total of approximately 188,000 square feet
of net rentable area. The apartment units are generally very spacious. Almost
half of the apartment units are three-bedroom apartments, making the Property
especially suitable for families.
Leases at the Property generally are for terms of one year or less. Average
rental rates for the past five years have generally increased. As an example, a
three bedroom apartment rented for $495 in 1991, $520 in 1992, $515 in 1993,
$535 in 1994, $560 in 1995, and now rents for $690. The average effective annual
rental per square foot at the Property for 1991, 1992, 1993, 1994, and 1995 was
$5.25, $5.45, $5.49, $5.98, and $5.99 respectively. The Company and Cornerstone
Management Group, Inc. believe that the substantial rental rate increases
implemented following the Company's acquisition of the Property are reasonable
and appropriate because of more effective Property management and improved
marketing of the Property. In addition, Cornerstone Management Group, Inc.
believes that a substantial rental rate increase is possible for the
three-bedroom units because of a strong demand for units of that size in the
area.
The buildings are wood frame on concrete slabs. Exteriors have vinyl siding
and pitched roofs covered with composition shingles. New siding was installed
and all roofs were replaced by the previous owner within the last three years.
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<PAGE>
The Property's common areas include an outdoor swimming pool, two tennis
courts, a playground area, outdoor grills, a clubhouse and rental office and
ample paved parking.
All apartment units have wall-to-wall carpeting in the living areas, and
vinyl floors in the kitchen and baths. Each apartment unit has a cable
television hook-up, washer/dryer connections and an individually controlled
heating and air conditioning unit. Each kitchen is equipped with a
refrigerator/freezer, electric range and oven, dishwasher and garbage disposal.
The owner of the Property supplies cold water, sewer service and trash removal.
The tenants pay for their own electric usage, which covers heat, air
conditioning, cooking, hot water and lights. Over the last three years, the
former owners replaced approximately 50% of the dishwashers, ranges and
refrigerators, representing an expenditure of approximately $85,000.
There are at least three apartment properties in the area which compete with
the Property. All offer similar amenities and have rents that are generally the
same as or higher than those of the Property. Based on a recent telephone
survey, Cornerstone Management Group, Inc. estimates that occupancy in nearby
competing projects now averages approximately 94%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 94% in 1991, 95% in 1992, 97% in 1993, 89% in
1994, and 88% in 1995. On March 1, 1996, the Property was 93% occupied. The
current residents at the Property are employed in a variety of white-collar and
blue-collar jobs, and there are also student residents. There is no predominant
employer.
The 1995 real estate tax rate applicable to the Property was approximately
$1.30 per $100 of assessed value, and the real estate taxes for 1995 were
calculated to be $57,111. The assessed value was $4,393,200. The basis of the
depreciable residential real Property portion of the Property (currently
estimated at about $6,000,000) will be depreciated over 27.5 years on a
straight-line basis. The basis of the personal Property portion will be
depreciated in accordance with the modified accelerated cost recovery system of
the Code. Amounts to be spent by the Company on repairs and improvements will be
treated for tax purposes as permitted by the Code based on the nature of the
expenditures.
(21) WEST EAGLE GREENS APARTMENTS
AUGUSTA, GEORGIA
On March 21, 1996, effective March 1, 1996, the Company purchased the
Scarlett Oaks Apartments, a 165-unit apartment complex having an address of 249
Boy Scout Road in Augusta, Georgia (the "Property"). The Company purchased the
Property from a seller which is unaffiliated with the Company, the Advisor and
their Affiliates. The Company has changed the name of the Property to "West
Eagle Greens Apartments." The purchase price was $4,000,000. At closing, the
entire purchase price was paid in cash from the proceeds from the sale of
Shares. Title to the Property was conveyed to the Company by limited warranty
deed.
Location. The following information is based in part upon information
provided by the Augusta Chamber of Commerce. The Property is located in Richmond
County in Augusta, Georgia. As of 1990, Richmond County had a population of
approximately 190,000, with approximately 45,000 of such total residing within
the city limits. Augusta is an approximately 2 hour drive from Atlanta and an
approximately 2 1/2 hour drive from Charlotte, North Carolina.
There are two major employers within the greater metropolitan area: Fort
Gordon, a military installation, and the medical community, which centers around
the Medical College of Georgia and University Hospital. The Medical College of
Georgia employs approximately 7,000 persons and University Hospital employs
approximately 3,500 persons. There are also a number of Fortune 500 companies
with a significant presence in the metropolitan Augusta area. These include
Allied Signal, Archer Daniels Midland, Borden, Proctor & Gamble, Sunbeam and
Philip Morris. There are two major colleges in the area: Augusta College with an
enrollment of approximately 5,700 and the Medical College of Georgia, with
approximately 5,300.
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<PAGE>
The major highways serving the area are Interstate 20 and Interstate 520.
There is a municipal airport approximately five miles from the Property.
The immediate neighborhood surrounding the Property is focused on the
intersection of Washington Road and Interstate 20. There are numerous retail
centers, restaurants and businesses in this area. The Property is approximately
5 miles from the central business district of Augusta via Washington Road. The
central business district of Augusta is similar to that of other older southern
towns being characterized by governmental offices and banks, with some newer
businesses. The Property is convenient to shopping areas, fast food restaurants,
motels and other business establishments via Washington Street.
Description of the Property. The Property consists of 165 garden-style
apartments in 15 two-story and three-story buildings located on approximately
11.5 acres of land. The Property was constructed in 1974.
The Company believes the Property has generally been well maintained and is
generally in good condition. However, the Company has budgeted approximately
$370,000 for repairs and improvements, including re-siding of the entire
Property, re-roofing of five buildings and renovation of the clubhouse.
The Property offers five unit types. The unit mix and rents currently being
charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- -------------------------- ------------- ---------
<S> <C> <C> <C>
29 1 bedroom, 1 bath 609 $365
37 1 bedroom, 1 bath (large) 684 375
13 2 bedrooms, 1 bath 865 415
28 2 bedrooms, 1 bath 865 425
49 2 bedrooms, 1 bath (large) 886 440
9 3 bedrooms, 1 bath 1063 515
</TABLE>
The apartments provide a combined total of approximately 131,000 square feet
of net rentable area.
Leases at the Property are for terms of one year or less. Average rental
rates for the past five years have generally been steady or gradually increased.
As an example, a two bedroom (large) apartment rented for $415 in 1991, $430 in
1992, $440 in 1993, $440 in 1994 and $440 in 1995. The average effective annual
rental per square foot at the Property for 1991, 1992, 1993, 1994, and 1995 was
$5.88, $6.09, $6.20, $6.20 and $6.20, respectively.
The buildings feature stone and wood siding over wood frames on concrete
slabs. Roofs are pitched and covered with composition shingles over plywood
decking. Approximately half of the roofs have been replaced within the last five
years.
The common areas include an outdoor swimming pool, two tennis courts, a
laundry room, clubhouse and rental office. There is ample paved parking for
residents.
All apartment units have wall-to-wall carpeting in the living area and vinyl
floors in the kitchen and bath. Each unit has a cable television hook-up, and an
individually controlled heating and air-conditioning unit. There are
washer/dryer connections in the two and three-bedroom units. Each kitchen is
equipped with a refrigerator/freezer, electric range and oven, dishwasher and
garbage disposal. The owner of the Property supplies cold water, sewer service
and trash removal. The tenants pay for their own electricity usage which covers
heat, air conditioning, cooking, hot water and lights. Approximately 60% of the
heating and air-conditioning units have been replaced within the last three
years.
Some of the apartment units have a patio or balcony and some of the larger
units include vaulted ceilings, skylights and ceiling fans.
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<PAGE>
There are at least seven apartment properties in the area which compete with
the Property. All offer similar amenities and have rents that are generally
higher when compared with those of the Property.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 90% in 1991, 89% in 1992, 85% in 1993, 81% in
1994 and 85% in 1995. On March 25, 1996, the Property was 92% occupied. The
residents are a mix of white-collar, blue-collar and military workers, with some
students. There is no predominant employer.
The 1995 real estate tax rate applicable to the Property was approximately
$1.09 per $100 of assessed value, and the real estate taxes for 1995 were
calculated to be $40,910. The assessed value was $3,761,000. The basis of the
depreciable residential real Property portion of the Property (currently
estimated at about $3.5 million) will be depreciated over 27.5 years on a
straight-line basis. The basis of the personal Property portion will be
depreciated in accordance with the modified accelerated cost recovery system of
the Code. Amounts to be spent by the Company on repairs and improvements will be
treated for tax purposes as permitted by the Code based on the nature of the
expenditures.
(22) ASHLEY PARK APARTMENTS
RICHMOND, VIRGINIA
On March 29, 1996, effective March 1, 1996, the Company purchased the Ashley
Park Apartments, a 272-unit apartment complex having an address of 6901 Marlowe
Road in Richmond, Virginia (the "Property"). The Company purchased the Property
from a seller which is unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $12,205,000. At closing the entire purchase
price was borrowed on an interim basis under the Company's unsecured line of
credit. As of June 17, 1996, $4.5 million of such amount had been repaid with
proceeds from the sale of Shares. Title to the Property was conveyed to the
Company by limited warranty deed.
Location. The following information is based in part upon information
provided by the Richmond Chamber of Commerce. The Property is located in
Virginia, within the City of Richmond, in close proximity to Chesterfield
County. The current population of Richmond is approximately 202,000 and the
current population of the Metropolitan Statistical area including the City of
Richmond is approximately 930,000. Richmond is located centrally within the
Commonwealth of Virginia, approximately midway between Washington, D.C. and
Raleigh, North Carolina.
The greater Richmond area is served by the Richmond International Airport,
and is situated at the intersection of Interstates 95 and 64. In addition to
being the capital of Virginia, Richmond is also home to numerous Fortune 500
companies. Some of the larger employers in the area are Philip Morris, state
government, AT&T, Dupont, and NationsBank. In addition, the area is the site of
a number of institutions of higher education, including Virginia Commonwealth
University, the Medical College of Virginia, the University of Richmond, and
Virginia State University.
The Property is located off of Jahnke Road in south Richmond. The immediate
area consists of other multi-family housing, commercial and retail development
and single family housing. The Property is convenient to a number of major
shopping areas, including Cloverleaf Mall, restaurants, and other businesses.
The Property is located less than one-half mile from Chippenham Parkway and the
Powhite Parkway, which provide ready access to Interstates 95 and 64. The
Property is an approximately fifteen minute drive from downtown Richmond and an
approximately 30 minute drive from Richmond International Airport. The Property
is located a few hundred feet from Chippenham Hospital, which is a major
hospital and medical office complex in the area.
Description of the Property. The Property consists of 272 luxury garden-style
apartments in 14 two-story and three-story buildings located on approximately 27
acres of land. The Property was constructed in 1988.
The Company believes that the Property has been well maintained and is
generally in good condition. However, the Company has budgeted approximately
$80,000 for repairs and improvements, including parking lot repair and enhanced
landscaping.
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<PAGE>
The Property offers five unit types. The unit mix and rents currently being
charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
SQUARE MONTHLY
QUANTITY TYPE FOOTAGE RENTAL
- ---------- --------------------- ------------- ----------
<S> <C> <C> <C>
48 1 bedroom, 1 bath 510-550 $470-485
96 1 bedroom, 1 bath 624-674 500-515
32 1 bedroom, 1 bath 710-750 560-600
32 2 bedrooms, 1.5 baths 860-900 635-675
64 2 bedrooms, 2 baths 935-975 660-685
</TABLE>
The apartments provide a combined total approximately 208,000 square feet of
net rentable area.
Leases at the Property are for terms of one year or less. Average rental
rates for the past five years have generally increased. As an example, a two
bedroom apartment rented for $570 in 1991, $580 in 1992, $595 in 1993, $630 in
1994, and $660 in 1995. The average effective annual rental per square foot at
the Property for 1991, 1992, 1993, 1994, and 1995, was $7.70, $7.83, $8.03,
$8.51, and $8.81, respectively.
The buildings are wood siding and brick on concrete slabs. Roofs are pitched
and covered with composition shingles over plywood decking. Windows are aluminum
frame with dual panes. The Property was recently repainted and all of the roofs
are in good condition.
The Property is located in a wooded park-like setting with two fresh water
ponds. The amenities include an outdoor swimming pool with tanning deck, a
Jacuzzi, two lighted tennis courts, a fitness center, laundry room, car wash
area, storage areas, private balconies, clubhouse, and rental office. Ample
paved parking is available.
All apartment units have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. All units have draperies or mini-blinds, cable
television hook-ups and individually controlled heating and air conditioning
units. Most apartment units also include washer/dryer hook-ups, vaulted
ceilings, a fireplace, and a built-in entertainment center. Some units are
equipped with a washer and dryer. Each kitchen is equipped with a
refrigerator/freezer with ice maker, electric range and oven, dishwasher and
garbage disposal. The owner of the Property supplies cold water, sewer service
and trash removal. The tenants pay for their own electricity usage, which covers
heat, air conditioning, cooking, hot water and lights.
There are at least five apartment properties in the area which compete with
the Property. All offer similar amenities and those comparable in age to the
Property have rents that are generally higher when compared with those of the
Property. Based on a recent telephone survey, Cornerstone Management Group, Inc.
estimates that occupancy in nearby competing projects now averages approximately
95%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 95% in 1991, 95% in 1992, 94% in 1993, 94% in
1994, and 96% in 1995. On March 25, 1996, the Property was 96% occupied. A
majority of the current residents at the Property are employed in white-collar
positions. According to tenant files, almost a third of the residents have
household incomes in excess of $40,000.
The 1995 real estate tax rate applicable to the Property was approximately
$1.445 per $100 of assessed value, and the real estate taxes for 1995 were
calculated to be $146,465. The assessed value was $10,136,000. The basis of the
depreciable residential real Property portion of the Property (currently
estimated at about $8.9 million) will be depreciated over 27.5 years on a
straight line basis. The basis of the personal Property portion will be
depreciated in accordance with the modified accelerated cost recovery system of
the Code. Amounts to be spent by the Company on repairs and improvements will be
treated for tax purposes as permitted by the Code based on the nature of the
expenditures.
78
<PAGE>
(23) ARBOR TRACE APARTMENTS
VIRGINIA BEACH, VIRGINIA
On March 29, 1996, effective March 1, 1996, the Company purchased the
Colonial Ridge Apartments, a 148-unit apartment complex having an address of 624
Suhtai Court, Virginia Beach, Virginia (the "Property"). The Company has changed
the name of the Property to "Arbor Trace Apartments." A description of Virginia
Beach can be found herein under the heading "Mayflower Seaside Apartments."
The Company purchased the Property from a seller which is unaffiliated with
the Company, the Advisor, and their Affiliates. The purchase price was
$5,000,000. At closing, the entire purchase price was paid in cash from the
proceeds from the sale of Shares. Title to the Property was conveyed to the
Company by limited warranty deed.
Location. The Property is located off of Laskin Road in the City of Virginia
Beach. The Property is approximately four miles from the Atlantic Ocean via
Laskin Road. The immediate area surrounding the Property consists of other
multi-family housing, commercial and retail development and single-family homes.
The Property is convenient to major shopping areas, restaurants and other
business establishments and can be readily assessed from Interstate 64 and Route
44. The Norfolk International Airport is an approximately 15 minute drive from
the Property via Route 44.
Description of the Property. The Property consists of 148 two-bedroom
garden-style apartments in 13 three-story buildings located on approximately
7.75 acres of land. The Property was constructed in 1985.
All of the apartment units are essentially identical, and include two
bedrooms and one bath and comprise approximately 850 square feet of interior
space. The monthly rent currently being charged new tenants is $530.
The Company believes that the Property has generally been well maintained and
is generally in good condition. However, the Company has budgeted approximately
$74,000 for repairs and improvements, including carpet replacement and
renovation of interior hallways.
The apartments provide a combined total of approximately 125,000 square feet
of net rentable area. The common areas include an outdoor pool, grill and picnic
area, a laundry room in each building and a rental office. There is ample paved
parking.
Leases at the Property are for terms of one year or less. Average rental
rates for the past five years have been generally increased. As an example, a
unit rented for $430 in 1991, $450 in 1992, $480 in 1993, $495 in 1994, and $530
in 1995. The average effective annual rental per square foot at the Property for
1991, 1992, 1993, 1994, and 1995 was $6.07, $6.35, $6.78, $6.99, and $7.48,
respectively.
The buildings are wood frame and brick veneer on concrete slabs. Roofs are
pitched and covered with composition shingles over plywood decking. Windows are
aluminum framed with dual panes. Each apartment unit has a balcony or patio.
Each apartment unit has wall-to-wall carpeting in the living area and vinyl
floors in the kitchen and bath, as well as mini-blinds, cable television
hook-ups, and an individually controlled heating and air conditioning unit. Each
unit has a full-sized laundry room with a washer/dryer connection. Each kitchen
is equipped with a refrigerator/freezer with ice maker, electric range and oven,
dishwasher and garbage disposal. The owner of the Property supplies cold water,
sewer service and trash removal. The tenants pay for their own electric service,
which includes heat, air conditioning, cooking, hot water and lights.
There are at least five apartment properties in the area which compete with
the Property. All offer similar amenities and have rents that are generally
higher when compared with those of the Property. Based on a recent telephone
survey, Cornerstone Management Group, Inc. estimates that occupancy in nearby
competing projects now averages approximately 95%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 90% in 1991, 90% in 1992, 89% in 1993, 92% in
1994, and 85% in 1995. On March 25, 1996, the Property was 85% occupied.
79
<PAGE>
The seller was an investment group based in Richmond, Virginia which acquired
the Property after the predecessor owning partnership declared bankruptcy. The
Property was previously managed by a management company unaffiliated with the
owners. This management company maintained the Property but was not aggressive
in marketing the Property or seeking rental increases. In addition, a number of
tenants with marginal credit moved into the Property over the last 18 months,
causing higher than normal rental delinquencies. To remedy this situation, the
seller elected to evict all of the 20 marginal tenants in February of 1996,
which resulted in a substantial decline in occupancy. The Company and
Cornerstone Management Group, Inc. believe that the Property will enjoy
substantially increased occupancy in a relatively short period of time as a
result of measures they plan to implement. These measures include an active
marketing program for the Property, a more careful tenant selection process, and
the completion of planned repairs and improvements at the Property.
The current residents at the Property are a mix of students, military
personnel and persons employed in various white-collar and blue-collar jobs.
Approximately half of the current tenants have positions in the military.
The 1995 real estate tax rate applicable to the Property was approximately
$1.188 per $100 of assessed value, and the real estate taxes for 1995 were
calculated to be $58,224. The assessed value was $4,900,999. The basis of the
depreciable residential real Property portion of the Property (currently
estimated at about $3.9 million) will be depreciated over 27.5 years on a
straight-line basis. The basis of the personal Property portion will be
depreciated in accordance with the modified accelerated cost recovery system of
the Code. Amounts to be spent by the Company on repairs and improvements will be
treated for tax purposes as permitted by the Code based on the nature of the
expenditures. Property are a mix of students, military personnel and persons.
(24) LONGMEADOW APARTMENTS
CHARLOTTE, NORTH CAROLINA
On April 30, 1996, effective April 1, 1996, the Company purchased the
Longmeadow Apartments, a 120-unit apartment complex having an address of 6017
Williams Road in Charlotte, North Carolina (the "Property"). The Company
purchased the Property from a seller which is unaffiliated with the Company, the
Advisor and their Affiliates. The purchase price was $5,025,000. At closing, the
Company paid the entire purchase price in cash with the proceeds from the sale
of Shares. Title to the Property was conveyed to the Company by limited warranty
deed.
Location. For a description of the Charlotte, North Carolina area, see
"Hanover Landing Apartments" herein.
The Property is located on Williams Road off of Harris Boulevard in the City
of Charlotte. The immediate area consists of other multi-family housing,
commercial and retail development and single-family housing. The Property is
convenient to area shopping centers. The Property is readily accessible from
Interstates 85 and 77. The downtown area and Charlotte/Douglass International
Airport are easily accessible from the Property via Interstate 77.
Description of the Property. The Property consists of 120 garden style
apartments located in 13 buildings on approximately seven acres of land. The
Property was constructed in 1986.
The Company believes that the Property has been well maintained and is
generally in good condition. However, the Company has budgeted approximately
$60,000 for repairs and improvements, including painting and exterior
renovations.
80
<PAGE>
The unit mix and rents currently being charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
QUANTITY TYPE SQUARE FOOTAGE MONTHLY RENTAL
- ---------- ------------------- ---------------- ----------------
<S> <C> <C> <C>
3 studio 568 $ 465
3 studio-deluxe 596 485
12 1 bedroom, 1 bath 624 490
6 1 bedroom, 1 bath 648 510
18 1 bedroom, 1 bath 672-690 505-525
72 2 bedrooms, 2 baths 958-995 605-635
6 3 bedrooms, 2 baths 1,115 750
</TABLE>
The apartments provide a combined total of approximately 104,000 square feet
of net rentable area.
Leases at the Property are for terms of one year or less. Average rental
rates for the past five years have generally remained constant, with some recent
increase. As an example, a two bedroom, two bath apartment rented for $520 in
1991, $520 in 1992, $520 in 1993, $520 in 1994, and $570 in 1995. The average
effective annual rental per square foot at the Property for 1991, 1992, 1993,
1994, and 1995, was $7.44, $7.44, $7.44, $7.44, and $8.16, respectively.
The buildings are wood frame construction on concrete slabs. Roofs are
pitched and covered with composition shingles. Windows are aluminum with dual
panes.
The amenities at the Property include an outdoor swimming pool, playground,
laundry facilities and a combined clubhouse and rental office. There is ample
paved parking.
All apartment units have wall-to wall carpeting in the living areas and vinyl
floors in the kitchen and bath. Each unit has a cable television hook-up, washer
and dryer connection, miniblinds and an individually controlled heating and
air-conditioning unit. Most of the apartment units include fireplaces, vaulted
ceilings, bay windows and room-sized decks. Each kitchen is equipped with a
refrigerator/freezer, electric range and oven, dishwasher and garbage disposal.
The owner of the Property supplies cold water, sewer service and trash removal.
The tenants pay for their own electricity usage, which covers heat,
air-conditioning, cooking, hot water and lights.
There are at least five apartment properties in the area which compete with
the Property. All offer similar amenities and have rents that are generally
higher when compared with those of the Property. Based on a recent telephone
survey, Cornerstone Management Group, Inc. estimates that occupancy in nearby
competing projects now averages approximately 95%.
The seller is a limited partnership which originally built the Property in
1986. Approximately two years ago, the seller filed for protection under Chapter
11 of the Bankruptcy Code. In the opinion of the Company and Cornerstone
Management Group, Inc., the operating difficulties encountered by the Seller are
attributable to excessive mortgage debt and the absence of needed partnership
capital. Since the Company expects to own the Property on a debt-free basis and
plans to improve management and marketing activities, the Company and
Cornerstone Management Group, Inc. believe that the difficulties encountered by
the seller will not be similarly encountered by the Company.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 95% in 1991, 95% in 1992, 96% in 1993, 96% in
1994, and 97% in 1995. On May 21, 1996, the Property was 97% occupied. The
tenants are a mix of white-collar and blue-collar workers and students. Major
employers of tenants include IBM and the University of North Carolina at
Charlotte.
The 1995 real estate tax rate applicable to the Property was approximately
$1.233 per $100 of assessed value, and the real estate taxes for 1995 were
calculated to be $47,315. The assessed value was $3,600,510. The basis of the
depreciable residential real Property portion of the Property (currently
estimated at about $4,230,000) will be depreciated over 27.5 years on a straight
line basis. The basis of
81
<PAGE>
the personal Property portion will be depreciated in accordance with the
modified accelerated cost recovery system of the Code. Amounts to be spent by
the Company on repairs and improvements will be treated for tax purposes as
permitted by the Code based on the nature of the expenditures.
(25) TROPHY CHASE APARTMENTS
CHARLOTTESVILLE, VIRGINIA
On April 30, 1996, effective April 1, 1996, the Company purchased the
Westfield Apartments, a 185-unit apartment complex having an address of 2704
Peyton Drive outside of Charlottesville, Virginia (the "Property"). The Company
has renamed the Property the "Trophy Chase Apartments." The purchase price was
$3,710,000. At closing, the entire purchase price was paid in cash using the
proceeds from the sale of Shares. Title of the Property was conveyed to the
Company by limited warranty deed.
The Company purchased the Property from a limited partnership in which Glade
M. Knight, an Affiliate of the Advisor, served as a co-general partner. The
other general partner is an affiliate of a major investment banking firm. A
company owned and controlled by Mr. Knight also managed the Property since 1983.
All of the distributable cash received from the Company as a result of the
purchase will be distributed to the limited partners of the seller as a partial
return of their equity. Mr. Knight, in his capacity as a general partner of the
seller, will not receive any cash from the proceeds of the sale. The other
general partner, which effectively represents the interests of the limited
partners of the seller, had reached a business decision to terminate its
activities in the real estate industry. In addition, the other general partner
had determined that, as a result of the Tax Reform Act of 1986, the limited
partners of the seller had maximized the value of their investment in the
Property.
Pursuant to the Bylaws of the Company, the purchase from an Affiliate must be
approved by a majority of the Company's Independent Directors. The purchase was
approved by unanimous vote of such Independent Directors. The Company also
obtained an independent appraisal and engineering report in accordance with its
standard practice and Bylaws. The appraised value was in excess of the purchase
price of the Property.
Location. The following information is based in part upon information
provided by the Charlottesville Chamber of Commerce. The Property is located in
Virginia, within Albemarle County, in close proximity to the City of
Charlottesville. The greater Charlottesville metropolitan area has a population
of approximately 130,000. Growth has been steady since the 1970's, and steady
growth is expected to continue throughout the 1990's. Charlottesville is located
approximately 70 miles northwest of Richmond, Virginia and approximately 95
miles southwest of Washington, D.C.
The Charlottesville area has a diverse economy. However, the largest employer
in the area is the University of Virginia, which has approximately 10,500
employees. The University of Virginia was designed by Thomas Jefferson in 1815
and has grown into one of the largest colleges in Virginia, with an
undergraduate program as well as graduate schools in law, business, medicine,
engineering, commerce and education. There are over 20,000 students at the
school. The University of Virginia was responsible for bringing close to 480,000
visitors to the area during 1992, whose spending totaled almost $44 million.
The Property is located in the northern portion of the metropolitan area. The
immediate area consists of extensive commercial and retail development. The
Property is readily accessible from U.S. Route 29, which provides access to
Interstate 64, the major interstate highway in the area.
Description of the Property. The Property consists of 185 garden-style
apartments in 9 buildings on approximately 7.5 acres of land. The Property was
constructed in two phases in 1969 and 1970.
Management believes that the Property has been well maintained and is in
generally good condition. However, the Company has budgeted approximately
$552,000 for repairs and improvements, including office renovation, siding
replacement and interior renovations.
82
<PAGE>
The Property offers numerous unit types. The unit mix and rents currently
being charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
QUANTITY TYPE SQUARE FOOTAGE MONTHLY RENTAL
- ---------- -------------------------------- ---------------- ----------------
<S> <C> <C> <C>
35 1 Bedroom, 1 Bath (Breakfast bar) 659 $420
24 1 bedroom, 1 bath (den) 843 455
31 1 bedroom, 1 bath 659 420
22 1 bedroom, 1 bath (tudor) 659 435
16 2 bedrooms, 1 bath 799 460
16 2 bedrooms, 1 bath (den) 1,064 510
19 2 bedrooms, 1 bath (tudor) 922 480
12 2 bedrooms, 2 baths 922 485
10 3 bedrooms, 2 baths 1,197 560
</TABLE>
The apartments provide a combined total of approximately 149,000 square feet
of net rentable area.
Leases at the Property are for terms of one year or less. Average rental
rates for the last five years have generally been constant. As an example, a one
bedroom, one bath apartment rented for $420 in 1991, $420 in 1992, $420 in 1993,
$420 in 1994, and $420 in 1995. The average effective annual rental per square
foot at the Property for 1991, 1992, 1993, 1994, and 1995, was $6.84, $6.84,
$6.84, $6.84, and $6.84, respectively.
The buildings are of wood frame construction, with a combination of brick
veneer and white aluminum siding on either concrete slabs or concrete and block
foundations. In one phase, roofs are pitched and covered with fiberglass
shingles, and in the other phase are flat with rubber membrane surfacing.
Windows are single pane with aluminum frames.
The amenities at the Property include two outdoors swimming pools, a
sunbathing area, a clubhouse and laundry facilities.
All apartment units have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. Each unit has a cable television hook-up and an
individually controlled heating and air-conditioning unit. All kitchens are
equipped with a refrigerator/freezer, electric range and oven, and garbage
disposal. Some, but not all, units have dishwashers. The owner of the Property
supplies cold water, sewer service and trash removal. The tenants pay for their
own electricity usage, which covers heat, air-conditioning, cooking, hot water
and lights.
There are at least seven apartment properties which compete with the
Property. All offer similar amenities and have rents that are generally higher
when compared with those of the Property. Based on a recent telephone survey,
Cornerstone Management Group, estimates that occupancy at nearby competing
projects now averages approximately 94%.
Physical occupancy at the Property averaged approximately 90% in 1991, 90% in
1992, 90% in 1993, 90% in 1994, and 90% in 1995. On May 21, 1996, the Property
was 90% occupied. Most of the tenants are blue-collar workers. Approximately 25%
are white-collar workers and 5% of the tenants are graduate students.
The 1995 real estate tax rate applicable to the Property was approximately
$0.72 per $100 of assessed value, and the real estate taxes for 1995 were
calculated to be $36,226. The assessed value was $5,031,500. The basis of the
depreciable residential real Property portion of the Property (currently
estimated at about $2,770,000) will be depreciated over 27.5 years on a straight
line basis. The basis of the personal Property portion will be depreciated in
accordance with the modified accelerated cost recovery system of the Code.
Amounts to be spent by the Company on repairs and improvements will be treated
for tax purposes as permitted by the Code based on the nature of the
expenditures.
83
<PAGE>
(26) BEACON HILL APARTMENTS
CHARLOTTE, NORTH CAROLINA
On May 30, 1996, effective May 1, 1996, the Company purchased the Beacon Hill
Apartments, a 349-unit apartment complex having an address of 5625 South
Boulevard, Charlotte, North Carolina (the "Property").
The Company purchased the Property from a seller which is unaffiliated with
the Company, the Advisor and their Affiliates. The purchase price was
$13,407,200. At closing, the entire purchase price was paid in cash from the
proceeds from the sale of Shares. Title to the Property was conveyed to the
Company by limited warranty deed.
Location. A description of Charlotte, North Carolina appears under "Hanover
Landing Apartments" herein. The Property is located on South Boulevard at Tyvola
Road in Charlotte, North Carolina. The immediate area consists of other
multi-family housing, commercial and retail development and single-family
housing. The Property is located close to major shopping, dining and
entertainment. The Property has convenient access to Interstate 77 and
Interstate 85, the Charlotte-area interstates. The downtown area and
Charlotte/Douglas International Airport are readily accessible from the Property
via Interstate 77.
Description of the Property. The Property consists of 349 garden-style
apartments in 14 buildings located on approximately 14.2 acres of land. The
Property was constructed in 1985.
The Company believes that the Property is generally in good condition.
However, the Company has budgeted approximately $60,000 for repairs and
improvements, to include clubhouse renovation and parking lot repair.
The Property offers a number of unit types. The unit mix and rents currently
being charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
QUANTITY TYPE SQUARE FOOTAGE MONTHLY RENTAL
- ---------- ------------------------------ ---------------- ----------------
<S> <C> <C> <C>
69 1 bedroom, 1 bath 530 $ 460
112 1 bedroom, 1 bath 652 480-500
31 1 bedroom, 1 bath w/sun room 745 520-540
39 1 bedroom, 1 bath 748 545-570
28 2 bedrooms, 1.5 baths 826 605-640
16 2 bedrooms, 2 baths 892 660-680
12 2 bedrooms, 2 baths w/sun room 958 685-690
42 2 bedrooms, 2 baths 1,079 705-725
</TABLE>
The apartments provide a combined total of approximately 256,000 square feet
of net rentable area.
Leases at the Property are for terms of one year or less. Average rental
rates for the past five years have generally remained constant or increased. As
an example, a one bedroom apartment rented for $395 in 1991, $395 in 1992, $395
in 1993, $405 in 1994, and $430 in 1995. The average effective annual rental per
square foot at the Property for 1991, 1992, and 1993, 1994, and 1995 was $7.79,
$7.79, $7.79, $7.92, and $8.47, respectively.
The buildings are wood frame construction on concrete slab. Roofs are pitched
and covered with composition shingles. Exteriors are brick veneer and hardboard
siding. The windows are aluminum with dual panes. All of the siding was
repainted by the former owner in April 1996 at a cost of approximately $50,000.
The Property has two outdoor swimming pools, two hot tubs, two laundry
facilities, a car wash area and a clubhouse with a rental office. There is ample
paved parking for residents.
All apartment units have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath, as well as cable television hook-ups, and
individually controlled heating and air conditioning units. Most apartment units
include such amenities as a fireplace, ceiling fans, an over-sized patio or
balcony
84
<PAGE>
and washer/dryer connections. All kitchens have a refrigerator/freezer, electric
range and oven, dishwasher and garbage disposal. The owner of the Property
supplies cold and hot water, sewer service and trash removal. The tenants pay
for their own electricity usage which covers heat, air conditioning, cooking,
and lights.
There are at least seven apartment properties in the area which compete with
the Property. All offer similar amenities and have rents that are generally
higher when compared with those of the Property. Based on a recent telephone
survey, Cornerstone Management Group, Inc. estimates that occupancy in nearby
competing projects now averages approximately 93%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 92% in 1991, 92% in 1992, 96% in 1993, 94% in
1994, and 93% in 1995. On June 7, 1996, the Property was 90% occupied. Most of
the tenants are employed as professionals or white-collar workers and only a
small percentage of the residents are employed in blue-collar jobs. According to
information and tenant files, at the time of the Company's acquisition of the
Property, approximately one quarter of the tenants had household incomes in
excess of $35,000. The major employers of the tenants include USAir, Microsoft
and Carolina Medical.
The 1995 real estate tax rate applicable to the Property was approximately
$1.233 per $100 of assessed value, and the real estate taxes for 1995 were
calculated to be $145,319. The assessed value was $11,134,740. The basis of the
depreciable residential real Property portion of the Property (currently
estimated at about $8,738,000) will be depreciated over 27.5 years on a straight
line basis. The basis of the personal Property portion will be depreciated in
accordance with the modified accelerated cost recovery system of the Code.
Amounts to be spent by the Company on repairs and improvements will be treated
for tax purposes as permitted by the Code based on the nature of the
expenditures.
(27) MEADOW CREEK APARTMENTS
PINEVILLE, NORTH CAROLINA
On May 31, 1996, effective June 1, 1996, the Company purchased the Meadow
Creek Apartments, a 250-unit apartment complex having an address of 12821 Meadow
Creek Lane in Pineville, North Carolina (the "Property").
The Company purchased the Property from a seller which is unaffiliated with
the Company, the Advisor, and their Affiliates. The purchase price was
$11,100,000. At closing, the entire purchase price was borrowed on an interim
basis under the Unsecured Line of Credit. Title to the Property was conveyed to
the Company by limited warranty deed.
Location. Pineville is a suburb located southeast of Charlotte, North
Carolina. For a description of the greater Charlotte, North Carolina area, see
"Hanover Landing Apartments" herein.
Southeast Charlotte is one of the more popular residential locations in the
Charlotte area. Historically, most growth in the Charlotte area has been to the
south of the city. At one time, Highway 51 represented a southern boundary for
growth. However, in the last ten years, growth has continued beyond Highway 51.
Such growth has been encouraged by substantial major road improvements in the
area, including widening of Highway 51 to a four-lane highway, and the partial
completion of Interstate 485, the Charlotte Beltway.
One of the more significant economic elements in the growth in the southern
area of Charlotte was the construction of Carolina Place Mall, which comprises
1,200,000 square feet. This mall, completed in 1991, has Belk's, JCPenney,
Dillard's and Hecht's as its anchors. The mall is located approximately five
miles from the Property.
Residential growth in the area has also been vigorous. The area southeast of
Charlotte has the largest number of new apartments under construction, as well
as some of the more affluent neighborhoods in the region, including Piper Glen,
Providence Country Club and Ballantyne. Ballantyne is an approximately
2,000-acre mixed used development including high-end single-family housing, a
country club, and retail and corporate office sites. There is an entrance to
Ballantyne approximately 1.5 miles from the Property.
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<PAGE>
The immediate area surrounding the Property consists of other multi-family
housing, commercial and retail development and single-family housing. The
Property is located near major shopping, dining and entertainment. The Property
is approximately one mile from Interstate 485.
Description of the Property. The Property consists of 250 garden-style
apartments in 12 two-story and three-story buildings on approximately 21.8 acres
of land. The Property was constructed in 1984.
The Company believes that the Property has been well maintained and is
generally in good condition. However, the Company has budgeted approximately
$150,000 for repairs and improvements, including roof replacement and clubhouse
renovation.
The Property offers three unit types. The unit mix and rents currently being
charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
QUANTITY TYPE SQUARE FOOTAGE MONTHLY RENTAL
- ---------- ------------------- ---------------- ----------------
<S> <C> <C> <C>
110 1 bedroom, 1 bath 696 $520
120 2 bedrooms, 2 baths 958 625
20 3 bedrooms, 2 baths 1,170 740
</TABLE>
The apartments provide a combined total of approximately 215,000 square feet
of net rentable area.
Leases at the Property are for terms of one year or less. Average rental
rates for the past five years have generally increased. As an example, a two
bedroom apartment rented for $490 in 1991, $495 in 1992, $515 in 1993, $555 in
1994, and $575 in 1995. The average effective annual rental per square foot at
the Property for 1991, 1992, 1993, 1994, 1995 was $7.12, $7.12, $7.41, $7.98,
and $8.27, respectively.
The buildings are wood frame construction with pitched roofs covered with
asphalt shingles. There are mostly poured concrete foundations, but some
buildings are constructed on a crawl space. The exteriors are a combination of
hardboard and brick siding. The windows are double-paned and insulated. Over the
past 18 months, 230 of the 250 apartments have had the individual heating and
air conditioning units replaced. In addition, the Property was repainted less
than two years ago and the pool area was recently reconditioned. Also, over the
last 18 months, the former owner expended approximately $98,000 in exterior
improvements including roof replacement. About half of the roofs are new or in
otherwise excellent condition.
The Property features an outdoor swimming pool with jacuzzi, two lighted
tennis courts, a children's playground, a sauna and weight room, and a
designated car wash area. There is also a clubhouse with a rental office. There
is ample paved parking for residents and, at the back of the Property, a
designated parking area for recreational vehicles.
All apartments have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen, bath and utility closets. Each unit has a cable
television hook-up and an individually controlled heating and air conditioning
unit. Each unit has a fireplace and washer/dryer connections, and some apartment
units feature a bay window, full size pantry and large walk-in closets. Each
kitchen is equipped with a refrigerator/freezer, electric range and oven,
dishwasher and garbage disposal. The owner of the Property provides cold water,
sewer service and trash removal. The tenants pay for their own electricity usage
which covers heat, air conditioning, cooking, hot water, and lights. The prior
owner states that it spent approximately $79,000 in carpet replacement and
$10,000 in appliance replacement over the last 18 months.
There are at least six apartment properties in the area which compete with
the Property. All offer similar amenities and have rents that are generally
higher when compared with those of the Property. Based on a recent telephone
survey, Cornerstone Management Group, Inc. estimates that occupancy in nearby
competing projects now averages approximately 94%. There are a number of
competing projects now under construction, and additional construction of
competing projects in the future is likely.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 86% in 1991, 88% in 1992, 94% in 1993, 94% in
1994, and 94% in 1995. On June 7, 1996,
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the Property was 97% occupied. The tenants are employed in a mix of white-collar
and blue-collar jobs. According to tenant files, approximately one quarter of
the residents had household incomes in excess of $40,000 as of the date of the
Company's purchase of the Property.
The 1995 real estate tax rate applicable to the Property was approximately
$0.995 per $100 of assessed value, the real estate taxes for 1995 were
calculated to be $79,324. The assessed value was $7,392,080. The basis of the
depreciable residential real Property portion of the Property (currently
estimated at about $6,631,350) will be depreciated over 27.5 years on a straight
line basis. The basis of the personal Property portion will be depreciated in
accordance with the modified accelerated cost recovery system of the Code.
Amounts to be spent by the Company on repairs and improvements will be treated
for tax purposes as permitted by the Code based on the nature of the
expenditures.
(28) SUMMER WALK APARTMENTS
CONCORD, NORTH CAROLINA
On May 31, 1996, effective May 1, 1996, the Company purchased the Lakewood
Apartments, a 160-unit apartment complex having an address of 500 Summerlake
Drive, in Concord, North Carolina (the "Property"). The Company has changed the
name of the Property to "Summer Walk."
The Company purchased the Property from a seller which is unaffiliated with
the Company, the Advisor, and their Affiliates. The purchase price was
$5,660,000. At closing, the entire purchase price was borrowed on an interim
basis under the Unsecured Line of Credit. Title to the Property was conveyed to
the Company by limited warranty deed.
Location. Concord is a suburb of Charlotte, North Carolina. For a description
of the greater Charlotte, North Carolina area, see "Hanover Landing Apartments"
in this Supplement.
Concord is approximately 20 miles east of Charlotte, and is located within
Cabarras County. The population of Cabarras County is approximately 157,000.
Concord is the home of Charlotte Motor Speedway, as well as many
manufacturing plants for companies such as Philip Morris, Fieldcrest Cannon,
Perdue Farms, S&D Coffee and Willis Hosiery Mills. The area is served by
Interstate Highways 85 and 77, and U.S. Highways 21, 29 and 74.
The immediate neighborhood surrounding the Property is characterized by
various retail centers, restaurants and businesses.
Description of the Property. The Property consists of 160 garden-style
apartments in 14 buildings located on approximately 27 acres of land. The
Property was constructed in 1983.
The Company believes that the Property has been well maintained and is
generally in good condition. However, the Company has budgeted approximately
$320,000 for repairs and improvements including roof and siding replacement and
clubhouse renovation.
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The Property offers a variety of unit types. The unit mix and rents currently
being charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
QUANTITY TYPE SQUARE FOOTAGE MONTHLY RENTAL
- ---------- ------------------------------------------ ---------------- ----------------
<S> <C> <C> <C>
10 1 bedroom, 1 bath 700 $445
12 1 bedroom, 1 bath w/FP 700 450
10 1 bedroom, 1 bath, FP, cathedral ceiling 700 450
6 1 bedroom, 1 bath, handicapped 700 445
2 1 bedroom, 1 bath, handicapped w/FP 700 450
20 2 bedrooms, 1 bath 1,000 530
14 2 bedrooms, 1 bath w/FP 1,000 540
6 2 bedrooms, 1 bath, FP, cathedral ceiling 1,000 550
16 2 bedrooms, 2 baths 1,000 550
30 2 bedrooms, 2 baths w/FP 1,000 560
14 2 bedrooms, 2 baths, FP, cathedral ceiling 1,000 570
8 3 bedrooms, 2 baths 1,300 640
12 3 bedrooms, 2 baths w/FP 1,300 650
</TABLE>
The apartments provide a combined total of approximately 154,000 square feet
of net rentable area.
The Property is subject to a Housing Assistance Payments (HAP) Contract with
HUD, under which the owner receives rent subsidies in exchange for maintaining
certain rent-restricted apartment units. Under the HAP Contract, the Property
must make available 32 apartment units. These currently consist of 12
one-bedroom, one-bath units (current rent of $427), and 20 two-bedroom, one-bath
units (current rent of $497). The current rents are $23 and $33, respectively,
below market rents for similar units. The HAP Contract expires on January 31,
1998, and the Company does not plan to seek its renewal.
Leases at the Property are for terms of one year or less. Average rental
rates for the past five years have generally increased. However, rental rates
decreased in 1995. The Company and Cornerstone Management Group, Inc. believe
that such decrease was attributable to inadequate attention by the former
management company and the lack of capital, while the Property was in
bankruptcy, properly to maintain the Property. As an example, a one bedroom
apartment (with fireplace) rented for $383 in 1991, $393 in 1992, $425 in 1993,
$467 in 1994, and $413 in 1995. The average effective annual rental per square
foot at the Property for 1991, 1992, 1993, 1994, 1995 was $6.20, $6.36, $6.88,
$7.56, and $6.63, respectively.
The buildings are wood frame construction on concrete slab or crawl space.
Roofs are pitched and covered with composition shingles. The windows are
aluminum with dual panes. The exteriors are a combination of brick and masonite
siding.
The Property has an outdoor swimming pool, two tennis courts, a fishing lake,
hiking trails, a laundry room and a clubhouse with a rental office. There is
ample paved parking for residents.
All apartments have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. Each apartment unit has a cable television
hook-up and are individually controlled heating and air conditioning unit. Each
apartment unit has a washer/dryer connection and 150 apartment units include
microwaves. Each kitchen has a refrigerator/freezer, electric range and oven,
dishwasher and garbage disposal. The owner of the Property supplies cold water,
sewer service and trash removal. The tenants pay for their own electricity
usage, which includes heat, air conditioning, cooking, hot water and lights.
There are at least four apartment properties in the area which compete with
the Property. All offer similar amenities and have rents that are generally
higher when compared with those of the Property. Based on a recent telephone
survey, Cornerstone Management Group, Inc. estimates that occupancy in nearby
competing projects now averages approximately 93%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 88% in 1991, 86% in 1992, 91% in 1993, 85% in
1994, and 90% in 1995. On June 7, 1996, the Property was 90% occupied. The
tenants are a mix of white-collar and blue-collar workers and
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students. According to tenant files, at the time of the Company's acquisition of
the Property, over 40% of the tenants' household incomes were in excess of
$35,000. The major employers of the tenants include Philip Morris, UNC Charlotte
and Cabarras Memorial Hospital.
The seller was a North Carolina limited partnership which originally built
the Property. The seller filed for protection under Chapter 11 of the Bankruptcy
Code approximately two years ago. During the bankruptcy period, the Property was
managed by at least three different management companies. In the opinion of
Cornerstone Management Group, Inc., the management by these companies was
substandard. However, Cornerstone Management Group, Inc. does not believe that
any problems associated with the operation of the Property cannot be remedied by
new management. In addition, the Company and Cornerstone Management Group, Inc.
believe that the prior bankruptcy was largely a result of excessive debt
encumbering the Property and the lack of partnership capital of the seller.
Since the Company intends to own and operate the Property on a debt-free basis,
Cornerstone Management Group, Inc. and the Company do not believe that these
factors will be relevant to the Company's proposed ownership and operation of
the Property.
The 1995 real estate tax rate applicable to the Property was approximately
$1.005 per $100 of assessed value, and the real estate taxes for 1995 were
calculated to be $34,307. The assessed value was $3,413,680. The basis of the
depreciable residential real Property portion of the Property (currently
estimated at about $2,480,000) will be depreciated over 27.5 years on a straight
line basis. The basis of the personal Property portion will be depreciated in
accordance with the modified accelerated cost recovery system of the Code.
Amounts to be spent by the Company on repairs and improvements will be treated
for tax purposes as permitted by the Code based on the nature of the
expenditures.
(29) WILLOW CREEK APARTMENTS
DURHAM, NORTH CAROLINA
On May 31, 1996, effective May 1, 1996, the Company purchased the Willow
Creek Apartments, a 200-unit apartment complex having an address of 18 Weather
Hill Circle, Durham, North Carolina (the "Property").
The Company purchased the Property from a seller which is unaffiliated with
the Company, the Advisor and their Affiliates. The purchase price was
$8,345,000. At closing, the entire purchase price was borrowed on an interim
basis under the Unsecured Line of Credit. Title to the Property was conveyed to
the Company by limited warranty deed.
Location. Durham, North Carolina is located in the North Central portion of
North Carolina, approximately equidistant between Atlanta and New York. The Blue
Ridge Mountains are approximately 150 miles to the west and the Atlantic Coast
is approximately 150 miles to the east. As of 1992, Durham was the fifth largest
city in the state of North Carolina, with a population of 144,000. Durham County
had a population of 189,000 in 1992.
Durham is home to Duke University, and its nationally known medical center,
which are located within 10 miles of the Property. Research Triangle Park is
approximately 20 miles from the Property. Both the Durham Regional Hospital and
Northgate Mall are in the same general area as the Property.
The immediate neighborhood surrounding the Property is characterized by
various retail centers, restaurants, and businesses. The Property is within
walking distance of a strip shopping center which has two grocery stores, a
state employees' credit union, Willow Dale Spa and Willow Dale Cinemas. The
movie theater houses ten theaters and the spa is frequently used by residents of
the Property. The Raleigh/Durham International Airport is accessible from
Interstate 85, which is within three miles of the Property.
Description of the Property. The Property consists of 200 garden-style
apartments in 12 buildings on approximately 21 acres of land. The Property was
constructed in 1984.
The Company believes that the Property has been well maintained and is
generally in good condition. However the Company has budgeted approximately
$400,000 for repairs and improvements, including siding replacement and
clubhouse renovation.
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The Property offers seven unit types. The unit mix and rents currently being
charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
QUANTITY TYPE SQUARE FOOTAGE MONTHLY RENTAL
- ---------- -------------------------------- ---------------- ----------------
<S> <C> <C> <C>
26 1 bedroom, 1 bath 750 $550-560
32 1 bedroom, 1 bath w/FP 750 550-560
10 1 bedroom, 1 bath, handicapped 750 550-560
24 2 bedrooms, 2 baths 1,000 630-640
16 2 bedroom, 2 baths, w/FP 1,000 630-640
48 2 bedrooms, 2 baths (split) 1,100 645-655
44 2 bedrooms, 2 baths (split) w/FP 1,100 645-655
</TABLE>
The apartments provide a combined total of approximately 192,000 square feet
of net rentable area.
Leases at the Property are for terms of one year or less. Average rental
rates for the past five years have generally increased. As an example, a two
bedroom apartment rented for $487 in 1991, $510 in 1992, $565 in 1993, $640 in
1994, and $655 in 1995. The average effective annual rental per square foot at
the Property for 1991, 1992, 1993, 1994, 1995 was $6.39, $6.69, $7.41, $8.40,
and $8.59, respectively.
The buildings are wood frame construction on concrete slab or crawl space.
Roofs are pitched and covered with composition shingles. The windows are
aluminum with dual panes. The exteriors are a combination of brick and masonite
siding. The Property has an outdoor swimming pool, two tennis courts, a
playground, a laundry room and a clubhouse with a rental office.
There is ample paved parking for residents.
All apartment units have wall-to-wall carpeting in the living areas and vinyl
floors in the kitchen and bath. Each unit has a fire extinguisher, cable
television hook-up, and an individually controlling heating and air conditioning
unit. All top-floor units have a fireplace. All apartment units have
washer-dryer connections, mini blinds, vertical blinds, and a patio or balcony.
Each kitchen is equipped with a microwave, refrigerator/freezer, electric range
and oven, dishwasher and garbage disposal. The owner of the Property supplies
cold water, sewer service and trash removal. The tenants pay for their own
electricity usage, which includes, heat, air conditioning, cooking, hot water
and lights.
There are at least four apartment properties in the area which compete with
the Property. All offer similar amenities and have rents that are generally
slightly higher when compared with those of the Property. Based on a recent
telephone survey, Cornerstone Management Group, Inc. estimates that occupancy in
nearby competing projects now averages approximately 94%.
According to information provided by the Seller, physical occupancy at the
Property averaged approximately 96% in 1991, 95% 1992, 94% 1993, 98% 1994, and
93% in 1995. On June 7, 1996, the Property was 89% occupied. The tenants are a
mix of white collar and blue collar workers and students. According to tenant
files, at the time of the Company's acquisition of the Property, over half of
the tenants' household incomes were in excess $40,000.
The seller was a North Carolina limited partnership which originally built
the Property. The seller filed for protection under Chapter 11 of the Bankruptcy
Code approximately two years ago. During the bankruptcy period, the Property was
managed by at least three different management companies. In the opinion of
Cornerstone Management Group, Inc., the management by these companies was
substandard. However, Cornerstone Management Group, Inc. does not believe that
any problems associated with the operation of the Property cannot be remedied by
new management. In addition, the Company and Cornerstone Management Group, Inc.
believe that the prior bankruptcy was largely a result of excessive debt
encumbering the Property and the lack of partnership capital of the seller.
Since the Company intends to own and operate the Property on a debt-free basis,
Cornerstone Management Group, Inc. and the Company do not believe that these
factors will be relevant to the Company's proposed ownership and operation of
the Property.
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The 1995 real estate tax rate applicable to the Property was approximately
$1.6227 per $100 of assessed value, and the real estate taxes for 1995 were
calculated to be $108,883. The assessed value was $6,818,200. The basis of the
depreciable residential real Property portion of the Property (currently
estimated at about $5,982,000) will be depreciated over 27.5 years on a straight
line basis. The basis of the personal Property portion will be depreciated in
accordance with the modified accelerated cost recovery system of the Code.
Amounts to be spent by the Company on repairs and improvements will be treated
for tax purposes as permitted by the Code based on the nature of the
expenditures.
(30) LEXINGTON TOWERS APARTMENTS
RICHMOND, VIRGINIA
On June 26, 1996, effective the same date, the Company purchased the
Lexington Towers Apartments, a 197-unit high-rise apartment building having an
address of 102 North Fifth Street, Richmond, Virginia (the "Property").
The seller is unaffiliated with the Company, the Advisor and their
Affiliates. The purchase price was $6,000,000. At closing, the Company paid
$500,000 in cash from a borrowing under the Unsecured Line of Credit. The
balance of $5.5 million is evidenced by a promissory note bearing interest at
5.65%. The principal amount of the promissory note and all accrued interest is
due three years after closing. The note is secured with a letter of credit which
will cost the Company approximately 1% per year. The note is not secured by the
Property. The Company expects to pay the note with proceeds from the sale of
Shares. Title to the Property was conveyed to the Company by limited warranty
deed.
Location. A description of Richmond, Virginia appears under "Ashley Park
Apartments" herein. The Property is located in downtown Richmond, Virginia. The
immediate area consists of other multi-family housing, commercial development
and retail development. The Property is in close proximity to Virginia
Commonwealth University, and is near to the two established commercial areas
known as Carytown and Shockoe Slip.
The Property is in close proximity to Virginia's 23-acre Biotechnology
Research Park, which is under development. The Park is being sponsored and
master-leased by Virginia Commonwealth University to provide a common site for
public and private medical-oriented biotechnology research and development
facilities. Phase I, consisting of approximately 100,000 square feet, was
recently completed and is fully leased. The second and third phases are under
construction and are expected to be completed in late 1996. The facility, which
is adjacent to the Medical College of Virginia campus of Virginia Commonwealth
University, is expected to impact the demand for rental housing in the area.
The Property is only a few blocks from the Richmond Downtown Expressway,
which provides ready access to Interstates 95 and 64. The Richmond International
Airport is approximately 15 minutes from the Property.
Description of the Property. The Property consists of 197 apartment units in
a single 17-story apartment building in the central business district. The
Property was built in 1965.
The Company believes that the Property is generally in good condition.
However, the Company has budgeted approximately $517,500 for various repairs and
improvements, including interior renovations of apartment units, carpet and
appliance replacement, pool renovation, and renovation of the fitness facility
and common areas.
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<PAGE>
The Property offers 4 unit types. The unit mix and rents currently being
charged new tenants are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
INTERIOR
QUANTITY TYPE SQUARE FOOTAGE MONTHLY RENTAL
- ---------- ------------------- ---------------- ----------------
<S> <C> <C> <C>
42 efficiency 365 $375-450
94 junior executive 480 395-500
1 executive suite 690 550
54 1 bedroom, 1 bath 678-937 525-700
6 2 bedrooms, 2 baths 912-1,035 775-875
</TABLE>
The apartments provide a combined total of approximately 107,000 square feet
of net rentable area.
Leases at the Property are generally for terms of one year or less. Average
rental rates for the past five years have gradually increased. As an example, a
junior executive apartment rented for $370 in 1991, $380 in 1992, $380 in 1993,
$390 in 1994, and $390 in 1995. The average effective annual rental per square
foot at the Property for 1991, 1992, 1993, 1994, and 1995 was $10.21, $10.49,
$10.49, $10.78, and $10.78, respectively.
The Property has an outdoor swimming pool, a clubhouse and exercise room
(located on the 16th floor), a meeting/game room, a restaurant leased to an
operator, laundry facilities on each floor, and an attached parking garage, with
approximately 111 parking spaces which can be reconfigured to accommodate
approximately 138 vehicles. There is also 24-hour security at the Property.
The Company is planning to convert approximately 7,500 square feet of
unoccupied office space on the first floor and approximately 17,500 square feet
on the 16th floor that is now being used as a clubhouse and exercise facility
into new apartments. The Company believes that an additional 10 apartment units
can be added using these spaces.
The building is brick veneer over steel frame. There are concrete floor
decks. The roof is flat with a modified bitumen rubber sheathing, and was
replaced within the last 12 months. Windows are single stainless steel frames.
All apartment units have wall-to-wall carpeting or parquet flooring in the
living area, and vinyl flooring in the kitchen. Each apartment unit has a cable
television hook-up and an individually controlled heating and air-conditioning
unit. Each kitchen is equipped with a refrigerator/freezer, electric range and
oven, dishwasher and garbage disposal. The owner of the Property provides all
utilities. The tenants pay for their phone and cable services.
There are at least four apartment properties in the area which compete with
the Property. All offer similar amenities and have rents that are generally
slightly higher when compared with those of the Property. Based on a recent
telephone survey, Cornerstone Management Group, Inc. estimates that occupancy in
nearby competing projects now averages approximately 97%.
According to information provided by the seller, physical occupancy at the
Property averaged approximately 43% in 1991, 41% in 1992, 41% in 1993, 42% in
1994, and 63% in 1995. On June 1, 1996, the Property was 95% occupied. The
tenants are a mix of white-collar and blue-collar workers and students. Many of
the current tenants have resided at the Property for many years, and detailed
information on them and their status is not available. A large number of the
residents are foreign intern students at the Medical Collage of Virginia. Many
of the tenants on which current information is available are employed in
professional positions in engineering, medicine and education.
The Property has been managed by its original owner since construction.
According to the prior owner, the Property historically enjoyed an excellent
occupancy rate until the prior owner decided to convert it to condominiums
approximately four years ago. Following such decision, the occupancy at the
Property decreased to approximately 50%. The prior owner subsequently reversed
its decision to convert to condominiums and thereafter continued to run the
building as an apartment complex. However,
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the occupancy at the Property remained at approximately 50% until the fall of
1995. Cornerstone Management Company, Inc. believes that the failure to increase
occupancy was attributable to a passive management style and insufficient
on-site staff. In the fall of 1995, the owner restaffed the Property and
occupancy began to improve.
The 1995 real estate tax rate applicable to the Property was approximately
$1.445 per $100 of assessed value, and the real estate taxes for 1995 were
calculated to be $53,393. The assessed value was $3,695,000. The basis of the
depreciable residential real Property portion of the Property (currently
estimated at about $2,710,000) will be depreciated over 27.5 years on a straight
line basis. The basis of the personal Property portion will be depreciated in
accordance with the modified accelerated cost recovery system of the Code.
Amounts to be spent by the Company on repairs and improvements will be treated
for tax purposes as permitted by the Code based on the nature of the
expenditures.
MANAGEMENT
DIRECTORS AND OFFICERS
The Directors of the Company have ultimate control over the management of the
Company and the conduct of its affairs, including the acquisition and
disposition of the Company's assets, but the Company has entered into an
Advisory Agreement with the Advisor to manage the Company's day-to-day affairs.
The Directors are charged with the responsibility of monitoring the relationship
between the Company and the Advisor. The Independent Directors are required to
make an annual determination that the Advisor's compensation is reasonable, that
total fees and expenses of the Company are reasonable and that the Company's
borrowings, if any, are appropriate.
The Directors will spend such time on the affairs of the Company as their
duties may require. It is expected that the Directors will meet quarterly or
more frequently as required. Financial statements and various other financial
reports of the Company will be provided to the Directors quarterly to aid them
in the discharge of their duties. It is not contemplated that the Directors will
devote a substantial portion of their time to the discharge of their duties as
Directors.
At the Annual Meeting of Shareholders held on April 26, 1995, the
Shareholders approved amendments to the Company's Amended and Restated Articles
of Incorporation and Bylaws that would provide for the election of Directors to
staggered terms of office beginning with the election of Directors at the 1996
Annual Meeting of Shareholders; approved amendments to the Company's Bylaws that
would reduce the vote required to elect Directors to a plurality of the votes
cast by the Shares entitled to vote in the election at a meeting at which a
quorum is present; and approved amendments to the Company's Bylaws that would
establish certain procedures to be followed by Shareholders when (i) bringing
business before the Annual Meeting of Shareholders and (ii) nominating
candidates for election to the Board of Directors. Additional information on
these matters is provided below.
Staggered Terms for Directors. Beginning at the 1996 Annual Meeting of
Shareholders, the Board of Directors will be divided into three staggered terms
of office.
The adoption of staggered terms for the Directors is evidenced by Article VII
in the Company's Amended and Restated Articles of Incorporation which reads as
follows:
ARTICLE VII
BOARD OF DIRECTORS
Commencing with the 1996 Annual Meeting of Shareholders,
the Board of Directors will be divided into three classes,
denominated as Class I, Class II and Class III, each as nearly
equal in number to the other two as possible. At the 1996
Annual Meeting of Shareholders, directors of Class I shall be
elected to hold office for a term expiring at the 1997 Annual
Meeting of Shareholders; directors of Class II shall be
elected to hold office for a term expiring at the 1998 Annual
Meeting of Shareholders; and directors of Class III shall be
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elected to hold office for a term expiring at the 1999 Annual
Meeting of Shareholders. At each Annual Meeting of
Shareholders after 1996, the successors to the class of
directors whose terms shall then expire shall be identified as
being of the same class of directors they succeed and shall be
elected to hold office for a term expiring at the third
succeeding Annual Meeting of Shareholders. When the number of
directors is changed, any newly created directorships or any
decrease in directorships shall be so apportioned among the
classes by the Board of Directors as to make all classes as
nearly equal in number as possible.
In addition to the foregoing addition to the Company's Amended and Restated
Articles of Incorporation, an essentially identical provision was added to the
Company's Bylaws.
These additions to the Amended and Restated Articles of Incorporation and the
Bylaws make it more difficult to change the composition of the Board of
Directors and therefore help to assure the continuity and stability of the
Company's management and policies. A Board of Directors upon which Directors
serve staggered three-year terms requires at least two annual Shareholder
meetings in order to effect a change in the control of the Board (unless the
size of the Board is changed). Currently, a change in control of the Board of
Directors could be effected in one Shareholder meeting.
By stabilizing the composition of the Board of Directors, the amendment is
designed to encourage any person who might seek to acquire control of the
Company to consult first with the Company's Board of Directors and to negotiate
the terms of any proposed business combination or tender offer. The Board of
Directors believes that any takeover attempt or business combination in which
the Company is involved should be thoroughly studied by the Board of Directors
to assure that all of the Company's Shareholders are treated fairly.
Although neither the Board of Directors nor the management of the Company is
aware of any actual or threatened change in control of the Company, the
amendment serves to reduce the vulnerability of the Company to an unsolicited
proposal for the takeover of the Company that does not contemplate the
acquisition of all of the Company's outstanding Shares at a fair price, or an
unsolicited proposal for the restructuring or sale of all or part of the
Company.
The staggering of the terms of the members of the Board of Directors may have
the effect of "entrenching" current management by making a change in control of
the Company more difficult, since at least two Annual Meetings of Shareholders
will be required to replace a majority of the Board of Directors, unless the
size of the Board is changed. The Company believes that the provision in the
Company's Bylaws prohibiting any person from acquiring or holding, directly or
indirectly, ownership of more than 9.8% of all of the outstanding Shares already
imposes a substantial impediment to attempted change in control of the Company.
However, prospective Shareholders should consider the staggered terms of the
Company's Board of Directors, and its potential effect of "entrenching" current
management, in making a decision whether or not to purchase Shares.
Vote Required to Elect Directors. Pursuant to a proposal adopted at the 1995
Annual Meeting of Shareholders, the vote required to elect Directors was reduced
from a majority of outstanding Shares to a plurality of the votes cast by the
Shares entitled to vote in the election at a meeting at which a quorum is
present. This change was accomplished by amending relevant provisions of the
Company's Bylaws.
Procedures for Bringing Business and Nominating Candidates for Director
Positions. At the 1995 Annual Meeting of Shareholders, the Shareholders also
approved certain procedures to be followed by Shareholders when bringing
business before the Annual Meeting of Shareholders and nominating candidates for
election to the Board of Directors. These procedures are described in new
provisions added to the Company's Bylaws.
The new provisions in the Bylaws state that a Shareholder who wishes to bring
business before an Annual Meeting of Shareholders or to nominate a candidate for
election to the Board of Directors must provide written notice of his intention
to the Company. The notice must be timely and must contain certain specific
information pertaining to the Shareholder's proposal.
The precise and detailed provisions dealing with these matters, which are
contained in the Bylaws, are available without charge upon request of any
Shareholder from the Company's secretary, S.J. Olander, 306 East Main Street,
Richmond, Virginia 23219 (804-643-1761), and any Shareholder contem-
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<PAGE>
plating bringing business before an Annual Meeting of Shareholders or nominating
a candidate for election to the Board of Directors should refer to the relevant
Bylaws provisions (Sections 4.2 and 5.3 thereof). In addition, a copy of the
Company Bylaws, as amended, is filed as an exhibit to the Company's registration
statement, which can be inspected and copied as described under "Additional
Information" in the Company's Prospectus.
In general, the new Bylaws provisions require that a Shareholder provide to
the Company written notice of proposed business or of a proposed candidate for
election to the Board of Directors so that it is received by the Company (i) on
or after February 1 and before March 1 of the year in which the meeting will be
held, if the meeting is held in May, or (ii) not less than 60 days before the
meeting if the date of the meeting is earlier than May 1 or later than May 31 in
such year. In the case of proposed business (other than the nomination of a
candidate for election as a Director), the notice must contain certain
information concerning the proposing Shareholder and the proposed business. In
the case of the nomination of a candidate for election as a Director, the notice
must contain certain information concerning the proposing Shareholder and the
proposed candidate for election, and such notice must be accompanied by a
written consent of the proposed nominee to serve as a Director if elected and a
statement from the proposed nominee to the effect that the information about him
in the notice is correct.
The amendments which were adopted are intended to provide standardized and
orderly procedures for Company governance. The amendments require Shareholders
who desire to bring business before the Company or to nominate candidates for
election to the Board of Directors to provide timely notice of their intentions
together with certain information concerning such business or such candidates.
The Shareholders who fail to follow any of such procedures will not have their
business or candidate brought before the Shareholders for consideration.
The Company proposed and recommended adoption of such procedures in light of
the substantial number of Company Shareholders, as well as the substantial
number of Shareholders who actually attended the Company's 1994 Annual Meeting
of Shareholders. The procedures are designed to promote regularity and
orderliness in the bringing of business before the Company. However, since a
Shareholder who fails to comply with procedures will not have requested business
brought before the Company, such procedures could also have the effect of
preventing proposals which might otherwise be meritorious from coming before the
Shareholders for consideration. Prospective Shareholders should consider this
potential effect in evaluating their potential acquisition of Shares.
At a meeting of the Board of Directors on January 25, 1996, the Board
unanimously approved (Messrs. Kirkpatrick, Graham and Marcus abstaining
therefrom) to reduce the size of the Board from 10 to seven members and to
nominate for election at the 1996 Annual Meeting of Shareholders the following
persons, all currently serving as directors: Glenn W. Bunting, Jr., Leslie A.
Grandis, Glade M. Knight, Penelope W. Kyle, Stanley J. Olander, Jr., Harry S.
Taubenfeld and Martin Zuckerbrod. The reduction in the size of the Board was
based upon a desire to increase the efficiency with which the Board operates and
generally to conform the size of the Board with the size of the boards of
directors of other real estate investment trusts, as determined by the Board.
The reduction in size of the Board from 10 members to seven members was
effective upon the election of the Board at the 1996 Annual Meeting of
Shareholders and did not affect or shorten the remaining term of any Director.
However, in anticipation of the reduction in the size of the Board and to permit
the Company to begin functioning with the smaller Board as soon as possible, Mr.
Kirkpatrick resigned as a Director effective January 25, 1996. Messrs. Graham
and Marcus resigned effective March 28, 1996 and April 8, 1996, respectively.
At the 1996 Annual Meeting of Shareholders, Messrs. Zuckerbrod and Olander
were nominated for election as Directors to serve until the 1997 Annual Meeting
of Shareholders, Mr. Taubenfeld and Ms. Kyle were nominated for election as
Directors to serve until the 1998 Annual Meeting of Shareholders, and Messrs.
Bunting, Grandis and Knight were nominated for election as Directors to serve
until the 1999 Annual Meeting of Shareholders. At the 1996 Annual Meeting of
Shareholders, each person so nominated as a Director was duly elected as a
Director. The division of the Board of Directors into three classes represents
the initial implementation of "staggered" terms for Directors as approved at the
1995 Annual Meeting of Shareholders.
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<PAGE>
The Company has a total of seven Directors, a majority of whom, as required
by the Company's Bylaws, are Independent Directors.
The current Directors of the Company, and the executive officers of the
Company, and their primary occupations during the last five years or more are
set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- ----- --------------------------------------------
<S> <C> <C>
Glade M. Knight........ 51 Director, Chairman of the Board of President
Stanley J. Olander,Jr.. 41 Director, Vice President and Secretary
Martin Zuckerbrod...... 65 Director
Harry S. Taubenfeld ... 67 Director
Glenn W. Bunting, Jr. . 51 Director
Leslie A. Grandis...... 52 Director
Penelope W. Kyle....... 48 Director
</TABLE>
Glade M. Knight. Mr. Knight is President, Chief Executive Officer and sole
beneficial shareholder and Director of Cornerstone Realty Group, Inc., a
Virginia corporation organized in 1990. Since 1972, he has held executive and/or
ownership positions in several corporations (including, beginning in 1978,
Knight-Austin Corporation) involved in the management of and investment in real
estate. He has served, directly or indirectly, as a general or limited partner
of 71 limited partnerships owning 80 Properties comprising over 13,000 apartment
units. See "The Advisor -- Prior Performance of Programs Sponsored by Affiliates
of the Advisor" for information on certain prior real estate programs organized
by Glade M. Knight.
Mr. Knight is a member of the advisory board to the Graduate School of Real
Estate and Urban Land Development at Virginia Commonwealth University and the
Board of Directors of the Richmond Business Workout Council, and is a former
member of the National Housing Roundtable. An alumnus of Brigham Young
University, he has served on a National Advisory Council for the University and
is a founding member of and active lecturer for the University's Entrepreneurial
Department of the Graduate School of Business Management.
Stanley J. Olander, Jr. Mr. Olander is a Senior Vice President of Cornerstone
Realty Group, Inc. Mr. Olander's principal responsibility is to coordinate the
investment activities of Cornerstone Realty Group, Inc., including the
structuring and organization of investments. Mr. Olander has held various
executive positions with Cornerstone Realty Group, Inc. and its predecessor
firm, Knight-Austin Corporation, since 1981. Prior thereto, he was a National
Division Sales Representative for Lawyers Title Insurance Corporation. He
received a B.S. in Business Administration from Radford University and an M.S.
in Real Estate and Urban Land Development from Virginia Commonwealth University.
Mr. Olander is a licensed real estate agent in the Commonwealth of Virginia and
a member of the Richmond Board of Realtors.
Martin Zuckerbrod. Mr. Zuckerbrod has practiced law, and been involved in
mortgage and real estate investment activities, in the firm of Zuckerbrod &
Taubenfeld of Cedarhurst, New York since 1959, and has practiced law since 1956.
Mr. Zuckerbrod's areas of professional concentration include real estate and
commercial law. He received a B.A. from Brooklyn College in 1952, and a J.D.
from Columbia University in 1954.
Harry S. Taubenfeld. Mr. Taubenfeld has practiced law, and been involved in
mortgage and real estate investment activities, in the firm of Zuckerbrod &
Taubenfeld since 1959, and has practiced law since 1956. Mr. Taubenfeld also
specializes in real estate and commercial law. He received a B.A. from Brooklyn
College in 1951, and a J.D. from Columbia University in 1954.
Glenn W. Bunting, Jr. Mr. Bunting has been President of American KB
Properties, Inc., which develops and manages shopping centers, since 1985. He
has been President of G.B. Realty Corporation,
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<PAGE>
which brokers shopping centers and apartment communities, since 1980. In
addition to his 14 years' experience in the real estate industry, he worked for
various mortgage firms for 13 years. Mr. Bunting received a B.S. in Business
Administration from Campbell University in 1967.
Leslie A. Grandis. Mr. Grandis has been a partner in the law firm of McGuire,
Woods, Battle & Boothe in Richmond, Virginia since 1974. Mr. Grandis received a
B.S. from Washington & Lee University in 1966 and a J.D. from the University of
Virginia in 1969. He is a Director of Markel Corporation.
Penelope W. Kyle. Ms. Kyle became Director of the Virginia Lottery on
September 1, 1994. Ms. Kyle had worked in various capacities for CSX Corporation
and its affiliated companies from 1981 until August, 1994. She served as Vice
President, Administration and Finance for CSX Realty, Inc. since 1991, as Vice
President, Administration for CSX Realty, Inc. from 1989 to 1991, and as
Assistant Vice President and Assistant to the President for CSX Realty, Inc.
from 1987 to 1989. She received a B.A. from Guilford College in 1969, an M.A.
from Southern Methodist University in 1971, a degree in law from the University
of Virginia in 1979 and an M.B.A. from The College of William and Mary in 1987.
COMMITTEES OF DIRECTORS
The Directors have established an Executive Committee that has the authority
of the full Board except for the declaration of distributions and non-delegable
matters specified in Virginia law. A majority of the members of the Executive
Committee must be Independent Directors. The Executive Committee currently
consists of Glade M. Knight (Co-Chairman of Committee), Martin Zuckerbrod
(Co-Chairman of Committee) and Glenn W. Bunting, Jr.
At this time, the Executive Committee is responsible for making all of the
Company's investment and acquisition decisions, including all decisions to
invest in or acquire a Property. Depending on the circumstances, certain
transactions with the Advisor and its Affiliates will require the additional
approval of a majority of the Directors or a majority of the Directors who are
not parties to the transaction or Affiliates of any person (other than the
Company) who is a party to the transaction.
The Directors also have established an Audit Committee which will be
responsible for overseeing the relationship between the Company and its
independent auditors, including the annual audit of the Company's financial
statements, and monitoring the reasonableness of the Company's expenses. A
majority of the members of the Audit Committee must be Independent Directors.
The Audit Committee currently consists of Penelope W. Kyle, Stanley J. Olander,
Jr. and Harry S. Taubenfeld (Chairman of Committee).
DIRECTOR COMPENSATION
The Company pays to each Director who is not an Affiliate of the Advisor an
annual fee of $2,000 plus $500 for each meeting of the Directors attended by
such person in person ($100 if any are attended by telephonic means) and
reimburses all Directors for their travel and other out-of-pocket expenses
incurred in connection with attending any such meeting and for carrying on the
business of the Company, including reimbursement for expenses for any on-site
review of Properties presented for acquisition or of new markets. If a Director
who is not an Affiliate of the Advisor serves on the Executive Committee, such
person receives an additional $1,000 per year. Each Director also receives $100
for each Committee meeting attended, whether in person or by telephone.
Directors who are Affiliates of the Advisor receive no compensation from the
Company for their service as Directors. These Directors, however, are
remunerated indirectly by their relationship to the Advisor and its Affiliated
companies and are reimbursed by the Company for their expenses in attending
meetings of the Directors or a Committee and in carrying on the business of the
Company.
INDEMNIFICATION AND INSURANCE
See "Summary of Organizational Documents -- Responsibility of Board of
Directors, Advisor, Officers and Employees" for a description of the nature of
the Company's obligation to indemnify the Company's directors and officers and
certain others in certain situations.
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<PAGE>
The Company has obtained, and pays the cost of, directors' and officers'
liability insurance coverage in the amount of $2 million (subject to a retention
or "deductible" of $250,000). Directors' and officers' insurance insures (i) the
directors and officers of the Company from any claim arising out of an alleged
wrongful act by the directors and officers of the Company in their respective
capacities as directors and officers of the Company, and (ii) the Company to the
extent that the Company has indemnified the directors and officers for such
loss.
OFFICER COMPENSATION
The officers of the Company are not paid salaries by the Company. Such
officers are officers of the Advisor and its Affiliates, which entities are
entitled to certain fees for services rendered by them to the Company. Thus, the
officers of the Company are, in essence, compensated by the Advisor or its
Affiliates. See "Compensation" for a description of the fees payable to the
Advisor and its Affiliates.
STOCK INCENTIVE PLANS
The Company has adopted two stock incentive plans which are described below.
For purposes of the description below, the term "Offering" means the Initial
Offering plus all additional offerings and sales of Shares which may occur
during the five-year period beginning July 8, 1994 and ending July 7, 1999. The
term "Initial Offering" means the offering of Shares made pursuant to the
Prospectus dated December 31, 1992, as amended and supplemented from time to
time. The term "Minimum Offering" means the offering and sale of an initial one
million Shares by the Company (which was accomplished on May 26, 1993).
The aggregate number of Shares reserved for issuance under the two stock
incentive plans is (1) 80,000 Shares, plus (2) 6.425% of the number of Shares
sold in the Initial Offering in excess of the Minimum Offering, plus (3) 6.2% of
the number of Shares sold in the Offering above the Initial Offering.
THE INCENTIVE PLAN
Under one plan (the "Incentive Plan"), incentive awards may be granted to
certain employees (including officers and directors who are employees) of the
Company, or of Cornerstone Advisors, Inc., Cornerstone Management Group, Inc. or
Cornerstone Realty Group, Inc. (the latter three companies being sometimes
referred to herein as the "Cornerstone Companies"). Of the Directors of the
Company, currently Glade M. Knight and Stanley J. Olander, Jr. are participants
in the Incentive Plan. Such incentive awards may be in the form of stock options
or restricted stock (as described below). Under the Incentive Plan, the number
of Shares reserved for issuance is equal to an aggregate of (1) 35,000 Shares,
plus (2) 4.625% of the number of Shares sold in the Initial Offering in excess
of the Minimum Offering, plus (3) 4.4% of the number of the Shares sold in the
Offering above the Initial Offering. If an option is cancelled, terminates or
lapses unexercised, any unissued Shares allocable to such option may be
subjected again to an incentive award. The purpose of the Incentive Plan is to
attract and retain the services of experienced and qualified employees who are
acting on behalf of the Company, either directly or through the Cornerstone
Companies, in a way that enhances the identification of such employees'
interests with those of the Shareholders.
The Incentive Plan will be administered by a Compensation Committee of the
Board of Directors of the Company (the "Committee"). The Compensation Committee
currently consists of Leslie A. Grandis (Chairman of Committee) and Penelope W.
Kyle. Leslie A. Grandis is also a partner in the law firm of McGuire, Woods,
Battle & Boothe, L.L.P., which serves as general counsel to the Company,
Cornerstone Advisors, Inc. (the "Advisor") and certain of the Advisor's
affiliates. Notwithstanding anything to the contrary in this Prospectus
(including the Company's organizational documents referred to herein), the
Committee must have a minimum of two members who are not eligible to participate
in the Incentive Plan or any similar plan of the Company other than the
Directors' Plan (described below).
Subject to the provisions of the Incentive Plan, the Committee has authority
to determine (i) when to grant incentive awards, (ii) which eligible employees
will receive incentive awards, (iii) whether the
98
<PAGE>
award will be an option or restricted stock, and the number of Shares to be
allocated to each incentive award. The Committee may impose conditions on the
exercise of options and upon the transfer of restricted stock received under the
Plan, and may impose such other restrictions and requirements as it may deem
appropriate.
STOCK OPTIONS
An option granted under the Incentive Plan will not be transferrable by the
option holder except by will or by the laws of descent and distribution, and
will be exercisable only at such times as may be specified by the Committee.
During the lifetime of the option holder the option may be exercised only while
the option holder is in the employ of the Company or one of the Cornerstone
Companies, or within 60 days after termination of employment. In the event the
termination is due to death or disability, the option will be exercisable for a
180-day period thereafter.
The exercise price of the options will be not less than 100% of the fair
market value of the Shares as of the date of grant of the option.
The Committee has discretion to take such actions as it deems appropriate
with respect to outstanding options in the event of a sale of substantially all
of the stock or assets of the Company, a merger of the Cornerstone Company by
which an option holder is employed, or the occurrence of similar events.
Adjustments will be made in the terms of options and the number of Shares which
may be issued under the Incentive Plan in the event of a future stock dividend,
stock split or similar pro rata change in the number of outstanding Shares or
the future creation or issuance to shareholders generally of rights, options or
warrants for the purchase of Shares.
Options granted under the Incentive Plan are non-qualified stock options, not
intended to qualify for favorable incentive stock option tax treatment under the
Code.
RESTRICTED STOCK
Restricted stock issued pursuant to the Incentive Plan is subject to the
following general restrictions: (i) none of such Shares may be sold,
transferred, pledged, or otherwise encumbered or disposed of until the
restrictions on such Shares shall have lapsed or been removed under the
provisions of the Incentive Plan, and (ii) if a holder of restricted stock
ceases to be employed by the Company or one of the Cornerstone Companies, he
will forfeit any shares of restricted stock on which the restrictions have not
lapsed or been otherwise removed.
The Committee will establish as to each share of restricted stock issued
under the Incentive Plan the terms and conditions upon which the restrictions on
such Shares shall lapse. Such terms and conditions may include, without
limitation, the lapsing of such restrictions at the end of a specified period of
time, or as a result of the disability, death or retirement of the participant.
In addition, the Committee may, at any time, in its sole discretion, accelerate
the time at which any or all restrictions will lapse or remove any or all such
restrictions.
AMENDMENT OF THE INCENTIVE PLAN AND INCENTIVE AWARDS
The Board of Directors may amend the Incentive Plan in such respects as it
deems advisable; provided that the shareholders of the Company must approve any
amendment that would (i) materially increase the benefits accruing to
participants under the Incentive Plan, (ii) materially increase the number of
Shares that may be issued under the Incentive Plan, or (iii) materially modify
the requirements of eligibility for participation in the Incentive Plan.
Incentive awards granted under the Incentive Plan may be amended with the
consent of the recipient so long as the amended award is consistent with the
terms of the Plan.
DIRECTORS' PLAN
The Company has also adopted a stock option plan for Directors of the Company
who are not employees of the Company or the Cornerstone Companies (the
"Directors' Plan"). Under the Directors' Plan, the number of Shares reserved for
issuance is equal to 45,000 Shares plus 1.8% of the number of Shares sold in the
Offering in excess of the Minimum Offering.
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<PAGE>
A Director is eligible to receive an option under the Directors' Plan if the
Director is not otherwise an employee of the Company or any Cornerstone Company
or any subsidiary of the Company and was not an employee of any of such entities
for a period of at least one year before the date of grant of an option under
the Plan. Seven members of the Board (all of the Directors except Messrs. Knight
and Olander) currently qualify to receive options under the Directors' Plan.
The Directors' Plan will be administered by the Board. Grants of stock
options to eligible Directors under the Plan will be automatic. However, the
Board has certain powers vested in it by the terms of the Plan, including,
without limitation, the authority (within the limitations described therein) to
prescribe the form of the agreement embodying awards of stock options under the
Plan, to construe the Plan, to determine all questions arising under the Plan,
and to adopt and amend rules and regulations for the administration of the Plan
as it may deem desirable. Any decision of the Board in the administration of the
Directors' Plan will be final and conclusive. The Board may act only by a
majority of its members in office, except members thereof may authorize any one
or more of their number, or any officer of the Company, to execute and deliver
documents on behalf of the Board.
The Directors' Plan provides for the following automatic option awards:
(1) As of the initial closing of the Shares on May 26, 1993, each eligible
Director received an option to purchase 500 Shares plus 0.0125% of the number of
Shares in excess of the Minimum Offering sold by the initial closing (an option
to purchase 539 Shares per director).
(2) As of each subsequent closing of the Offering before June 1, 1994, each
eligible Director automatically received an option to purchase 0.0125% of the
number of Shares in excess of the Minimum Offering sold since the last closing
of the Offering.
(3) As of each June 1 during the years 1994 through 1998 (inclusive), each
eligible Director shall automatically receive an option to purchase 0.02% of the
number of Shares issued and outstanding on that date.
(4) As of July 8, 1994, each eligible Director automatically received an
option to purchase 5,000 Shares.
(5) As of the election as a Director of any new person who qualifies as an
eligible Director, such eligible Director will automatically receive an option
to purchase 5,000 Shares.
The purpose of the Directors' Plan is to enhance the identification of the
participating Directors' interests with those of the Shareholders.
The exercise price for each option granted under the Directors' Plan will be
100% of the fair market value on the date of grant; no consideration will be
paid to the Company for the granting of the option. Options granted under the
Directors' Plan will have a term of 10 years and will be fully exercisable six
months after the date of grant. If an optionee ceases to serve as a Director of
the Company prior to the expiration of the six-month period following the date
of grant, the option will terminate on the date of such termination of service
as a Director. If an optionee ceases to serve as a Director of the Company after
the expiration of the six-month period following the date of grant, the option
will terminate three years after the date of termination of service, or on
expiration of the option, whichever is earlier.
Options granted under the Directors' Plan are non-transferable other than by
will or the laws of descent and distribution upon the death of the optionee and,
during the lifetime of the optionee, are exercisable only by him. Payment upon
exercise of an option under the Directors' Plan may be made in cash or with the
Company's Shares of equivalent value.
The Board may suspend or discontinue the Directors' Plan or revise or amend
the Plan in any respect; provided, however, that without approval of the
Company's shareholders no revision or amendment may increase the number of
Shares subject to the Plan or materially increase the benefits accruing under
the Plan. In addition, the Directors' Plan may not be amended more than once
every six months other than to comply with changes in the Code or ERISA.
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<PAGE>
STOCK OPTION AND INCENTIVE SHARE GRANTS
Pursuant to the Incentive Plan or the Directors' Plan, as applicable, the
following persons have received the following options to purchase Shares and
restricted Shares as of February 24, 1996 (the Record Date for the 1996 Annual
Meeting of Shareholders):
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
UNDERLYING OPTIONS UNDERLYING OPTIONS TOTAL NUMBER
(EXERCISE PRICE OF (EXERCISE PRICE OF OF SHARES
$10 $11 UNDERLYING RESTRICTED
NAME OF PERSON PER SHARE) PER SHARE) OPTIONS (4) SHARES (5)
- ----------------------------- --------------------- --------------------- -------------- ------------
<S> <C> <C> <C> <C>
Glenn W. Bunting, Jr.(1) .... 539 7,599 8,138 --
Leslie A. Grandis(1)......... 539 7,599 8,138 --
Penelope W. Kyle(1).......... 539 7,599 8,138 --
Martin Zuckerbrod(1)(6) ..... -- 14,589 34,220 --
Harry S. Taubenfeld(1)(6) ... -- 14,589 34,220 --
Glade M. Knight(2)(6)........ -- 41,176 80,438 5,000
Stanley L. Olander, Jr.(2)(6) -- 22,224 44,309 2,500
Debra A. Jones(3)(6)......... -- 22,224 44,309 2,500
</TABLE>
- ----------
(1) Director participating in Directors' Plan.
(2) Director participating in Incentive Plan.
(3) Employee of the Advisor, Cornerstone Realty Group, Inc. and Cornerstone
Management Group, Inc. participating in Incentive Plan.
(4) Each of William P. Graham, Philip H. Kirkpatrick and Edward L. Marcus,
former Directors, formerly participating in the Directors' Plan, holds
options to purchase 539 Shares at $10 per Share and 15,322 Shares at $11
per Share. Each of these Directors received a special award of an option
to purchase 7,723 Shares at a meeting of the Board of Directors on
January 25, 1996.
(5) The Restricted Shares were issued on July 1, 1995. The Restricted Shares
vest in equal 1/5 portions on July 1 of each year from 1995 through 1999,
inclusive. If the grantee ceases to be an "Employee," as defined below,
for any reason other than death or permanent disability, the unvested
Restricted Shares will revert to the Company. For this purpose, a person
will be deemed to be an "Employee" if such person (1) is an officer or
employee of the Company, or (2) is an officer or employee of Cornerstone
Advisors, Inc. (so long as it serves as the Advisor), or is an officer or
employee of Cornerstone Management Group, Inc. (so long as it serves as
the Company's principal management company). Distributions are payable to
the grantees on all of the Restricted Shares, both vested and unvested.
(6) The "Total Number of Shares Underlying Options" figures include certain
options awarded but not yet issued. Some of the options awarded to the
persons who were formerly or are participating in the Incentive Plan will
be issued in five equal portions on September 8 of each year from 1994
through 1998, inclusive. The balance of the options awarded to the
persons participating in the Incentive Plan are already issued in full.
The issuance of deferred portions is not subject to any other conditions,
including any requirement that the recipient remains a Director or
officer of the Company or of the Cornerstone Companies. The exercise
price for the two initial portions of the options granted to such persons
is $11 per Share. The exercise price for the subsequent portions of the
options to be issued will be the fair market value of the underlying
Shares at the times of issuance of the options. The following table shows
the grantees of options under the Incentive Plan as of February 24, 1996,
the number of Shares covered by the options granted or awarded, and the
manner in which such options are issued:
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<PAGE>
INCENTIVE PLAN GRANTS
<TABLE>
<CAPTION>
TOTAL
NUMBER OF
NUMBER OF SHARES NUMBER OF SHARES SHARES
UNDERLYING OPTIONS UNDERLYING OPTIONS UNDERLYING
NAME FIRST GRANT (B) SECOND GRANT (C) OPTIONS
- ----------------------- -------------------- ------------------ ------------
<S> <C> <C> <C>
Glade M. Knight........ 65,438 15,000 80,438
Stanley J. Olander,Jr.. 36,809 7,500 44,309
Martin Zuckerbrod(A)... 32,719 0 32,719
Harry S. Taubenfeld(A). 32,719 0 32,719
Debra A. Jones......... 36,809 7,500 44,309
</TABLE>
(A) On April 26, 1995, Messrs. Zuckerbrod and Taubenfeld ceased to participate
in the Incentive Plan and began to participate in the Directors' Plan. On
June 1, 1995, each of Mr. Zuckerbrod and Mr. Taubenfeld received, under the
Directors' Plan, an option to purchase 1,501 shares at $11 per Share. These
grants are not included in the above table within this note (6).
(B) These options are issued in five equal portions on September 8 of each year
from 1994 through 1998, inclusive.
(C) These options were issued in full on July 1, 1995.
None of the foregoing options has been exercised.
THE ADVISOR AND AFFILIATES
GENERAL
Pursuant to the Advisory Agreement with the Company, the Advisor, among other
things, will seek to obtain, investigate, evaluate and recommend Property
investment opportunities for the Company, serve as Property investment advisor
and consultant in connection with investment policy decisions made by the
Directors and, subject to the direction of the Directors, supervise the
day-to-day operations of the Company. The Advisor is a Virginia corporation all
of the stock of which is owned by Glade M. Knight. The directors and principal
officers of the Advisor and their principal occupations during the last five
years are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- ----- ------------------------------------------------
<S> <C> <C>
Glade M. Knight........ 51 Director, Chairman and Chief Executive Officer
Stanley J. Olander, Jr. 41 President, Chief Operating Officer and Director
Debra A. Jones......... 40 Secretary
</TABLE>
Glade M. Knight. See "Management."
Stanley J. Olander, Jr. See "Management."
Debra A. Jones. Ms. Jones is a Senior Vice President of Cornerstone Realty
Group, Inc. Ms. Jones' principal responsibility is to oversee the management of
the properties managed by Cornerstone Realty Group, Inc., including overseeing
the financial conditions of the properties and arranging for and supervising
construction and rehabilitation at the properties. Ms. Jones has worked for the
firm and its predecessor firm since 1979. Ms. Jones is licensed as a real estate
agent in the Commonwealth of Virginia, and is recognized by the Institute of
Real Estate Management as a Certified Property Manager and by the National
Association of Real Estate Appraisers as a Certified Real Estate Appraiser.
THE ADVISORY AGREEMENT
As described under "Compensation -- Compensation Paid to Advisor and
Affiliates in 1994 and 1995," Note (1), effective July 1, 1994, the Company
cancelled its original Advisory Agreement with Cornerstone Realty Advisors, Inc.
in conjunction with the issuance to Cornerstone Realty Advisors, Inc. of 40,000
Shares. Under the original Advisory Agreement with Cornerstone Realty Advisors,
Inc., the Company paid no Asset Management Fees in 1993 or 1994.
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<PAGE>
The current Advisory Agreement has a one-year term ending June 30, 1997, and
is renewable annually by the Directors. The Advisory Agreement provides that it
may be terminated at any time by a majority of the Independent Directors or the
Advisor upon 60 days' written notice. Under the Advisory Agreement, the Advisor
undertakes to use its best efforts (i) to supervise and arrange for the
day-to-day management of the Company and (ii) to assist the Company in
maintaining a continuing and suitable Property investment program consistent
with the Company's investment policies and objectives. Under the Advisory
Agreement, generally the Advisor is not required to, and will not, advise the
Company on investments in securities, i.e., the temporary investment of offering
proceeds pending investment of such proceeds in Property, as described in
"Investment Objectives and Policies -- General." It is expected that the Company
generally will make its own decisions with respect to such temporary securities
investments.
Pursuant to the Advisory Agreement, the Advisor will be entitled to an annual
Asset Management Fee. The Asset Management Fee is payable quarterly in arrears.
The amount of the Asset Management Fee is a percentage of Total Contributions.
The applicable percentage used to calculate the Asset Management Fee is based on
the ratio of Funds from Operations to Total Contributions (such ratio being
referred to as the "Return Ratio" for the preceding calendar quarter. The per
annum Asset Management Fee is initially equal to the following with respect to
each calendar quarter: 0.1% of Total Contributions if the Return Ratio for the
preceding calendar quarter is 6% or less; 0.15% of Total Contributions if the
Return Ratio for the preceding calendar quarter is more than 6% but not more
than 8%; and 0.25% of Total Contributions if the Return Ratio for the preceding
calendar quarter is above 8%. See "Compensation." The Advisor or an Affiliate
thereof will also receive reimbursement for certain direct expenses and
allocable overhead incurred in connection with its provision of services to the
Company.
The Bylaws require the Independent Directors to monitor the Advisor's
performance of the Advisory Agreement and to determine at least annually that
the amount of compensation the Company pays the Advisor is reasonable, based on
such factors as they deem appropriate, including the amount of the Asset
Management Fee in relation to the size, composition and profitability of the
investments of the Company; the success of the Advisor in selecting
opportunities that meet the Company's investment objectives; the rates charged
by other investment advisors performing comparable services; the amount of
additional revenues realized by the Advisor and its Affiliates for other
services performed for the Company; the quality and extent of service and advice
furnished by the Advisor; the performance of the Company's investments and the
quality of the Company's investments in relation to any investments generated by
the Advisor for its own account.
The foregoing is only a summary of the Advisory Agreement. A copy of the form
of such agreement has been filed as an exhibit to the registration statement of
which this Prospectus is a part; reference is made to the agreement for a
complete statement of its provisions.
The Company is an "externally-advised" or "externally-managed" REIT. As
described herein, the Advisor (Cornerstone Advisors, Inc.) oversees the ordinary
business of the Company pursuant to the Advisory Agreement. In addition,
Cornerstone Management Group, Inc. and Cornerstone Realty Group, Inc. (both
Affiliates of the Advisor) provide property management services and property
acquisition and disposition services to the Company. In exchange for their
services, the Advisor, Cornerstone Management Group, Inc. and Cornerstone Realty
Group, Inc. all receive certain fees and expense reimbursements from the
Company. See "Compensation" herein.
The officers and Directors of the Company have undertaken an evaluation of
whether it would be in the best interests of the Company and the Shareholders to
convert the Company into a "self-administered" or "self-managed" REIT. This
conversion, if undertaken, would involve transferring some or all of the
management and other services now being provided by other companies to employees
of the Company. If such conversion were implemented, the Company would no longer
pay fees (such as the Asset Management Fee, Real Estate Commissions and Property
Management Fees) to other companies for services assumed by employees of the
Company, but would itself bear the costs thereof (including salaries and wages
to such employees). Any such conversion would likely involve the payment of
consideration, either in Shares, cash or other property, from the Company to the
entities whose
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contracts with the Company were being terminated in connection with such
conversion, in recognition of such companies agreeing to the termination of
their agreements. Material developments, if any, pertain to the possible
conversion of the Company to "self-administered" or "self-managed" status will
be reported in supplements to this Prospectus or in appropriate filings under
the Securities Exchange Act of 1934.
CORNERSTONE REALTY GROUP, INC.
Cornerstone Realty Group, Inc. is a Virginia corporation which was organized
on March 5, 1990. Cornerstone Realty Group, Inc. is engaged in the business of
management of real property and the solution of financial and marketing problems
related to investments in real property. Cornerstone Realty Group, Inc.
currently manages four apartment complexes. See "Investment Objectives and
Policies -- Management of Properties."
Cornerstone Realty Group, Inc. and the Company have entered into a Property
Acquisition/Disposition Agreement under which Cornerstone Realty Group, Inc. has
agreed to act as a real estate broker in connection with the Company's purchases
and sales of Properties. Under such agreement, Cornerstone Realty Group, Inc. is
entitled to a real estate commission equal to 2% of the gross purchase prices of
the Company's Properties, payable by the Company in connection with each
purchase; provided that if indebtedness is assumed or incurred in connection
with the acquisition the acquisition fee that would have been payable with
respect to the portion of the purchase price represented by such indebtedness
shall not be payable until such time, if ever, that such indebtedness is repaid
with the proceeds of this Offering or other equity financing. Under such
agreements, Cornerstone Realty Group, Inc. is also entitled to a real estate
commission equal to 2% of the gross sales prices of the Company's Properties,
payable by the Company in connection with each Property sale if, but only if,
any such Property is sold and the sales price exceeds the sum of (1) the
Company's cost basis in the Property (consisting of the original purchase price
plus any and all capitalized costs and expenditures connected with the Property)
plus (2) 10% of such cost basis. If the sales price of a particular Property
does not equal such amount, no real estate commission is payable, but
Cornerstone Realty Group, Inc. is still entitled to payment by the Company of
its "direct costs" incurred in marketing such Property where "direct costs"
refers to a reasonable allocation of all costs, including salaries of personnel,
overhead and utilities, allocable to services in marketing such Property. The
agreement has an initial term of five years ending June 30, 1999, and will renew
automatically for successive terms of five years unless either party to the
agreement elects not to renew by notice sent to the other party within 60 days
before the end of any term.
A copy of the form of Property Acquisition/Disposition Agreement has been
filed as an exhibit to the registration statement of which this Prospectus is a
part, and reference is made to the agreement for a complete description of its
provisions.
Subject to the conditions applicable generally to transactions between the
Company and Affiliates of the Advisor (see "Conflicts of Interest --
Transactions with Affiliates and Related Parties"), Cornerstone Realty Group,
Inc. or an Affiliate may render services to the Company in connection with
Company financings or refinancings, and would be entitled to compensation for
such services. As of the date of this Prospectus, there are no specific
agreements for any such services.
Glade M. Knight is the sole shareholder and Director of Cornerstone Realty
Group, Inc., as well as its President and Chief Executive Officer. Debra A.
Jones serves as a Senior Vice President and Secretary, and Stanley J. Olander,
Jr. serves as a Senior Vice President, of Cornerstone Realty Group, Inc.
CORNERSTONE MANAGEMENT GROUP, INC.
Property management services for the Company's Properties generally will be
performed by Cornerstone Management Group, Inc., an Affiliate of the Advisor.
See "Investment Objectives and Policies -- Management of Properties."
Cornerstone Management Group, Inc. is a Virginia corporation which was organized
on July 29, 1992.
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Cornerstone Management Group, Inc. currently manages 30 apartment complexes
with an aggregate of 6,619 residential units. All of the apartment complexes
managed by Cornerstone Management Group, Inc. are owned by the Company.
Cornerstone Management Group, Inc. is wholly owned by Glade M. Knight. The
sole Director of Cornerstone Management Group, Inc. is Glade M. Knight, who also
serves as its Chairman and Chief Executive Officer. Debra A. Jones is the
President and Chief Operating Officer of Cornerstone Management Group, Inc., and
Stanley J. Olander, Jr. serves as Secretary for this corporation.
PRIOR PERFORMANCE OF PROGRAMS SPONSORED BY AFFILIATES OF THE ADVISOR
This section contains information on certain prior programs, all of which
were organized as partnerships, sponsored by Affiliates of the Advisor to invest
in real estate. Such information should not be considered to be indicative of
the capitalization or operations of the Company. Purchasers of the Shares will
not have any interest in the partnerships referred to in this Section or in any
of the Properties owned by such partnerships.
Affiliates of Cornerstone Realty Group, Inc. or its predecessor have
organized 40 partnerships for the purpose of investing in real estate. Interests
in 38 of these partnerships, in which Mr. Knight served as a general partner and
all but one of which were limited partnerships, were sold to investors in
privately offered transactions. The 38 privately offered partnerships
collectively owned and operated 40 apartment complexes with a total of 5,972
apartment units and one motel with 144 rooms. A total of 733 investors in these
partnerships contributed an aggregate of approximately $47,788,965 to the
capital of the partnerships. The aggregate cost of the 41 properties purchased
by these 38 privately offered partnerships was approximately $129,088,000. All
of the partnerships were formed before and have investment objectives dissimilar
to those of the Company.
Seven of the dissimilar partnerships filed for reorganization under Chapter
11 of the United States Bankruptcy Code. Five of these partnerships subsequently
reached agreements with their lenders to allow foreclosure on their properties
on terms which were more favorable to the partnerships than were available
before the filing of the petition for reorganization. Two of the partnerships
emerged from their Chapter 11 reorganizations and in one of those partnerships,
an unaffiliated entity became the new general partner as part of a partnership
recapitalization. Two other partnerships in which Mr. Knight formerly served as
a general partner filed for reorganization under Chapter 11 of the United States
Bankruptcy Code within two years after Mr. Knight ceased to serve as general
partner. Six of the dissimilar partnerships acquiesced to negotiated
foreclosures on their Properties upon terms which were more favorable to the
partners than would have been available in the absence of negotiation. Each of
the partnerships described in this paragraph owned a single property, and the
adverse business development affecting the partnership therefore resulted in the
partnership ceasing all cash distributions to investors.
The dissimilar partnerships used leverage which varied from substantial to
virtually 100% in the acquisition of their properties. In addition, a
significant objective of the dissimilar partnerships was the realization of tax
losses which could be used to offset some or all of investors' other sources of
income. In the opinion of the Advisor, the bankruptcy filings and foreclosures
described above which were experienced by various dissimilar partnerships were
attributable to a combination of high leverage, a downturn in economic
conditions generally and the real estate industry in particular, changes in tax
laws (which decreased the perceived value of real estate to potential buyers and
lenders) and the unavailability of favorable financing. The Advisor does not
expect that this combination of factors will be applicable to the operations of
the Company. In particular, the Company has to date, and expects in the future,
to acquire its Properties on an all-cash basis. See "Investment Objectives and
Policies Borrowing Policies."
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Two partnerships sponsored by an Affiliate of Cornerstone Realty Group, Inc.
were issuers in public offerings of assignee units of limited partnership
interest. These two publicly offered partnerships are the only partnerships
sponsored by Mr. Knight that had investment objectives similar to those of the
Company. One publicly offered partnership, Southeastern Income Properties
Limited Partnership ("Southeastern I"), raised $25,000,000 from 2,714 investors.
Southeastern I owns four apartment complexes comprising 833 apartment units. The
other publicly offered partnership, Southeastern Income Properties II Limited
Partnership ("Southeastern II"), raised $17,883,780 from 1,710 investors.
Southeastern II owns four apartment complexes comprising 794 apartment units.
The aggregate cost of the eight properties purchased by Southeastern I and
Southeastern II (including capital improvements thereto) was approximately
$41,178,606. The Affiliates of Cornerstone Realty Group, Inc. which originally
served as the general partners for these two partnerships transferred management
control over these partnerships to a third party in February, 1992 by converting
to limited partner status. Thus, while these partnerships continue to exist and
hold their properties, Affiliates of Cornerstone Realty Group, Inc. no longer
serve as their general partners. The transfer of management control was part of
a transaction in which Cornerstone Realty Group, Inc. (which had acted as
manager of the two partnerships' Properties) sold its property management rights
to an unaffiliated property management company.
PRINCIPAL AND MANAGEMENT STOCKHOLDERS
Beneficial ownership of Shares, and options to purchase Shares (exercisable
currently or within 60 days), held by Directors and executive officers of the
Company, as of February 24, 1996 (the Record Date for the 1996 Annual Meeting of
Shareholders), are indicated in the table below. Each person named in the table
and included in the Director/Officer group has sole voting and investment powers
as to such Shares, or shares such powers with his or her spouse and minor
children, if any.
As of February 24, 1996 there are no shareholders known to the Company who
own beneficially more than 5% of the outstanding shares of the Company's common
stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED(2) PERCENT OF
NAME (1) CLASS
- ------------------------------------------------------------------ ------------
<S> <C> <C>
Glenn W. Bunting, Jr.......................... 8,138 *
Leslie A. Grandis............................. 8,749 *
Glade M. Knight(3)............................ 63,316 *
Penelope W. Kyle.............................. 8,735 *
Stanley J. Olander, Jr.(4).................... 27,724 *
Harry S. Taubenfeld........................... 27,063 *
Martin Zuckerbrod............................. 25,123 *
All directors and executive officers as a
group......................................... 168,848 1.23%
======= ======
</TABLE>
* Less than one percent of outstanding Shares
(1) The seven listed individuals are Directors of the Company. Messrs. Knight
and Olander are also executive officers of the Company.
(2) Includes Shares which may be acquired upon the exercise of stock options,
as follows: Messrs. Bunting and Grandis and Ms. Kyle -- 8,138 Shares; Mr.
Knight -- 41,176 Shares; Mr. Olander -- 22,224 Shares; and Messrs.
Taubenfeld and Zuckerbrod -- 14,589 Shares.
(3) Number of Shares beneficially owned by Glade M. Knight includes (i) 5,000
restricted Shares issued in 1995 under the Incentive Plan (as defined
below) and (ii) 616 Shares owned by a corporation wholly owned by him.
(4) Number of Shares beneficially owned by Stanley J. Olander includes 2,500
restricted Shares issued in 1995 under the Incentive Plan (as defined
below).
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of all material United States federal income tax
considerations applicable to the Company and its shareholders is based upon
current law which is subject to change, that may be retroactively applied and
alter significantly the tax considerations described herein. The following dis-
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cussion is not exhaustive of all possible tax considerations and does not give a
detailed discussion of any state, local or foreign tax considerations. Nor does
it discuss all of the aspects of federal income taxation that may be relevant to
a prospective Shareholder in light of his or her particular circumstances or to
certain types of Shareholders (including insurance companies, tax-exempt
entities, financial institutions or broker-dealers, foreign corporations, and
persons who are not citizens or residents of the United States) who are subject
to special treatment under the federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO SUCH PURCHASER OF THE
PURCHASE, OWNERSHIP, AND SALE OF SHARES OF THE COMPANY, INCLUDING THE FEDERAL,
STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP
AND SALE, AND WITH RESPECT TO POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
FEDERAL INCOME TAXATION OF THE COMPANY
The Company has elected to be treated for federal income tax purposes as a
REIT and intends to conduct its operations in a manner that will permit it to
continue so to qualify. While the Board of Directors and the Advisor intend to
cause the Company to operate in a manner that will enable it to comply with the
REIT requirements, there can be no certainty that such intention will be
realized. Moreover, relevant law may change so as to make compliance with one or
more of the REIT requirements difficult or impracticable. Failure to meet any of
the REIT requirements with respect to a particular taxable year could result in
termination of the Company's election to be a REIT, effective for the year of
such failure and all succeeding years.
The Company has not requested, and does not intend to request, a ruling from
the Service that it will qualify as a REIT. However, the Company has received an
opinion of its counsel, McGuire, Woods, Battle & Boothe, L.L.P., that, based
upon various assumptions and certain representations made by the Company as to
factual matters, the Company currently qualifies as a REIT, and will continue so
to qualify if it conducts its operations in the manner assumed therein. However,
investors should be aware that opinions of counsel are not binding upon the
Service. Furthermore, both the validity of the opinion and the continued
qualification of the Company for treatment as a REIT will depend on its
continuing to meet various requirements concerning, among other things, the
ownership of its Shares, the nature of its assets, the sources of its income and
the amount of its distributions to Shareholders. McGuire, Woods, Battle &
Boothe, L.L.P. will not review the actual annual operating results of the
Company. Accordingly, no assurance can be given that the actual results of the
Company's operation for any taxable year will satisfy the REIT requirements.
As long as the Company qualifies as a REIT for federal income tax purposes,
it generally will not be subject to federal income tax on any income or gain
that is distributed currently to Shareholders. However, any undistributed income
or gain will be taxed to the Company at regular corporate rates. In addition,
the Company may be subject to (i) a 100% tax on certain income from any
"prohibited transactions" (i.e., sales or other dispositions of Property (other
than certain real estate assets held not less than four years) that is stock in
trade, inventory, or held primarily for sale to customers in the ordinary course
of business), (ii) a 100% tax on the greater of the amount, if any, by which it
fails the 75% income test or the 95% income test described below, multiplied by
a fraction intended to reflect the REIT's profitability, (iii) a tax at the
highest corporate rate on any net income relating to "dealer" activities with
respect to foreclosure Property, (iv) a 4% excise tax on a portion of any
undistributed income, and (v) a minimum tax on any items of tax preference.
REQUIREMENTS FOR QUALIFICATION AS A REIT
In order to qualify as a REIT, the Company must satisfy a variety of complex
tests relating to its organization, Share ownership, assets, income and
distributions. Those tests are summarized below.
Organizational Requirements. A REIT is defined in the Code as: (1) a
corporation, trust or association; (2) which is managed by one or more
directors or trustees; (3) the beneficial ownership of which is evidenced by
transferable shares or by transferable certificates of beneficial interest;
(4) which would
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be taxable as a domestic corporation, but for Sections 856 through 860 of the
Code; (5) which is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (6) the beneficial ownership of which
is held by 100 or more persons; and (7) not more than 50% in value of the
outstanding stock of which is owned during the last half of each taxable year,
directly or indirectly, by or for five or fewer individuals (as defined in the
Code to include certain entities). In addition, the organization must meet
certain income and asset tests described below. Conditions (1) to (5),
inclusive, must be met during the entire taxable year and condition (6) must be
met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. However, conditions
(6) and (7) will not apply until after the first taxable year for which an
election is made to be taxed as a REIT.
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company's taxable year will be the calendar year.
As a Virginia corporation, the Company satisfies the first and fourth
requirements. The Company also will be managed by a board of directors. The
Company has transferable shares and does not intend to operate as a financial
institution or insurance company. Additionally, the Company has more than 100
shareholders. To assure continued compliance with the 50% diversity of ownership
requirement, the Company's Bylaws prohibit any individual investor from
acquiring, directly or indirectly, more than 9.8% (by value) of the outstanding
Shares and provide restrictions regarding the transfer of Shares. Treasury
Regulations require the Company to maintain records of the actual ownership of
its Shares. In accordance with those regulations, the Company must demand from
record Shareholders written statements which disclose information concerning the
actual ownership of the Shares. Any record Shareholder who does not provide the
Company with required information concerning actual ownership of the Shares is
required to include certain specified information relating thereto in his income
tax return.
Income Tests. To maintain qualification as a REIT for any taxable year, three
gross income requirements must be met annually: the "75% income test," the "95%
income test," and the "30% income test." The 75% income test requires that the
Company derive, directly or indirectly, at least 75% of its gross income
(excluding gross income from prohibited transactions) from certain real estate
related sources, which include, but are not limited to: (i) certain types of
"rents from real property," (ii) "interest" on obligations secured by mortgages
on real property or interests in real property, (iii) income or gain from real
property acquired through foreclosure or similar proceedings, (iv) gains from
the sale or other disposition of certain real property or interests in real
property that are not "dealer property" (i.e., property that is stock in trade,
inventory, or held primarily for sale to customers in the ordinary course of
business), (v) commitment fees with respect to mortgage loans, (vi) income from
stock or debt instruments that were acquired as a temporary investment of new
capital, if such income is received or accrued during the first year after the
Company receives the new capital ("qualified temporary investment income"),
(vii) dividends or other dividends on shares of other qualified REITs, (viii)
abatements and refunds of taxes on real property, and (ix) gains from the sale
or disposition of real estate assets which are not prohibited transactions
solely by reason of Section 857(b)(6) of the Code. The 95% income test requires
that at least an additional 20% of the Company's gross income for the taxable
year consist either of income that qualifies under the 75% income test or
certain types of passive income, which include, but are not limited to: (i)
dividends from companies other than REITs, (ii) interest on obligations that are
not secured by interests in real property, and (iii) gains from the sale or
other disposition of stock, securities, or real property, if such assets are not
dealer property. The 30% income test, unlike the other income tests, prescribes
a ceiling for certain types of income. The Company may not derive more than 30%
of its gross income from the sale or other disposition of (i) stock or
securities held for less than one year, (ii) property in a transaction which is
a prohibited transaction, and (iii) real property (including interests in real
property and interests in real property mortgages) held for less than four years
other than property compulsorily or involuntarily converted within the meaning
of Section 1033 of the Code or foreclosure property.
In the case of a REIT that is a partner in a partnership, the REIT will be
deemed to own its proportionate share of the assets of the partnership and will
be deemed to be entitled to the income of
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the partnership attributable to such share. In addition, the assets and gross
income of the partnership attributed to the REIT retain the same character as in
the hands of the partnership.
The Company expects that substantially all its gross income from its
Properties will be considered "rents from real property." Rents received by the
Company will qualify as "rents from real property" for purposes of satisfying
the income tests described above only if several conditions are met. First, the
amount of rent must not be based in whole or in part on the income or profits of
any person although rents generally will not be excluded merely because they are
based on a fixed percentage or percentages of receipts or sales. None of the
rents from Properties that will be held by the Company are based on income or
profits of a kind that would disqualify such rents from being treated as rents
from real property. Second, rents received from a tenant will not qualify as
rents from real property if the REIT, or an owner of 10% or more of the REIT,
also directly or constructively owns 10% or more of such tenant (a "Related
Party Tenant"). The Company does not anticipate receiving any rents from Related
Party Tenants. Third, if rent attributable to personal property that is leased
in connection with a lease of real property is greater than 15% of the total
rent received under the lease, then the portion of rent attributable to such
personal property will not qualify as rents from real property. The Company
anticipates that any rent attributable to personal property leased in connection
with a lease of real Property will not be greater than 15% of the total rent
received under the lease. Finally, for rents to qualify as rents from real
property, the REIT generally must not operate or manage the property or furnish
or render services to the tenants of such property, other than through an
independent contractor from whom the REIT derives no income. However, the
Company may perform directly certain services customary in the geographic
markets in which it operates the property and customary to the type and class of
such property, provided that such services are not services which are considered
rendered to an occupant of the property. In this regard, the Company presently
intends to have Cornerstone Management Group, Inc., a corporation that will
qualify as an "independent contractor," manage and operate the Company's real
Property assets.
The term "interest" generally does not include any amount determined, in
whole or in part, on the income or profits of any person, although an amount
generally will not be excluded from the term interest solely by reason of being
based on a fixed percentage or percentages of receipts or sales.
Any gross income derived from a prohibited transaction is taken into account
in applying the 30% income test necessary to qualify as a REIT (and the net
income from that transaction is subject to a 100% tax). The term "prohibited
transaction" generally includes a sale or other disposition of property (other
than foreclosure property) that is held primarily for sale to customers in the
ordinary course of a trade or business. The Company believes that none of its
assets are held for sale to customers and that sale of any Property will not be
in the ordinary course of business for the Company. Whether property is held
"primarily for sale to customers in the ordinary course of a trade or business"
depends, however, on the facts and circumstances in effect from time to time,
including those related to a particular property. Nevertheless, the Company will
attempt to comply with the terms of safe-harbor provisions in the Code
prescribing when asset sales will not be characterized as prohibited
transactions. Complete assurance cannot be given, however, that the Company can
comply with the safe-harbor provisions of the Code or avoid owning Property that
may be characterized as property held "primarily for sale to customers in the
ordinary course of business."
If the Company fails to satisfy one or both of the 75% or 95% income tests
for any taxable year, it may nevertheless qualify as a REIT for such year if it
is eligible for relief under certain provisions of the Code. These relief
provisions generally will be available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule is not due to fraud with intent to evade
tax. It is not now possible to determine the circumstances under which the
Company may be entitled to the benefit of these relief provisions. If these
provisions apply, a 100% tax is imposed on the net income attributable to the
greater of the amount by which the Company failed the 75% income test or the 95%
income test. No analogous relief is available should the Company fail to satisfy
the 30% income test.
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Asset Tests. At the close of each quarter of its taxable year, the Company
also must satisfy several tests relating to the nature and diversification of
its assets. First, at least 75% of the value of the Company's total assets must
be represented by real estate assets, cash, cash items (including receivables
arising in the ordinary course of the Company's operations) and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those includible in the 75% asset class.
Third, of the investments included in the 25% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the Company's
total assets. Finally, of the investments included in the 25% asset class, the
Company may not own more than 10% of any one issuer's outstanding voting
securities. The Properties in which the Company has invested and in which the
Company proposes to invest generally will qualify largely or entirely as real
estate assets under the 75% requirement described above.
Although not anticipated, the Company may organize and hold all of the stock
of one or more subsidiary corporations intended to qualify for treatment as a
"qualified REIT subsidiary." The Company's ownership of the stock of one or more
qualified REIT subsidiaries will not cause the Company to fail to satisfy the
asset tests described above. The Code provides that a corporation which is a
qualified REIT subsidiary will not be treated as a separate corporation, and,
for purposes of the asset and income tests, all assets, liabilities, and items
of income, deduction, and credit of a qualified REIT subsidiary will be treated
as assets, liabilities, and items of income, deduction and credit (as the case
may be) of the Company. Thus, in applying the income and asset tests described
above, the separate corporate existence of the Company's qualified REIT
subsidiary would be ignored in a manner analogous to an operating division of
the Company.
Annual Distribution Requirement. To qualify as a REIT, the Company is
required to make distributions (other than capital gain dividends) to its
Shareholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (ii) 95% of the after-tax net
income, if any, from foreclosure property, minus (B) the sum of certain items of
non-cash income. Such distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before the Company
timely files its tax return for such year and if paid on or before the first
regular distribution after such declaration. "REIT taxable income" generally is
computed in the same manner as taxable income of ordinary corporations, with
several adjustments, which include, but are not limited to, the deduction
allowed for dividends paid, but not for dividends received. To the extent that
the Company does not distribute all of its net capital gain or distributes at
least 95%, but less than 100%, of its REIT taxable income, as adjusted, it will
be subject to tax thereon at regular corporate tax rates. Finally, as discussed
above, the Company may be subject to an excise tax if it fails to meet certain
other distribution requirements.
The Company, from time to time, may not have sufficient cash or other liquid
assets to meet the 95% distribution requirement or to distribute such greater
amount as may be necessary to avoid income and excise taxation, due to timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at taxable income of the Company. Although not anticipated,
if such timing differences occur, the Company may find it necessary to arrange
for borrowings or, if possible, pay taxable stock dividends to meet the
distribution requirement.
The distribution requirement may be determined not to have been met by the
Company in a given year if the Service successfully challenges the deductibility
of a Company expenditure in an audit of that year (for example; if any expense
reimbursements or fees paid to the Advisor or an Affiliate are challenged or
recharacterized). The Service also could challenge the deductibility of the
Asset Management Fee and other fees paid by the Company by arguing, among other
things, (i) that the amount of the fees are unreasonable, or (ii) that the fees
were paid in advance of the performance of the services by the payees thereof
and that such fees do not meet the "economic performance" test of Section 461(h)
of the Code under which no fee may be deducted prior to the time the services
for such fee are performed. If a challenge by the Service were successful, the
Company may be able to rectify a resulting failure to meet the distribution
requirement by paying "deficiency dividends" to Shareholders in a later year,
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<PAGE>
which may be included in the Company's deduction for distributions paid for the
earlier year. Although the Company may be able, therefore, to avoid being taxed
on amounts distributed as deficiency dividends, it will be required to pay
interest to the Service based upon the amount of any deduction taken for
deficiency dividends.
Failure to Qualify as a REIT. If the Company fails to qualify as a REIT for
any taxable year, and certain relief provisions do not apply, it will be subject
to federal income tax (including any applicable minimum tax) at regular
corporate rates and will not receive deductions for distributions paid to
Shareholders. As a result, the amount of after-tax earnings available for
distribution to Shareholders would decrease substantially. All distributions to
Shareholders would be taxable as ordinary income to the extent of current and
accumulated earnings and profits and distributions received by corporate
Shareholders may be eligible for a dividends-received deduction. In addition,
the Company would not be eligible to elect REIT status for the four subsequent
taxable years, unless its failure to qualify was due to reasonable cause and not
to willful neglect, and certain other requirements were satisfied. In order to
renew its REIT qualification at the end of such a four-year period, the Company
would be required to distribute all of its current and accumulated earnings and
profits before the end of the period. Any such distributions would be taxable as
ordinary income to Shareholders. In addition, the Company would be subjected to
taxation on any unrealized gain inherent in its assets at such time. If the
Company were to lose REIT status, however, it expects that it would liquidate
over the period and in the manner that the Board of Directors deems to be in the
best interest of the Shareholders, and such liquidation likely would be
completed before the Company would be eligible to re-elect REIT status.
FEDERAL INCOME TAXATION OF THE SHAREHOLDERS
While the Company qualifies for taxation as a REIT, distributions made to the
Company's Shareholders from current or accumulated earnings and profits (and not
designated as capital gain dividends) will be includible by the Shareholders as
ordinary income for federal income tax purposes. None of these distributions
will be eligible for the dividends-received deduction for corporate
Shareholders. Distributions that are designated as capital gain dividends will
be taxed as long-term capital gains (to the extent they do not exceed the
Company's actual net capital gain for the taxable year) without regard to the
period for which the Shareholder has held his or her Shares in the Company.
Corporate Shareholders, however, may be required to treat up to 20% of certain
capital gain dividends as ordinary income.
Distributions in excess of current and accumulated earnings and profits will
not be taxable to a Shareholder to the extent that they do not exceed the
adjusted basis of the Shareholder's Shares. Shareholders will be required to
reduce the tax basis of their Shares by the amount of such distributions until
such basis has been reduced to zero, after which such distributions will be
taxable as capital gain (ordinary income in the case of a Shareholder who holds
its Shares as a dealer). The tax basis as so reduced will be used in computing
the capital gain or loss, if any, realized upon sale of the Shares. Any loss
upon a sale or exchange of Shares by a Shareholder who held such Shares for six
months or less (after applying certain holding period rules) generally will be
treated as a long-term capital loss to the extent that such Shareholder
previously received capital gain distributions with respect to such Shares. All
or a portion of any loss realized upon a taxable disposition of Shares of the
Company may be disallowed if other Shares of the Company are purchased (under a
dividend reinvestment plan or otherwise) within 30 days before or after the
disposition.
Shareholders may not include in their individual federal income tax returns
any net operating losses or capital losses of the Company. In addition, any
distribution declared by the Company in October, November, or December of any
year payable to a Shareholder of record on a specified date in any such month
shall be treated as both paid by the Company and received by the Shareholder on
December 31 of such year, provided that the distribution is actually paid by the
Company no later than January 31 of the following year. The Company may be
required to withhold a portion of capital gain distributions to any Shareholders
who fail to certify their non-foreign status to the Company.
Those Shareholders who avail themselves of the Additional Share Option
(described under "Plan of Distribution") or a dividend reinvestment plan, if
implemented, will be deemed for federal income tax purposes to have received the
gross amount distributed on their behalf notwithstanding its reinvest-
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<PAGE>
ment in Shares. Such Shareholders will thus be taxed as if they had received
such distributions despite the fact that their distributions have been
reinvested and, as a result, they will not receive any cash with which to pay
the resulting tax liability associated with the distribution. Shares received
pursuant to the Additional Share Option will have a holding period which begins
on the day after purchase of the Shares. The tax basis of such Shares will
generally be the gross amount of the deemed distribution.
INVESTMENT BY TAX-EXEMPT ENTITIES
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their unrelated business taxable income ("UBTI"). While many investments in
real estate generate UBTI, the Service has ruled that distributions by a REIT to
an exempt employee pension trust do not constitute UBTI. Based on such ruling
and assuming the Company conducts its activities as a REIT as described in this
Prospectus, amounts distributed by the Company to Exempt Organizations generally
should not constitute UBTI. However, if an Exempt Organization finances the
acquisition of its Shares, a portion of its income from the Company may
constitute UBTI pursuant to the "debt-financed Property" rules under Section 514
of the Code.
For taxable years beginning after December 31, 1993 qualified trusts that
hold more than 10% (by value) of the shares of a REIT may be required to treat a
percentage of REIT distributions as UBTI. The requirement applies only if (i)
the qualification of the REIT depends upon the application of a "look-through"
exception to the restriction on the holding of REIT shares by five or fewer
individuals, including qualified trusts, (ii) the REIT is "predominantly held"
by qualified trusts, and (iii) the REIT assets would have generated significant
UBTI if the qualified trust held such assets directly. A REIT would be
predominantly held if either (i) a single qualified trust held more than 25% by
value of the interests in the REIT or (ii) one or more qualified trusts, each
owning more than 10% by value, held in the aggregate more than 50% of the
interests in the REIT. The percentage of any distribution paid (or treated as
paid) to the qualified trust that will be treated as UBTI is determined by the
amount of UBTI earned by the REIT (treating the REIT as if it were a qualified
trust, and therefore subject to tax on UBTI) as a percentage of the total gross
income of the REIT. A de minimis exception applies where the percentage is less
than 5%. For these purposes, a qualified trust is any trust defined under
Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code.
The Company does not anticipate that it will be predominantly held by qualified
trusts.
FOREIGN INVESTORS
Foreign Shareholders. The rules governing United States federal income
taxation of nonresident alien individuals, foreign corporations, foreign
partnerships and other foreign Shareholders (collectively, "Non-U.S.
Shareholders") are complex. This discussion does not attempt to provide more
than a summary of such rules. Prospective Non-U.S. Shareholders should consult
with their own tax advisors to determine the impact of federal, state, and local
income tax laws with regard to an investment in the Shares, including any
reporting requirements, as well as the tax treatment of such an investment under
the laws in their country of residence.
Distributions that are not attributable to gain from sales or exchanges by
the Company of United States real Property interests and not designated by the
Company as capital gain dividends will be treated as dividend distributions and
as ordinary income to the extent of current or accumulated earnings and profits
of the Company. Such distributions ordinarily will be subject to a withholding
tax equal to 30% of the gross amount of the distribution unless an applicable
tax treaty reduces or eliminates that tax. However, if income from the
investment in the Shares is treated as effectively connected with the Non-U.S.
Shareholder's conduct of a United States trade or business, the Non-U.S.
Shareholder generally will be subject to a tax at graduated rates, in the same
manner as U.S. Shareholders are taxed with respect to such distributions (and
may also be subject to the 30% branch profits tax in the case of a Shareholder
that is a foreign corporation). The Company expects to withhold United States
income tax at the rate of 30% on the gross amount of any such distributions paid
to a Non-U.S. Shareholder unless
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(i) a lower treaty rate applies and an appropriate Form 1001 has been filed with
the Company or (ii) the Non-U.S. Shareholder files an Internal Revenue Service
Form 4224 with the Company claiming that the distribution is effectively
connected income. Distributions in excess of current and accumulated earnings
and profits of the Company will not be taxable to a Shareholder to the extent
that they do not exceed the adjusted basis of the Shareholder's Shares but
rather will reduce the adjusted basis of such Shares. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Shareholder's Shares, the
excess will give rise to tax liability if the Non-U.S. Shareholder otherwise
would be subject to tax on any gain from the sale or disposition of his or her
Shares in the Company, as described below. If it cannot be determined at the
time a distribution is made whether or not such distribution will be in excess
of current and accumulated earnings and profits, the distributions will be
subject to withholding at the same rate as dividends. However, amounts thus
withheld are refundable if it is subsequently determined that such distribution
was, in fact, in excess of current and accumulated earnings and profits of the
Company.
For any year in which the Company qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges by the Company of United States
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, these distributions are taxed to a Non-U.S.
Shareholder as if such gain were effectively connected with a United States
business. Thus, Non-U.S. Shareholders would be taxed at the normal capital gain
rates applicable to U.S. Shareholders (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals). Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate Shareholder not entitled
to treaty exemption. The Company is required by applicable Treasury Regulations
to withhold 34% of any distribution that could be designated by the Company as a
capital gain dividend. This amount is creditable against the Non-U.S.
Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of Shares generally
will not be taxed under FIRPTA if the Company is a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the stock was held directly or
indirectly by foreign persons. It currently is anticipated that the Company will
be a "domestically controlled REIT," and therefore the sale of Shares will not
be subject to taxation under FIRPTA. However, gain not subject to FIRPTA will be
taxable to a Non-U.S. Shareholder if (i) investment in the Shares is effectively
connected with the Non-U.S. Shareholder's United States trade or business, in
which case the Non-U.S. Shareholder will be subject to the same treatment as
U.S. Shareholders with respect to such gain, or (ii) the Non-U.S. Shareholder is
a nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States, in
which case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. If the gain on the sale of Shares were to be subject
to taxation under FIRPTA, the Non-U.S. Shareholder will be subject to the same
treatment as U.S. Shareholders with respect to such gain (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals), except that the purchaser of such Shares may be
required to withhold a portion of the proceeds against such tax liability. In
addition, distributions that are treated as gain from the disposition of Shares
and are subject to tax under FIRPTA may also be subject to a 30% branch profits
tax when made to a foreign corporate Shareholder that is not entitled to treaty
exemptions.
THE FOREGOING DISCUSSION DOES NOT PURPORT TO DESCRIBE ANY FOREIGN TAX
CONSEQUENCES OF AN INVESTMENT IN THE COMPANY. NON-U.S. SHAREHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO ALL TAX ASPECTS OF AN INVESTMENT
IN THE COMPANY.
Backup Withholding. The Company will report to its Shareholders and the
Service the amount of distributions paid during each calendar year and the
amount of tax withheld, if any. Under the backup withholding rules, a
Shareholder may be subject to backup withholding at the rate of 31% with respect
to distributions paid unless such holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(ii) has provided a correct taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise complies with
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applicable requirements of the backup withholding rules. A Shareholder that does
not provide the Company with a correct taxpayer identification number may also
be subject to penalties imposed by the Service. Any amount paid as backup
withholding will be creditable against the Shareholder's income tax liability.
STATE AND LOCAL TAXES
Even if the Company qualifies on a continuing basis as a REIT for federal
income tax purposes, the Company and its Shareholders may be subject to certain
state and local taxes. This Prospectus does not purport to describe any state or
local tax consequences of an investment in the Company. State and local tax
treatment of the Company and the Shareholders may differ substantially from the
federal income tax treatment described in this summary. CONSEQUENTLY, EACH
PROSPECTIVE SHAREHOLDER SHOULD CONSULT WITH HIS OR ITS OWN TAX ADVISOR WITH
REGARD TO THE STATE AND LOCAL TAX CONSEQUENCES OF AN INVESTMENT IN THE COMPANY.
INVESTMENT BY TAX-EXEMPT ENTITIES
UNRELATED BUSINESS TAXABLE INCOME
As discussed above, distributions from the Company will not constitute UBTI
to most tax-exempt investors, except to the extent such investors finance the
purchase of their Shares. See "Federal Income Tax Considerations -- Federal
Income Taxation of the Shareholders -- Investment By Tax-Exempt Entities."
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary responsibilities and other requirements regarding the
assets of an employee benefit plan ("Plan Assets"). For example, ERISA requires
that all Plan Assets shall be held in trust, that the plan shall avoid certain
prohibited transactions involving Plan Assets, and that investment management
responsibilities with respect to Plan Assets may be delegated only in certain
permitted manners. Although the matter is not entirely free from doubt, under
the relevant Department of Labor Regulations, the assets of the Company are not
expected to constitute Plan Assets because, subject to certain factual
determinations, the Shares should be treated as "publicly offered securities,"
i.e., securities that are widely held, freely transferable, and registered under
certain federal securities laws. In addition, the Company's assets would not
constitute Plan Assets to the extent that at least 75% of the Shares are held,
at all times, by investors other than "benefit plan investors." The term
"benefit plan investors" generally includes qualified employee pension or profit
sharing trusts and Keogh Plan trusts ("Employee Trusts"), individual retirement
accounts ("IRAs"), and certain other entities.
The assets of the Company are expected to be exempt from the Plan Asset rules
for the reasons set forth above. However, this determination is based, in part,
on facts that cannot be ascertained at the present time. Consequently, there can
be no assurance that the Company's assets will not be treated as Plan Assets at
any given time. Nevertheless, the Advisor will use its best efforts to qualify
the Company's assets for exemption from the Plan Asset rules. In order to help
ensure that the Company will not be deemed to hold Plan Assets, in the event
that either (i) the assets of the Company would constitute Plan Assets for
purposes of ERISA, or (ii) the transactions contemplated hereunder would
constitute prohibited transactions under ERISA or the Code and an exemption for
such transactions could not be obtained from the Department of Labor, the Board
of Directors and the Advisor have the right (upon notice to all Shareholders but
without the need to obtain the consent of any Shareholder) (i) to restructure
the Company's activities to the extent necessary to obtain a prohibited
transaction exemption from the Department of Labor or to comply with any
exemption in legislation or the Plan Asset Regulations adopted by the Department
of Labor from time to time, including establishing a fixed percentage of Shares
permitted to be held by employee benefit plans or other tax-exempt entities by
discontinuing sales to such plans or entities as necessary, or (ii) to terminate
the offering and compel a dissolution and termination of the Company.
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In considering the purchase of Shares and the number of Shares to be
purchased, a fiduciary with respect to an Employee Trust or other entity subject
to ERISA should consider, in addition to the foregoing, whether the investment
will satisfy: (i) the prudence requirement of Section 404(a)(1)(B) of ERISA,
considering the nature of an investment in, and the compensation structure of,
the Company, the fact that the Company has no history of operations and the fact
that the investments to be made by the Company have not been selected as of the
date of this Prospectus; (ii) the diversification requirement of Section
404(a)(1)(C) of ERISA; and (iii) the requirements that the fiduciary provide
benefits for the Plan participants and beneficiaries and value Plan Assets
annually.
In considering the purchase of Shares, a fiduciary with respect to an
Employee Trust should consider the trust requirement of ERISA. In addition, a
custodian or trustee of an IRA should consider the Code's prohibition against
the commingling of IRA assets with other Property. Section 403(a) of ERISA
generally provides that the assets of employee benefit plans must be held in
trust. Section 408(a)(5) of the Code provides that an IRA must prohibit the
commingling of IRA assets with other Property. The Department of the Treasury
and the Service have not issued any rulings or regulations that provide guidance
on the identification of the assets of an IRA for purposes of Section 408(a)(5)
of the Code.
If an IRA currently has insufficient funds to satisfy the minimum 200 Share
purchase requirement for an investment in the Company, it may be possible to
satisfy those requirements through contributions to the IRA by its owner
(concurrent with the investment in the Company) with respect to his prior and/or
current taxable year. In this regard, the owner of an IRA which is a prospective
investor should consult with his or her tax advisor.
Shares may not be purchased with Plan Assets by an Employee Trust or IRA with
respect to which the Board of Directors, the Advisor, or any of their Affiliates
(i) regularly gives investment advice, (ii) provides management services on a
discretionary basis, (iii) has an agreement, either written or unwritten, under
which information, recommendations, and advice used as a primary basis for
investment decisions is provided, (iv) has an agreement or understanding, either
written or unwritten, under which individualized investment advice is given, or
(v) is otherwise a fiduciary within the meaning of Section 3(21) of ERISA.
DILUTION
The price per Share to the public of Shares offered hereby exceeds the net
tangible book value per Share. Therefore, the holders of Shares previously
outstanding will realize an immediate increase in the net tangible book value of
their Shares, while purchasers of Shares sold in this offering will realize an
immediate dilution in the net tangible book value of their Shares. Net tangible
book value per Share is determined by subtracting total liabilities from total
tangible assets and dividing the remainder by the number of Shares outstanding.
The following table illustrates the dilution to purchasers of Shares sold in
this offering, based on the public offering price of $11 per Share.
<TABLE>
<CAPTION>
<S> <C>
Price per Share to the public (1) ................... $11.00
Net tangible book value per Share prior to this
Offering (2) ........................................ 9.60
Increase in net tangible book value per Share
attributable to the Offering (3) .................... .04
---------
Pro forma net tangible book value per Share after
the Offering ........................................ 9.64
---------
Dilution per Share to new public investors (4) ...... $ 1.36
=========
</TABLE>
________________________
(1) Before deduction of Selling Commissions, Marketing Expense Allowance and
estimated expenses of the offering.
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(2) Based on the financial statements for the Company as of March 31, 1996
contained elsewhere in this Prospectus.
(3) Calculated using net proceeds after offering costs and before consideration
of acquisition fees and expenses and working capital reserves associated
with Property acquisitions. Assumes sale of $50 million in Shares.
(4) Dilution is determined by subtracting pro forma net tangible book value per
Share after the offering from the public offering price paid by a new
public investor for a Share.
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SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with all
of the financial statements contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
-------------------------------------------- MARCH 31, 1996 MARCH 31, 1995
1995 1994 1993(B)
- --------------------------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Results
Rental Income................... $ 16,300,821 $ 8,177,576 $ 1,784,868 $ 6,552,688 $ 2,745,012
Net Income...................... 5,229,715 2,386,303 496,646 2,171,887 902,832
Distributions Declared and Paid. 6,316,185 2,977,136 359,427 2,728,443 1,086,210
Per Share
Net Income...................... $ 0.64 $ 0.60 $ 0.30 $ .16 $ .16
Distributions................... $ 0.96 $ 0.89 $ 0.27 $ .25 $ .23
Distributions Representing
Return of Capital.............. 17 % 21 % -- Not Available Not Available
Weighted Average Shares
Outstanding.................... 8,176,803 4,000,558 1,662,944 13,944,419 5,681,330
Balance Sheet Data
Investment in Rental Property... $129,696,447 $ 54,107,358 $ 25,549,790 $159,871,107 $55,161,173
Total Assets.................... $133,181,032 $ 57,257,950 $ 29,199,079 $164,077,826 $61,225,538
Shareholders' Equity............ $122,154,420 $ 51,436,863 $ 28,090,912 $149,451,275 $59,950,083
Shares Outstanding.............. 12,754,331 5,458,648 2,995,210 15,569,183 6,339,635
Other Data
Cash Flows from:
Operating Activities............ $ 9,618,956 $ 3,718,086 $ 1,670,406 $ 2,774,883 $ 1,842,593
Investing Activities............ (75,589,089) (28,557,568) (25,549,790) (30,174,660) (1,053,815)
Financing Activities............ 68,754,842 25,519,648 27,487,556 29,020,801 2,610,388
Number of Properties Owned at
Period-End...................... 19 9 5 23 9
Funds from Operations
Calculation
Net Income...................... $ 5,229,715 $ 2,386,303 $ 496,646 $ 2,171,887 $ 902,832
Amortization................... 30,564 30,628 17,832 7,641 7,641
Depreciation................... 2,788,818 1,210,818 255,338 1,238,249 459,175
-------------- -------------- -------------- ---------------- ---------------
Funds from Operations (a)....... 8,049,097 3,627,749 769,816 3,417,777 1,369,648
============== ============== ============== ================ ===============
</TABLE>
______________________________
(a) "Funds from operations" is defined as net income adjusted for
depreciation and amortization. The Company considers funds from operations in
evaluating Property acquisitions and its operating performance, and believes
that funds from operations should be considered along with, but not as an
alternative to, net income and cash flows as a measure of the Company's
operating performance and liquidity. Funds from operations, which may not be
comparable to other similarly titled measures of other REITs, does not represent
cash generated from operating activities in accordance with generally accepted
accounting principles and is not necessarily indicative of cash available to
fund cash needs.
(b) The Company did not purchase its first Property until June 1993 and did
not have any operations in 1992.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the Company's
financial condition and results of operations, reflecting the financial
condition at, and the results of operations for, the calendar year ended
December 31, 1995 and the three months ended March 31, 1996.
The Company invests primarily in existing residential apartment communities
located in the mid-Atlantic and southeastern United States. The Company is
operated and has elected to be treated as a real investment trust ("REIT") under
the Code for federal income tax purposes, and intends to qualify as a REIT on a
continuing basis. The Company began operations on June 1, 1993 and completed its
first full calendar year of operations in 1994. Changes in the Company's
liquidity and capital resources reflect periodic closings of sales of Shares to
investors and periodic acquisitions of Properties by the Company. Similarly,
changes in results from operations reflect increases in the rental income of the
Company's Properties and the addition of Properties to its asset base.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995
There was a significant change in the Company's liquidity during the year
ended December 31, 1995 as the Company continued to grow. During 1995, the
Company sold 7,285,683 Shares to its investors bringing the total number of
Shares outstanding to 12,754,331. The total gross proceeds from the Shares sold
in 1995 were $80,142,516 which netted $71,771,027 to the Company after the
payment of selling commissions and other Offering expenses. This raised the
total gross capitalization of the Company from $58,264,830 at December 31, 1994
to $138,407,346 at December 31, 1995. Shares were sold directly through David
Lerner Associates, Inc. on a "best efforts" basis and through the Additional
Share Option whereby Shareholders elect to purchase additional Shares with their
dividends.
Using proceeds from the sale of Shares and supplemented by short-term
borrowings when necessary, the Company acquired 2,303 apartment units in 10
residential rental communities during 1995, as follows:
<TABLE>
<CAPTION>
INITIAL
ACQUISITION NUMBER
DESCRIPTION LOCATION COST OF UNITS ACQUIRED
- ---------------- ------------------ -------------- ---------- -----------------
<S> <C> <C> <C> <C>
Wind Lake....... Greensboro, NC $ 8,760,000 299 April 1, 1995
Magnolia Run ... Greenville, SC 5,500,000 212 June 1, 1995
Breckinridge ... Greenville, SC 5,600,000 236 June 21, 1995
Bay Watch Pointe Virginia Beach, VA 3,372,525 160 July 18, 1995
Hanover Landing. Charlotte, NC 5,725,000 192 August 22, 1995
Mill Creek...... Winston-Salem, NC 8,550,000 220 September 1, 1995
Glen Eagles..... Winston-Salem, NC 7,300,000 166 October 1, 1995
Sailboat Bay ... Charlotte, NC 9,100,000 358 November 1, 1995
Tradewinds...... Hampton, VA 10,200,000 284 November 1, 1995
Osprey Landing . Wilmington, NC 4,375,000 176 November 1, 1995
-------------- ----------
$68,482,525 2,303
============== ==========
</TABLE>
These acquisitions brought the total number of apartment units owned at
year-end to 4,388. The Company continues to renovate the Properties it has
acquired since its inception in 1993. In connection with these renovations, the
Company capitalized improvements of $7,106,564 in 1995, $6,063,568 in 1994 and
$2,290,646 in 1993. Approximately $4 million of additional capital improvements
are budgeted for 1996 on the existing Property portfolio which will be funded
through the sale of Shares and dividend reinvestment.
The Company intends to hold all of its Properties on a totally unleveraged
basis. However, the Company will continue to use its unsecured line of credit
with a commercial bank to facilitate the timely acquisition of Properties if
proceeds from the Offering are not immediately available. In these cases, the
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line of credit is used to fund the acquisition on a short-term basis and is
subsequently repaid, generally within 60 days, with proceeds from the Offering.
It is anticipated that any borrowings will be curtailed through the sale of
additional Shares although there can be no assurance that such sales will be
sufficient to repay such borrowings. If the future sale proceeds were
insufficient, the Company could seek to extend the maturity dates or pay the
balance of the loans due from its rental operations or cash reserves.
At year-end, the Company had an outstanding balance of $6,000,000 on the line
of credit. In addition, the Company carried a $2,300,000 non-interest-bearing
purchase money promissory note. In January 1996, the Company repaid all
outstanding notes payable with proceeds from the Offering.
Cash and cash equivalents totaled $7,073,147 and $4,288,438 at December 31,
1995 and 1994, respectively. During the year the Company distributed $6,316,185
to the Shareholders of which $3,906,276 was reinvested in additional Shares
under the terms of the Company's Additional Share Option. The reinvested funds
netted the Company $3,515,644 after payment of selling commissions. Of the
amounts distributed for the years ended December 31, 1995 and 1994, 17% and 21%,
respectively, represented a return of capital.
The Company is operated as, and annually elects to be taxed as, a real estate
investment trust under the Code. Since inception, the Company distributed more
than 95% of its REIT taxable income and met the requirements of the election. As
a result, the Company has no provision for income taxes and thus, there is no
effect on the Company's liquidity from liability for income taxes.
Approximately 62% of the Shareholders were participating in the Additional
Share Option as of December 31, 1995. The Company intends to maintain a cash
reserve equal to 0.5% of the gross proceeds from the sale of the Shares which,
in addition to cash flow from operations, is expected to be sufficient to
satisfy general liquidity requirements. The Company is expecting to continue
with significant growth during 1996. The Company plans to have monthly equity
closings in 1996, until the Offering is fully funded or until such time as the
Company may opt to discontinue it. It is anticipated that the equity funds will
be invested in additional apartment communities.
At March 31, 1996
There was a significant change in the Company's liquidity during the quarter
ended March 31, 1996. During the quarter, the Company closed the sale to
investors of 2,814,852 shares at $11 per Share representing gross proceeds to
the Company of $30,963,372 and net proceeds after payment of selling commissions
of $27,844,244. The Company capitalized $2,769,660 of improvements to its
various Properties during the quarter. It is anticipated that some $2,000,000 in
additional capital improvements will be completed during the next year on the
current portfolio. The source to fund these improvements is from equity raised
and set aside specifically for the improvements and from the expected sale of
additional Shares.
Since December 31, 1995, the Company made six acquisitions of residential
rental properties. On January 31, 1996, the Company acquired The Meadows
Apartments, a 176-unit apartment community located in Asheville, North Carolina
for $6,200,000. On March 20, 1996, effective March 1, 1996, the Company acquired
West Eagle Green Apartments (formerly known as Scarlett Oaks), a 165-unit
apartment community located in Augusta, Georgia for $4,000,000. On March 29,
1996, effective March 1, 1996, the Company acquired Ashley Park Apartments, a
272-unit apartment community located in Richmond, Virginia for $12,205,000. On
March 29, 1996, effective March 1, 1996, the Company acquired Arbor Trace
Apartments (formerly Colonial Ridge), a 148-unit apartment community located in
Virginia Beach, Virginia for $5,000,000. In April 1996, the Company made two
acquisitions as discussed in Note 5 to the unaudited financial statements for
the quarter ended March 31, 1996. These acquisitions brought the total number of
apartment units owned by the Company to 5,454.
The Company borrowed $12,205,000 against the line of credit in conjunction
with the purchase of Ashley Park Apartments. The Company has repaid $4,500,000
of the balance of the debt as of May 6, 1996 and expects to repay the balance
within sixty days through the additional sale of Shares. This is consistent with
the Company's long term business objective to hold its Properties on an
unleveraged basis. As of April 1, 1996, the interest rate on the Company's
unsecured line of credit is one-month LIBOR plus 160 basis points.
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Cash and cash equivalents totaled $8,694,171 at March 31, 1996. During
January 1996, the Company distributed $2,728,443 (24.75 cents per Share) to its
Shareholders of which $1,622,082 was reinvested in additional Shares per the
terms of the Company's Additional Share Option. The reinvested funds netted the
Company $1,459,874 after payment of selling commissions.
While the Company is always assessing potential acquisitions, no material
commitments existed on May 1, 1996 for the purchase of additional Properties.
The Company's only on-going commitment for capital expenditures is to the
renovation of its existing portfolio. Equity funds are raised in conjunction
with the acquisition of Properties to fund these capital expenditures. In
addition, the Company will acquire new Properties as funds are available.
The Company has short-term cash flow needs to conduct the operation of its
Properties. The rental income generated from the Properties supplies sufficient
cash to provide for the payment of these operating expenses.
The Company's capital resources are expected to grow with the continued sale
of its Shares and through operations.
RESULTS OF OPERATIONS
Year Ended December 31, 1995
The results of the Company's Property operations for the year ended December
31, 1995 include the results of operations for the pre-1995 acquisitions and
from the 10 Properties acquired in 1995 since their respective acquisition
dates. The increased rental income, expenses and net income for the year ended
December 31, 1995, over the year ended December 31, 1994, is primarily due to a
full year of operation in 1995 of the 1994 acquisitions as well as the
incremental effect of the 1995 acquisitions.
Similarly, the increased rental income, expenses and net income noted in 1994
is due to the full year of operations from the Properties acquired in 1993 (the
Company commenced operations in June 1993) as well as the incremental effect of
the 1994 acquisitions since their respective acquisition dates. Since operations
began in mid-1993, comparison between 1993 and subsequent full years of
operations are not meaningful.
Substantially all of the Company's revenue is from the rental operation of
its apartment communities. Rental income increased to $16,300,821 in 1995 from
$8,177,576 in 1994 and $1,784,868 in 1993 due to the factors described above.
Rental income is expected to increase from the impact of planned improvements
which are being made in an effort to improve the Properties' marketability,
improve occupancies and increase rental rates.
The Properties acquired prior to 1995 provided 71% of the Company's 1995
rental income. These Properties had an average occupancy of 94% during 1995 and
93% in 1994. For Properties acquired before 1995, approximately 25% of the
revenue increase in 1995 was attributable to an increase in occupancy, and about
75% of the increase was attributable to increased rental rates. On a comparative
basis, the five Properties owned during all of 1995 and 1994 (Properties
acquired in 1993) provided rental and operating income of $6,681,120 and
$3,567,290, respectively, in 1995 and $6,175,925 and $3,202,454 in 1994. This
represents an increase from 1994 to 1995 of 8% and 11%, respectively. The
Properties acquired in 1995 provided 29% of the Company's 1995 rental income and
had an average occupancy of 94% during 1995.
The Properties acquired prior to 1994 provided 76% of the Company's 1994
rental income. These Properties had an average occupancy of 93% in 1994 and
1993. As previously stated, a comparison of results from 1994 to 1993 is not
meaningful as the Company began operations in mid-1993.
Overall, average monthly rental rates for the portfolio increased from $390
in 1993, to $454 in 1994, to $482 in 1995. This increase is due to a combination
of increased rental rates and the acquisition of Properties with higher average
rental rates.
Total expenses increased to $11,049,541 in 1995 from $5,901,759 in 1994 and
$1,334,855 in 1993 due largely to the acquisitions noted above. The operating
expense ratio (the ratio of rental expenses, excluding general and
administrative expense, amortization and depreciation, to rental income) was 47%
in 1995, 48% in 1994 and 47% in 1993.
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General and administrative expenses totaled 4% of revenues in 1995, 9% in
1994 and 12% in 1993. These expenses represent the administrative expenses of
the Company as distinguished from the operations of the Company's Properties.
This percentage is expected to further decrease as the Company's operations
grow.
The Company's other source of income is from the investment of its cash
reserves. Interest income was $226,555 in 1995, $110,486 in 1994 and $46,633 in
1993. This growth is consistent with the growth in the Company's cash reserves.
The Company incurred $248,120 of interest expense in 1995 associated with
short-term borrowings under its line of credit. The year 1995 was the first year
that the Company used unsecured borrowings to acquire Properties. As previously
noted, these borrowings are typically for periods of 60 days or less and were
repaid in January 1996 from the issuance of Shares.
In 1995, the Company was able to reduce the Advisor fee from 1% of total
funds raised to .25% through the acquisition of the assets of its previous
advisor and the negotiation of a contract with a new advisor. The fee is a part
of the above-referenced general and administrative expenses. Based on the old
arrangement, the fee for 1995 would have been $879,720, as opposed to the actual
cost of $219,930, under the new arrangement. This represents a savings of
$659,790, or eight cents per Share as a result of the renegotiation of this
contract. (See Note 6 of the financial statements for additional details.)
THREE MONTHS ENDED MARCH 31, 1996
The Company's Property operations for the three months ended March 31, 1996
reflect the operations of the Company's pre-1996 acquisitions, The Meadows since
February 1996, and West Eagle Green, Ashley Park and Arbor Trace since March
1996. The results of operations for the three months ended March 31, 1995
reflect the operations of the 1993 and 1994 acquisitions. The increase in income
and expenses for the three months ended March 31, 1996 over 1995 is mainly due
to a full three months of operation in 1996 of all of the 1995 acquisitions. As
of March 31, 1996, and March 31, 1995 rental income for the 1993 and 1994
acquisitions was $2,927,230 and $2,745,013, respectively which represents a 7%
increase.
The occupancy levels for the Company's Properties averaged 91% and 93% at the
end of the three months ended March 31, 1996 and 1995, respectively. The
decrease in occupancy is primarily due to the vacancy at three of the 1995
acquisitions which are currently under renovation. Overall, average rental rates
for the portfolio increased from $467 to $504 per month.
The Company's revenue is primarily from rental operation of its apartment
communities. Rental income for the first three months increased to $6,552,688 in
1996 from $2,745,012 in 1995. The increase is due to a combination of rental
increases and Property acquisitions. Rental income is expected to increase
further as a result of planned improvements, higher occupancies and increased
rental rates. The Company's other source of income is the investment of its cash
and cash reserves. Interest income for the three months ended March 31, 1996 and
1995 was $76,338 and $29,162, respectively.
Total expenses for the first three months increased to $4,410,259 in 1996
from $1,829,260 in 1995. The operating expense ratio (the ratio of rental
expenses, excluding general and administrative, amortization and depreciation
expense, to rental income) was 45% for the three months ended March 31, 1996 and
1995. In addition, the Company incurred interest expense of $46,880 and $42,082
during the first three months of 1996 and 1995, respectively, which related to
the short-term borrowings on Property acquisitions.
General and administrative expenses totaled 3% of total rental income for the
three months ended March 31, 1996 and 4% for the same period in 1995. This
percentage is expected to further decrease as the Company's asset base and
rental income grow. These expenses represent the administrative expenses of the
Company as distinguished from the operations of the Company's Properties.
IMPACT OF INFLATION
The Company does not believe that inflation had any significant impact on the
operation of the Company in 1995 or during the three months ended March 31,
1996. Future inflation, if any, would likely cause increased operating expenses,
but the Company believes that increases in expenses would be more than offset by
increases in rental revenues. Continued inflation may also cause capital
appreciation of the Company's Properties over time, as rental rates and
replacement costs increase.
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PLAN OF DISTRIBUTION
The Company is offering to sell the Shares using the services of David Lerner
Associates, Inc. as the Managing Dealer, and other broker-dealers ("Selected
Dealers"). The Shares are being offered on a "best efforts" basis, meaning that
the Managing Dealer and Selected Dealers are not obligated to purchase any
Shares.
The offering of Shares will terminate when all Shares offered hereby have
been sold or one year from the date hereof, unless sooner terminated by the
Company or extended by the Company for up to an additional year. In some states,
extension of the offering may not be allowed, or may be allowed only upon
certain conditions.
Purchasers will be issued Shares at one or more closings held from time to
time during the offering period. Because there is no minimum number of Shares
required to be sold in the offering made by this Prospectus, the prospective
investors' payments for Shares are not required to be held by an escrow agent or
in an escrow account. The Company may, however, as an administrative convenience
to the Company, place prospective investors' subscription funds in a separate
escrow account (with or without a separate "escrow agent") for disbursement to
the Company in a block at a "closing" selected by the Company. Disbursement of
such funds to the Company is not subject to any conditions pertaining to the
receipt of a minimum amount of offering proceeds. The Company reserves the right
to issue Shares at any time and from time to time, consistent with the terms of
this Prospectus and the Subscription Agreements executed by investors.
In no event is the Company required to accept the proffered subscription of
any prospective investor, and no such proffered subscription shall become
binding on the Company until a properly completed Subscription Agreement
prepared and executed by the prospective investor has been accepted by a duly
authorized representative of the Company. The Company intends to cause to be
paid from any escrow account each investor's share of net interest on escrowed
funds, whether or not the investor's subscription for Shares is accepted. The
Company reserves the right to adopt reasonable simplifying conventions or
assumptions in determining each investor's share of such net interest. If the
Company elects to use a separate escrow account (with or without a separate
"escrow agent"), investors' subscription funds will be deemed to remain the
Property of the investors, and the investors' subscriptions will be revocable by
written notice delivered to the escrow agent at least five days before the
applicable closing. Subject to the foregoing, an investor's subscription funds
may remain in escrow for an indefinite period of time.
It is expected that Shareholders will be able to elect to reinvest any
distributions from the Company in additional Shares available in this offering,
for as long as this offering continues. This option is referred to herein as the
"Additional Share Option." Any purchase by reinvestment of distributions would
be at the same price per Share and on the same terms applicable generally to
subscriptions in this offering effective at the time of reinvestment. The
Company reserves the right to establish rules governing such reinvestment, as
well as the right to modify or terminate such Additional Share Option at any
time. The Company estimates that approximately 300,000 Shares ($3,300,000 at $11
per Share) offered through this Prospectus will be purchased through
Shareholders' reinvestment of distributions in Shares pursuant to the Additional
Share Option described in this paragraph, but the number of Shares which will be
so purchased cannot be determined at this time.
Subject to the Additional Share Option being available through the
broker-dealer which initially sells a Shareholder his Shares, a Shareholder will
be able to elect the option by directing, on his Subscription Agreement, that
cash distributions be reinvested in additional Shares. Distributions
attributable to any calendar quarter will then be used to purchase Shares in
this offering. As described under "Federal Income Tax Considerations -- Federal
Income Taxation of the Shareholders," a Shareholder who elects the Additional
Share Option will be taxed as if he had received his distributions which are
used to purchase additional Shares. A Shareholder may elect to terminate his
participation in the Additional Share Option at any time by written notice sent
to the Company or to the broker-dealer through which the Shareholder initially
purchased Shares. The notice will be effective with respect to distributions
attributable to any calendar quarter if it is sent at least 10 days before the
end of such calendar quarter.
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Funds not invested in Properties may be invested by the Company in United
States Government securities, certificates of deposit of banks located in the
United States having a net worth of at least $50,000,000, bank repurchase
agreements covering the securities of the United States Government or United
States governmental agencies issued by banks located in the United States having
a net worth of at least $50,000,000, bankers' acceptances, prime commercial
paper or similar highly liquid investments (such as money market funds selected
by the Company) or evidences of indebtedness.
The Company will pay to the Managing Dealer Selling Commissions on all sales
made in an amount equal to 7.5% of the purchase price of the Shares, or $0.825
per Share purchased at $11 per Share. The Company will also pay to the Managing
Dealer a Marketing Expense Allowance equal to 2.5% of the purchase price of the
Shares, as a non-accountable reimbursement for expenses incurred by it in
connection with the offer and sale of the Shares. The Selling Commissions and
Marketing Expense Allowance are payable to the Managing Dealer at the times of
the issuance of Shares to purchasers. David Lerner, the President and sole
shareholder of the Managing Dealer, served as a Director of the Company from
August 3, 1992 until October 24, 1994, and as such received certain fees and
stock options or stock grants.
Prospective investors are advised that David Lerner Associates, Inc., and
other broker-dealers participating in this offering, reserve the right to
purchase Shares, on the same terms applicable generally to sales pursuant to
this Prospectus, for their own accounts, at any time and in any amounts, to the
extent not prohibited by relevant law.
The Agency Agreement among the Company, the Advisor, Cornerstone Realty
Group, Inc. and the Managing Dealer permits the Managing Dealer to use the
services of other broker-dealers in offering and selling the Shares, subject to
the Company's approval. The Managing Dealer will pay the compensation owing to
such broker-dealers out of the Selling Commissions or Marketing Expense
Allowance payable to it. Sales by such broker-dealers would be carried on in
accordance with customary securities distribution procedures. The Managing
Dealer may be deemed to be an "underwriter" for purposes of the Securities Act
in connection with this offering. Purchasers' checks are to be made payable to
"First Union National Bank, Escrow Agent" or as otherwise directed by the
Managing Dealer.
Purchasers are required to purchase a minimum of $5,000 in Shares ($2,000 in
Shares for Qualified Plans). The Advisor and Affiliates of the Advisor may
purchase in this offering up to 2.5% of the total number of Shares sold in the
offering, on the same terms and conditions as the public. If the Advisor or
Affiliates purchase any Shares, they will be permitted to vote on any matters
submitted to a vote of holders of the Shares. Any purchase of Shares in this
offering by the Advisor or Affiliates must be for investment, and not for resale
or distribution. The Shares described in this paragraph are exclusive of the
Shares which may be issued under the Company's stock incentive plans. See
"Management -- Stock Incentive Plans."
There has been no previous market for any of the Company's Shares. The
initial offering price for the Shares is arbitrary and was determined on the
basis of the proposed capitalization of the Company, market conditions and other
relevant factors.
The Company, the Advisor and Cornerstone Realty Group, Inc. have agreed to
indemnify the Managing Dealer and other broker-dealers against certain
liabilities, including liabilities under the Securities Act. No indemnification
is provided for willful misfeasance, bad faith, gross negligence or reckless
disregard of duties under the Securities Act by any of such persons.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50,000,000 Common
Shares, no par value. Each Common Share will be fully paid and nonassessable
upon issuance and payment therefor. As of the completion of the Second Offering,
there were 22,899,118 Common Shares of the Company issued and outstanding.
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The Common Shares will have the sole voting power to elect Directors and
holders of the outstanding Common Shares wil
l be entitled to one vote per Share
on all matters submitted to a vote of the Shareholders. Common Shares of the
Company have no preference, conversion, exchange, preemptive or cumulative
voting rights. No equity securities of the Company shall have greater voting
rights per share than those attributable to the Common Shares that will be sold
in this offering. Holders of Common Shares will be entitled to participate on a
per-Share basis in distributions paid in respect of the Shares if, when and as
declared by the Board of Directors and in the distribution of net assets of the
Company upon its liquidation, dissolution or winding up.
REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER
Two of the requirements for qualification for the tax benefits accorded a
REIT under the Code are that (i) at no time during the last half of each taxable
year may more than 50% in value of the outstanding Shares be owned, directly or
indirectly, by or for five or fewer individuals, and (ii) there must be at least
100 Shareholders for at least 335 days in any taxable year, or proportionate
part of any shorter taxable year, after its first taxable year. See "Federal
Income Tax Considerations."
In order that the Company may meet these requirements at all times, the
Bylaws prohibit any person from acquiring or holding, directly or indirectly,
ownership of a number of Shares in excess of 9.8% of all the outstanding Shares.
Shares owned by a person in excess of such amounts will be referred to in the
Bylaws and herein as "Excess Shares." For this purpose the term "ownership" is
defined in accordance with the constructive ownership provisions of Section 544
of the Code (as modified by Section 856(h) of the Code). Accordingly, Shares
owned or deemed to be owned by a person who individually owns less than 9.8% of
the Shares outstanding nevertheless may be Excess Shares.
Holders of Excess Shares are not entitled to voting rights, dividends or
distributions. If, after the purported transfer or other event resulting in an
exchange of Common Shares for Excess Shares and before discovery by the Company
of such exchange, dividends or distributions are paid with respect to Common
Shares that were exchanged for Excess Shares, then such dividends or
distributions are to be repaid to the Company upon demand.
The Bylaws also provide that in the event any person acquires Excess Shares,
such Excess Shares may be redeemed by the Company, at the discretion of the
Board of Directors. Except as set forth below, the redemption price for redeemed
Excess Shares shall be the lesser of (i) the price paid for the Excess Shares
(or if no notice of such purchase price is given, at a price to be determined by
the Board of Directors, in its sole discretion, but no lower than the lowest
market price for the Common Shares during the year prior to the date the Company
exercises its purchase option) and (ii) the fair market value of such Excess
Shares, which shall be the fair market value of the Shares as determined in good
faith by the Board of Directors or, if the Shares are listed on a national
securities exchange, the closing price (average of closing bid and asked prices
if the Shares are quoted on the NASDAQ National Market System) on the last
business day prior to the redemption date. To redeem Excess Shares, the Board of
Directors must give a notice of redemption to the holder of such Excess Shares
not less than one week prior to the date fixed by the Board of Directors for
redemption. The holder may sell such Excess Shares before the date fixed for
redemption. If he does not, the redemption price for such Excess Shares shall be
paid on the redemption date fixed by the Board of Directors and included in such
notice. From and after the date fixed for redemption of Excess Shares, such
Shares shall cease to be entitled to any distributions and other benefits, other
than the right to payment of the redemption price for such Shares. Under certain
circumstances, the proceeds of redemption might be taxed as a distribution to
the recipient.
The constructive ownership provisions applicable under Section 544 of the
Code (as modified by Section 856(h) of the Code) attribute ownership of
securities by a corporation, partnership, estate or trust proportionately to its
shareholders, partners or beneficiaries, attribute ownership of securities owned
by family members to other members of the same family, treat securities with
respect to which a person has an option to purchase as actually owned by that
person, and set forth rules as to when securities constructively owned by a
person are considered to be actually owned for the application of such
attribution provisions (i.e., "reattribution"). Thus, for purposes of
determining whether a person
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holds Excess Shares, a person will be treated as owning not only Shares actually
or beneficially owned, but also any Shares attributed to such person under the
attribution rules described above. Ownership of Shares through such attribution
is generally referred to as constructive ownership.
Under the Bylaws any acquisition of Shares of the Company that would result
in the disqualification of the Company as a REIT under the Code is void to the
fullest extent permitted by law, and the Board of Directors is authorized to
refuse to transfer Shares to a person if, as a result of the transfer, that
person would own Excess Shares. Prior to any transfer or transaction which, if
consummated, would cause a shareholder to own Excess Shares, and in any event
upon demand by the Board of Directors, a shareholder is required to file with
the Company an affidavit setting forth, as to that shareholder, the information
required to be reported in returns filed by shareholders under Treasury
Regulation Section 1.857-9 and in reports filed under Section 13(d) of the
Exchange Act. Additionally, each proposed transferee of Common Shares, upon
demand of the Board of Directors, also may be required to file a statement or
affidavit with the Company setting forth the number of Shares already owned by
the transferee and any person to or from whom Shares may be attributed by or to
the transferee.
The transfer or sale of Shares also will be subject to compliance with
applicable "Blue Sky" laws and federal securities laws.
FACILITIES FOR TRANSFERRING SHARES
The Managing Dealer may, but is not obligated to, assist Shareholders who
desire to transfer their Shares. In the event the Managing Dealer provides
assistance, it will be entitled to receive compensation as specified by the
Managing Dealer. Any assistance offered by the Managing Dealer may be terminated
or modified at any time without notice, and any fee charged for transfer
assistance may be modified or terminated at any time and without notice. The
Managing Dealer currently has no plans for rendering the type of assistance
referred to in this paragraph. Such assistance, if rendered, would likely
consist of informally matching isolated potential buyers and sellers, and would
not represent the creation of any "market" for the Shares.
No public market for the Shares currently exists. The Company intends, by the
end of the third quarter in 1996 or as soon thereafter as practicable, to use
its best efforts to cause the Shares to be listed on a national securities
exchange or quoted on the NASDAQ National Market System, if the Board of
Directors determines such action to be prudent. However, there can be no
assurance when or that the Shares will be so listed or quoted. See "Risk Factors
- -- Absence of Public Trading Market."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Shares is First Union National Bank
of North Carolina.
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SUMMARY OF ORGANIZATIONAL DOCUMENTS
The following is a summary of the principal provisions of the Company's
Articles of Incorporation and Bylaws, some of which may be described or referred
to elsewhere in this Prospectus. Neither this summary nor such descriptions
appearing elsewhere in this Prospectus purport to be, or should be considered, a
complete statement of the terms and conditions of the Articles of Incorporation
or Bylaws or any specific provision thereof, and this summary and all such
descriptions are qualified in their entirety by reference to, and the provisions
of, the Articles of Incorporation and Bylaws, which have been filed as exhibits
to the registration statement of which this Prospectus is a part. The Company's
Articles of Incorporation have been reviewed and approved unanimously by the
Directors.
BOARD OF DIRECTORS
The Board of Directors, subject to specific limitations in the Articles of
Incorporation and those imposed by law, has full, exclusive, and absolute power,
control and authority over the Property and business of the Company. The Board
of Directors, without approval of the Shareholders, may alter the Company's
investment policies in view of changes in economic circumstances and other
relevant factors, subject to the investment restrictions set forth in the
Bylaws.
A Director may be removed for cause by the vote or written consent of all
Directors other than the Director whose removal is being considered or with or
without cause at a special meeting of the Shareholders by vote of a majority of
the outstanding Shares. "For cause" is defined as willful violations of the
Articles of Incorporation or Bylaws, or gross negligence in the performance of a
Director's duties. Any vacancies in the office of Director may be filled by a
majority of the Directors continuing in office or at a special meeting of
Shareholders by vote of a majority of the Shares present at a meeting at which
there is a quorum. Any Director so elected shall hold office for the remainder
of his predecessor's term. The number of Directors shall not be less than three
nor more than 15. Currently, there are seven Directors, a majority of whom are
Independent Directors. See "Management." The holders of the Common Shares are
entitled to vote on the election or removal of the Board of Directors, with each
Share entitled to one vote. Beginning in 1996, the terms of the Directors will
be "staggered," as described under "Management."
The Board of Directors is empowered to fix the compensation of all officers
and the Board of Directors. Under the Bylaws, Directors may receive reasonable
compensation for their services as Directors and officers of the Company and
reimbursement of their expenses, and the Company may pay a Director such
compensation for special services, including legal and accounting services, as
the Board of Directors deems reasonable. The Board of Directors may delegate
certain of its powers to an Executive Committee, which must be comprised of at
least three Directors, the majority of whom are Independent Directors. At all
times a majority of the Directors and a majority of the members of any Board
committee shall be Independent Directors, except that upon the death, removal,
or resignation of an Independent Director such requirement shall not be
applicable for 60 days.
RESPONSIBILITY OF BOARD OF DIRECTORS, ADVISOR, OFFICERS AND EMPLOYEES
Virginia law and the Articles of Incorporation of the Company provide that
the Directors and officers of the Company shall have no liability to the Company
or its Shareholders in certain actions by or in the right of the Company unless
such officer or Director has engaged in willful misconduct or a knowing
violation of the criminal law or of any federal or state securities laws. The
Advisory Agreement provides that the Advisor shall have no liability to the
Company or its Shareholders unless the Advisor has engaged in gross negligence
or willful misconduct. Generally, claimants must look solely to the Company's
Property for satisfaction of claims arising in connection with the affairs of
the Company. The Articles of Incorporation and the Advisory Agreement,
respectively, provide that the Company shall indemnify any present or former
Director, officer, employee or agent and the Advisor against any expense or
liability in an action brought against such person if the Directors (excluding
the indemnified party) determine in good faith that the Director, officer,
employee or agent or the Advisor was acting in good faith within what he or it
reasonably believed to be the scope of his or its employment or authority and
for a purpose which he or it reasonably believed to be in the best interests of
the Company or its
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Shareholders, and that the liability was not the result of misconduct, bad
faith, negligence, reckless disregard of duties or violation of the criminal
law. Indemnification is not allowed for any liability imposed by judgment, and
costs associated therewith, including attorneys' fees, arising from or out of a
violation of federal or state securities laws associated with the public
offering of the Common Shares unless (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular indemnitee, or (ii) such claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction as
to the particular indemnitee, or (iii) a court of competent jurisdiction
approves a settlement of the claims against a particular indemnitee. To the
extent that the foregoing indemnification provisions purport to include
indemnification for liabilities arising under the Securities Act, in the opinion
of the Securities and Exchange Commission, such indemnification is contrary to
public policy and therefore unenforceable.
The exculpation and indemnification provisions in the Articles of
Incorporation and the Advisory Agreement have been adopted to help induce the
beneficiaries of such provisions to agree to serve on behalf of the Company or
the Advisor by providing a degree of protection from liability for alleged
mistakes in making decisions and taking actions. Such exculpation and
indemnification provisions have been adopted, in part, in response to a
perceived increase generally in shareholders' litigation alleging director and
officer misconduct. The exculpation and indemnification provisions in the
Articles of Incorporation and the Advisory Agreement may result in a Shareholder
or the Company having a more limited right of action against a Director, the
Advisor or its Affiliates than he or it would otherwise have had in the absence
of such provisions. See "Risk Factors -- Responsibilities of Directors, Advisor
and Affiliates -- Possible Inadequacy of Remedies." Conversely, the presence of
such provisions may have the effect of conferring greater discretion upon the
Directors, the Advisor and its Affiliates in making decisions and taking actions
with respect to the Company. Subject to the exculpation and indemnification
provisions in the Articles of Incorporation, the Advisory Agreement, and as
otherwise provided by law, the Advisor and the Directors are accountable to the
Company and its Shareholders as fiduciaries and must exercise good faith and
integrity in handling the Company's affairs.
ISSUANCE OF SECURITIES
The Board of Directors may in its discretion issue additional Shares or other
equity or debt securities of the Company, including options, warrants, and other
rights, on such terms and for such consideration as it may deem advisable. See
"Risk Factors -- Potential Dilution." Without limiting the generality of the
foregoing, the Board of Directors may, in its sole discretion, issue Shares or
other equity or debt securities of the Company, (1) to persons from whom the
Company purchases a Property, as part or all of the purchase price of the
Property, or (2) to the Advisor or its Affiliates in lieu of cash payments
required under the Advisory Agreement or other contract or obligation. The Board
of Directors, in its sole discretion, may determine the value of any Shares or
other equity or debt securities issued in consideration of property or services
provided, or to be provided, to the Company, except that while Shares are
offered by the Company to the public, the public offering price of such Shares
shall be deemed their value.
The Company has adopted two stock incentive plans for the benefit of the
Directors of the Company and certain employees of the Company and of the Advisor
and its Affiliates. See "Management -- Stock Incentive Plans."
REDEMPTION AND RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, not more than 50% of its
outstanding Shares may be owned directly or indirectly by five or fewer
individuals during the last half of any year other than the first year, and
after the first year all Shares of the Company must be owned by 100 or more
persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. As a means of attempting to ensure
compliance with these requirements, the Bylaws provide that the Company may
prohibit any person from directly or indirectly acquiring ownership (beneficial
or otherwise) of Excess Shares. See "Description of Capital Stock -- Repurchase
of Shares and Restrictions on Transfer."
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AMENDMENT
The Articles of Incorporation and the Bylaws may be amended or altered or the
Company may be dissolved by the affirmative vote of the holders of a majority of
the outstanding Common Shares, with each Shareholder entitled to cast one vote
per Share held. The Company's Articles and Bylaws may not be amended unless
approved by the vote of the holders of a majority of the Common Shares of the
Company (except that the Directors may amend the Bylaws if they determine such
amendment to be necessary to comply with the REIT provisions of the Code or
other applicable laws and regulations). No amendment that would change any
rights with respect to any outstanding Common Shares of the Company, or diminish
or eliminate any voting rights pertaining thereto, may be made unless approved
by the vote of the holders of two-thirds of the outstanding Common Shares so
affected.
SHAREHOLDER LIABILITY
The holders of the Company's Shares shall not be liable personally on account
of any obligation of the Company.
SALES LITERATURE
The Company may use certain sales or marketing literature in connection with
the offering of the Shares. Sales or marketing materials which may be used
include a sales brochure highlighting the Company. The literature may also
include a brochure describing Affiliates of the Advisor, and a "tombstone"
advertisement, mailer and introductory letter. The Company may, from time to
time, also utilize brochures describing completed or proposed Property
acquisitions, summaries of the Company or of the offering of the Shares, and
discussions of REIT investments generally.
The offering is, however, made only by means of this Prospectus. Except as
described herein, the Company has not authorized the use of other supplemental
literature in connection with the offering other than marketing bulletins to be
used internally by broker-dealers. Although the information contained in such
literature does not conflict with any of the information contained in this
Prospectus, such material does not purport to be complete, and should not be
considered as a part of this Prospectus or the registration statement of which
this Prospectus is a part, as incorporated in this Prospectus or the
registration statement by reference, or as forming the basis of the offering of
the Shares described herein.
REPORTS TO SHAREHOLDERS
Financial information contained in all reports to Shareholders will be
prepared in accordance with generally accepted accounting principles. The annual
report, which will contain financial statements audited by a nationally
recognized accounting firm, will be furnished within 120 days following the
close of each fiscal year. The annual report will contain a complete statement
of compensation and fees paid or accrued by the Company to the Advisor and its
Affiliates, together with a description of any new agreements with Affiliates.
LEGAL OPINIONS
Certain legal matters with respect to the legality of the Shares offered
hereby and certain federal income tax matters as set forth under "Risk
Factors--Federal Income Tax Risks" and "Federal Income Tax Considerations" will
be passed upon by McGuire, Woods, Battle & Boothe, L.L.P., Richmond, Virginia,
as counsel to the Company. McGuire, Woods, Battle & Boothe also acts as counsel
to the Advisor and certain of its Affiliates. Leslie A. Grandis, a partner in
McGuire, Woods, Battle & Boothe, L.L.P., is a Director of the Company. See
"Management."
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EXPERTS
The financial statements of Cornerstone Realty Income Trust, Inc. at December
31, 1995 and December 31, 1994, and for the years then ended appearing in this
Prospectus and the Registration Statement have been audited by Ernst & Young,
LLP, independent auditors, as set forth in their report thereon, appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The statements of operations, shareholders' equity and cash flows of
Cornerstone Realty Income Trust, Inc. for the year ended December 31, 1993 and
the historical summary of operating revenue and expenses of Ashley Park
Apartments for the year ended December 31, 1995 included herein and in the
Registration Statement, have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
auditors, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
Certain Statements of Income and Direct Operating Expenses of Properties
included in the Company's Prospectus and the Company's Registration Statement
have been examined by L. P. Martin & Company, independent certified public
accountants, for the periods indicated in their reports thereon. The financial
statements examined by L. P. Martin & Company have been included in reliance
upon their reports on their authority as experts in accounting and auditing.
CHANGE IN COMPANY'S CERTIFYING ACCOUNTANT
As of May 5, 1994, the firm of KPMG Peat Marwick LLP was dismissed as
independent auditors for the Company. As of the same date, the firm of Ernst &
Young LLP was engaged as independent auditors for the Company. The decision to
change accountants was made by the Company's Audit Committee.
KPMG Peat Marwick LLP's Report (as defined below) did not contain an adverse
opinion or a disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope or accounting principles. "Report" means the report of
KPMG Peat Marwick LLP under the date of March 7, 1994 (except for note (8) as to
which the date is October 25, 1994), concerning the balance sheets of
Cornerstone Realty Income Trust, Inc. as of December 31, 1993 and 1992, and the
related statement of operations for the year ended December 31, 1993 and the
related statements of shareholders' equity and cash flows for the year ended
December 31, 1993 and the period from August 18, 1992 through December 31, 1992.
In connection with its audits pertaining to the Report (as defined above),
and in connection with the interim period preceding the dismissal, there have
been no disagreements with KPMG Peat Marwick LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement(s), if not resolved to the satisfaction of the
former accountant, would have caused it to make reference to the subject matter
of the disagreement(s) in connection with its Report.
KPMG Peat Marwick LLP has furnished the Company with a letter addressed to
the Securities and Exchange Commission stating that KPMG Peat Marwick LLP agrees
with the statements made by the Company in the preceding three paragraphs,
except that it is not in a position to agree or disagree with the Company's
statement that the decision to change accountants was made by the Company's
Audit Committee.
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GLOSSARY
The following definitions are provided for information in reading this
Prospectus:
ACQUISITION EXPENSES. The total expenses, including but not limited to legal
fees and expenses, travel and communications expenses, costs of appraisals,
non-refundable option payments on Property not acquired, accounting fees and
expenses, title insurance, and miscellaneous expenses related to selection and
acquisition of Properties, whether or not acquired. Acquisition Expenses shall
not include Acquisition Fees.
ACQUISITION FEES. The total of all fees and commissions paid by any party in
connection with the purchase or development of real Property by the Company,
except a development fee paid to a person not Affiliated with the Sponsor in
connection with the actual development of a project after acquisition of the
land by the Company. Included in the computation of such fees or commissions
shall be any real estate commission, selection fee, development fee,
nonrecurring management fee, or any fee of a similar nature, however designated.
ADDITIONAL SHARE OPTION. The option of Shareholders to reinvest distributions
from the Company in additional Shares so long as the registration statement of
which this Prospectus is a part remains effective.
ADJUSTED NET ASSET VALUE. The net assets of the Company (total assets before
deducting depreciation or non-cash reserves less total liabilities) valued at
fair market value as determined by qualified appraisals or valuations of the
assets.
ADVISOR. The person or entity responsible for directing or performing the
day-to-day business affairs of the Company, including a person or entity to
which the Advisor subcontracts substantially all such functions. The Company has
entered into an Advisory Agreement with Cornerstone Advisors, Inc., which shall
serve as the Advisor until it resigns such appointment or is replaced in
accordance with the provisions of the Bylaws.
ADVISORY AGREEMENT. The agreement between the Company and its Advisor, as the
same may be in effect from time to time.
AFFILIATE. Means (i) any person or entity directly or indirectly controlling,
controlled by or under common control with another person or entity, (ii) any
person or entity owning or controlling 10% or more of the outstanding voting
securities or beneficial interests of such other person or entity, (iii) any
officer, director, trustee or general partner of such person or entity, and (iv)
if such other person or entity is an officer, director, trustee or partner of
another entity, then the entity for which that person or entity acts in any such
capacity. Affiliated means being an Affiliate of a specified person or entity.
ARTICLES OF INCORPORATION. The Articles of Incorporation of the Company,
including all amendments, restatements or modifications thereof.
ASSET MANAGEMENT FEE. The fee payable to Cornerstone Advisors, Inc. as the
Advisor, pursuant to the Advisory Agreement.
AVERAGE INVESTED ASSETS. The average of the aggregate book value of the
assets of the Company invested, directly or indirectly, in equity interests in
and loans secured by real estate, before reserves for depreciation or bad debts
or other similar non-cash reserves, computed by taking the average of such
values at the end of each month during any period.
BOARD OF DIRECTORS. The Directors of the Company as of any particular time,
under the Articles of Incorporation, whether they be the Directors named therein
or additional or successor Directors.
BYLAWS. The Bylaws of the Company, including all amendments, restatements or
modifications thereof.
CMG. Cornerstone Management Group, Inc., a Virginia corporation, which is an
Affiliate of the Advisor.
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CODE. The Internal Revenue Code of 1986, as amended from time to time,
including successor statutes thereto.
COMPANY. Cornerstone Realty Income Trust, Inc., a Virginia corporation.
CRG. Cornerstone Realty Group, Inc., a Virginia corporation, which is an
Affiliate of the Advisor.
DIRECTORS. The persons holding such office, as of any particular time,
whether they be the directors named under the Articles of Incorporation or
additional or successor directors.
EMPLOYEE TRUSTS. Qualified employee pension or profit sharing trusts and
Keogh Plan trusts.
ERISA. The Employee Retirement Income Security Act of 1974, as amended.
ESCROW ACCOUNT. The account into which funds will be deposited and retained
prior to the Initial Closing, and may be deposited thereafter pending investment
in Properties.
EXCESS SHARES. Shares owned, directly or indirectly (applying the rules of
Sections 544 and 856(h) of the Code), by a person in excess of 9.8% of the
Company's total outstanding Shares.
EXCHANGE ACT. The Securities Exchange Act of 1934, as amended.
EXEMPT ORGANIZATIONS. Tax-exempt entities, including Employee Trusts and
IRAs.
FINAL CLOSING. The last closing of the sale of Shares offered by the
Prospectus.
FIRPTA. The Foreign Investment in Real Property Tax Act of 1980, as amended.
FUNDS FROM OPERATIONS. Net income (computed in accordance with generally
accepted accounting principles) excluding gains (or losses) from debt
restructuring and sales of Property, plus depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures will be
calculated to reflect funds from operations on the same basis.
INDEPENDENT DIRECTORS. The Directors of the Company who are not Affiliated,
directly or indirectly, with the Advisor, whether by ownership of, ownership
interest in, employment by, any material business or professional relationship
with, or serving as an officer or director of, the Advisor or an Affiliated
business entity of the Advisor (other than as an Independent Director of up to
three other real estate investment trusts advised by the Advisor or an Affiliate
of the Advisor). An Independent Director may perform no other services for the
Company, except as a Director. Notwithstanding anything to the contrary herein,
any member of a law firm whose only material business or professional
relationship with the Company, the Advisor and their Affiliates is as legal
counsel to any of such entities shall constitute an Independent Director (unless
such person serves as a director for more than three REITs organized by the
Advisor and its Affiliates). An "indirect" affiliation shall be deemed to refer
to circumstances in which a member of the "immediate family" of a Director is
Affiliated with the Advisor, and a person's "immediate family" shall mean such
person's spouse, parents, children, siblings, mother and father-in-law, sons and
daughters-in-law and brothers and sisters-in-law.
INITIAL OFFERING. The offering of Shares made pursuant to the Company's
Prospectus dated December 31, 1992, as amended and supplemented from time to
time, which offering was completed on September 7, 1994.
MANAGING DEALER. David Lerner Associates, Inc.
MARKETING EXPENSE ALLOWANCE. An amount equal to up to 2.5% of the purchase
price of the Shares payable by the Company to the Managing Dealer or the
Selected Dealers as a non-accountable reimbursement for expenses incurred by
them in connection with the offer and sale of the Shares.
MAXIMUM OFFERING. The sale of $50,000,000 in Shares by the Company in the
offering made by this Prospectus.
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NET ASSETS OR NET ASSET VALUE. The total assets (other than intangibles) at
cost before deducting depreciation or other non-cash reserves less total
liabilities, calculated at least quarterly on a basis consistently applied.
NET INCOME. The total revenues of the Company for any period, less the
expenses applicable to such period other than additions to reserves for
depreciation or bad debts or other similar non-cash reserves.
OPERATING EXPENSES. All operating, general and administrative expenses of the
Company as determined under generally accepted accounting principles (including
regular compensation payable to the Advisor), excluding, however, the following:
(i) expenses of raising capital; (ii) interest payments; (iii) taxes; (iv)
non-cash expenditures, such as depreciation, amortization and bad debt reserve;
(v) incentive fees paid to the Advisor, if any; and (vi) costs related directly
to asset acquisition, operation and disposition.
ORGANIZATIONAL AND OFFERING EXPENSES. Those expenses incurred in connection
with the formation and registration of the Company and in qualifying and
marketing the Shares under applicable federal and state law, and any other
expenses actually incurred and directly related to the qualification,
registration, offer, and sale of the Shares, including such expenses as (i) all
marketing expenses and payments made to broker-dealers as compensation or
reimbursement for all costs of reviewing the offering, including due diligence
investigations and fees and expenses of their attorneys, accountants, and other
experts; (ii) registration fees, filing fees, and taxes; (iii) the costs of
printing, amending, supplementing and distributing the registration statement
and Prospectus; (iv) the costs of obtaining regulatory clearances of, printing,
and distributing sales materials used in connection with the offer and sale of
the Shares; (v) the costs related to investor and broker-dealer sales meetings
concerning the offering; and (vi) accounting and legal fees incurred in
connection with any of the foregoing.
PLAN ASSETS. The assets of an employee benefit plan.
PROPERTIES. All real properties (together with associated personalty) owned
by the Company from time to time, and as the context may require any such
properties proposed or considered for acquisition by the Company.
PROSPECTUS. The final prospectus of the Company in connection with the
registration of the Shares filed with the Securities and Exchange Commission on
Form S-11.
QUALIFIED PLANS. Employee Trusts and IRAs.
REIT. "REIT" and "real estate investment trust" shall mean a real estate
investment trust as described in Sections 856 through 860 of the Code, as now
enacted or hereafter amended, including successor statutes and regulations
promulgated thereunder.
RETURN RATIO. For any period, the ratio of Funds from Operation to Total
Contributions.
SECOND OFFERING. The offering of Shares made pursuant to the Company's
Prospectus dated November 4, 1994, as amended and supplemented from time to
time.
SECURITIES ACT. The Securities Act of 1933, as amended.
SELECTED DEALERS. Broker-dealers (other than the Managing Dealer) which offer
and sell Shares on behalf of the Company.
SELLING COMMISSIONS. Selling Commissions payable to the Managing Dealer or
the Selected Dealers in an amount equal to up to 7.5% of the purchase price of
the Shares.
SERVICE. The Internal Revenue Service.
SHAREHOLDERS. Those persons who, at any particular time, are shown as the
holders of record of the Common Shares.
SHARES OR COMMON SHARES. The Common Shares of the Company, no par value, and
all other Common Shares of the Company issued in this or any subsequent
offering.
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SPONSOR. Any person directly or indirectly instrumental in organizing, wholly
or in part, the Company or any person who will manage or participate in the
management of the Company, and any Affiliate of any such person, but not
including a person who is an Independent Director or whose only relationship
with the Company is as that of an independent property manager, whose only
compensation is as such. Sponsor also does not include wholly independent third
parties such as attorneys, accountants and underwriters whose only compensation
is for professional services. No Independent Director shall be deemed to be a
Sponsor.
UBTI. Unrelated Business Taxable Income, as defined in the Code.
TOTAL CONTRIBUTIONS. The gross offering proceeds which have been received by
the Company from time to time from the sale or sales of the Shares.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Company Financial Statements
Balance Sheets as of December 31, 1995 and December 31, 1994........................................... F-3
Statement of Operations for Years Ended December 31, 1995, December 31, 1994 and December 31, 1993 (as
restated, see Note 6)................................................................................. F-4
Statements of Shareholders' Equity for Years Ended December 31, 1993 (as restated, see note 6),
December 31, 1994 and December 31, 1995............................................................... F-5
Statements of Cash Flows for Years Ended December 31, 1995, December 31, 1994 and December 31, 1993 (as
restated, see Note 6)................................................................................. F-6
Notes to Financial Statements.......................................................................... F-7
Independent Auditors' Reports:
Ernst & Young LLP...................................................................................... F-12
KPMG Peat Marwick LLP.................................................................................. F-13
Schedule III -- Real Estate and Accumulated Depreciation............................................... F-14
Interim Financial Statements (Unaudited):
Balance Sheets - March 31, 1996 and December 31, 1995.................................................. F-16
Statements of Operations - Three Months ended March 31, 1996 and 1995.................................. F-17
Statements of Shareholders' Equity - Three Months ended March 31, 1996 and Year ended December 31,
1995.................................................................................................. F-18
Statements of Cash Flows - Three Months ended March 31, 1996 and 1995.................................. F-19
Notes to Financial Statements ......................................................................... F-20
Historical Statements of Operations*
Independent Auditors' Report for LaVista Apartments (Polo Club Apartments)............................. F-22
Statement of Income and Direct Operating Expenses for Year Ended December 31, 1992 and Unaudited
Statement of Income and Direct Operating Expenses for Five Months Ended May 31, 1993 for LaVista
Apartments (Polo Club Apartments) .................................................................... F-23
Independent Auditors' Report for The Hollows Apartments ............................................... F-24
Statement of Income and Direct Operating Expenses for Twelve Months Ended April 30, 1993 for The
Hollows Apartments ................................................................................... F-25
Independent Auditors' Report for Mayflower Seaside Tower Apartments ................................... F-26
Statement of Income and Direct Operating Expenses for Twelve Months Ended June 30, 1993 for Mayflower
Seaside Tower Apartments ............................................................................. F-27
Independent Auditors' Report for Stone Ridge Apartments (River Ridge Apartments) ...................... F-28
Statement of Income and Direct Operating Expenses for Twelve Months Ended September 30, 1993 for Stone
Ridge Apartments (River Ridge Apartments)............................................................. F-29
Independent Auditors' Report for County Green Apartments .............................................. F-30
Statements of Income and Direct Operating Expenses for Twelve Months Ended December 31, 1991 and
December 31, 1992 and for Eleven Months Ended November 30, 1993 for County Green Apartments .......... F-31
Independent Auditors' Report for Fountain Head Manor Apartments (Wimbledon Chase Apartments) .......... F-32
Statement of Income and Direct Operating Expenses for Year Ended December 31, 1993 for Fountain Head
Manor Apartments (Wimbledon Chase Apartments) ........................................................ F-33
Independent Auditors' Report for Birdneck Lakes Apartments (Harbour Club Apartments) .................. F-34
Statement of Income and Direct Operating Expenses for Twelve Months Ended March 31, 1994 for Birdneck
Lakes Apartments (Harbour Club Apartments) ........................................................... F-35
Independent Auditors' Report for The Palms Apartments (Chase Mooring Apartments) ...................... F-36
Statement of Income and Direct Operating Expenses for Year Ended May 31, 1994 The Palms Apartments
(Chase Mooring Apartments) ........................................................................... F-37
Independent Auditors' Report for The Trestles Apartments............................................... F-38
Statement of Income and Direct Operating Expenses for Twelve Months Ended September 30, 1994 for The
Trestles Apartments................................................................................... F-39
F-1
<PAGE>
PAGE
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Independent Auditors' Report for Sterling Pointe (Wind Lake) Apartments................................ F-40
Statement of Income and Direct Operating Expenses for Twelve Months Ended February 28, 1995 for
Sterling Pointe (Wind Lake) Apartments................................................................ F-41
Independent Auditors' Report for Breckinridge Apartments............................................... F-42
Statement of Income and Direct Operating Expenses for Twelve Months Ended April 30, 1995 for
Breckinridge Apartments............................................................................... F-43
Independent Auditors' Report for Edgewood (Magnolia Run) Apartments.................................... F-44
Statement of Income and Direct Operating Expenses for Twelve Months Ended April 30, 1995 for Edgewood
(Magnolia Run) Apartments............................................................................. F-45
Independent Auditors' Report for Broad Meadows (Bay Watch Pointe) Apartments........................... F-46
Statement of Income and Direct Operating Expenses for Twelve Months Ended April 30, 1995 for Broad
Meadows (Bay Watch Pointe) Apartments................................................................. F-47
Independent Auditors' Report for Lemon Tree (Hanover Landing) Apartments............................... F-48
Statement of Income and Direct Operating Expenses for Twelve Months Ended June 30, 1995 for Lemon Tree
(Hanover Landing) Apartments.......................................................................... F-49
Independent Auditors' Report for Mill Creek Apartments................................................. F-50
Statement of Income and Direct Operating Expenses for Twelve Months Ended July 31, 1995 for Mill Creek
Apartments............................................................................................ F-51
Independent Auditors' Report for Glen Eagles Apartments................................................ F-52
Statement of Income and Direct Operating Expenses for Twelve Months Ended July 31, 1995 for Glen Eagles
Apartments............................................................................................ F-53
Independent Auditor's Report for Summer Hill (Osprey Landing) Apartments............................... F-54
Statement of Income and Direct Operating Expenses for Twelve Months Ended September 30, 1995 for Summer
Hill (Osprey Landing) Apartments...................................................................... F-55
Independent Auditors' Report for Tradewinds Apartments................................................. F-56
Statement of Income and Direct Operating Expenses for Twelve Months Ended September 30, 1995 for
Tradewinds Apartments................................................................................. F-57
Independent Auditors' Report for The Lake (Sailboat Bay) Apartments.................................... F-58
Statement of Income and Direct Operating Expenses for Twelve Months Ended September 30, 1995 for The
Lake (Sailboat Bay) Apartments........................................................................ F-59
Independent Auditors' Report for The Meadows Apartments................................................ F-60
Statement of Income and Direct Operating Expenses for Year Ended December 31, 1995 for The Meadows
Apartments............................................................................................ F-61
Independent Auditors' Report for Scarlett Oaks (West Eagle Greens) Apartments.......................... F-62
Statement of Income and Direct Operating Expenses for Twelve Months Ended January 31, 1996 for Scarlett
Oaks (West Eagle Greens) Apartments................................................................... F-63
Independent Auditors' Report for Ashley Park Apartments................................................ F-64
Statement of Income and Direct Operating Expenses for Year Ended December 31, 1995 for Ashley Park
Apartments............................................................................................ F-65
Independent Auditors' Report for Colonial Ridge Apartments............................................. F-66
Statement of Income and Direct Operating Expenses for Year Ended December 31, 1995 for Colonial Ridge
Apartments............................................................................................ F-67
Company Pro Forma Financial Statements (Unaudited):*
Pro Forma Statement of Operations (Unaudited) for Year ended December 31, 1995......................... F-68
Pro Forma Statement of Operations (Unaudited) for Three Months ended March 31, 1996 ................... F-70
</TABLE>
_________________________
* As of the date of this Prospectus, the financial statements of, and pro
forma financial information reflecting, the Properties Longmeadow, Trophy Chase,
Beacon Hill, Meadow Creek, Summer Walk, Willow Creek and Lexington Towers
Apartments are not yet available. They will be filed with the Securities and
Exchange Commission as required by the Securities Exchange Act of 1934. All
Properties for which financial statements are available are reflected in the
Company's unaudited balance sheet of March 31, 1996. Thus, a pro forma balance
sheet is not provided.
F-2
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1995 1994
-------------- -----------
<S> <C> <C>
ASSETS
Investment in rental property
Land.................................................... $ 19,852,544 $ 8,824,723
Building................................................ 96,862,036 37,718,928
Property improvements................................... 10,627,687 6,132,911
Furniture and fixtures.................................. 2,354,180 1,430,796
-------------- -----------
129,696,447 54,107,358
Less accumulated depreciation........................... (4,254,974) (1,466,156)
-------------- -----------
125,441,473 52,641,202
-------------- -----------
Cash and cash equivalents................................ 7,073,147 4,288,438
Prepaid expenses......................................... 167,152 103,558
Other assets............................................. 499,260 224,752
-------------- -----------
7,739,559 4,616,748
-------------- -----------
Total Assets............................................. $133,181,032 $57,257,950
============== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable............................................ $ 8,300,000 $ 5,000,000
Accounts payable......................................... 555,691 213,398
Accrued expenses......................................... 1,257,231 230,817
Rents received in advance................................ 129,648 66,137
Tenant security deposits................................. 784,042 310,735
-------------- -----------
11,026,612 5,821,087
Shareholders' equity
Common stock, no par value, authorized 50,000,000
shares; issued and outstanding 12,754,331 shares and
5,458,648 shares, respectively.......................... 123,771,504 51,890,477
Deferred compensation.................................... (77,000) --
Distributions greater than net income.................... (1,540,084) (453,614)
-------------- ------------
122,154,420 51,436,863
-------------- ------------
Total Liabilities and Shareholders' Equity............... $133,181,032 $57,257,950
============== ============
</TABLE>
See accompany notes to financial statements.
F-3
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
------------- ------------ -------------
(AS RESTATED,
SEE NOTE 6)
<S> <C> <C> <C>
REVENUE
Rental income................................ $16,300,821 $8,177,576 $1,784,868
EXPENSES
Utility expenses............................ 1,676,938 925,075 181,676
Repairs and maintenance..................... 2,042,819 971,376 222,033
Taxes and insurance......................... 1,342,427 730,263 150,387
Property management......................... 896,521 455,650 101,295
Advertising................................. 378,089 189,111 45,951
General and administrative.................. 609,969 717,049 218,832
Amortization expense........................ 30,564 30,628 17,832
Depreciation of rental property............. 2,788,818 1,210,818 255,338
Other....................................... 1,283,396 671,789 141,511
------------- ------------ -------------
Total expenses............................... 11,049,541 5,901,759 1,334,855
------------- ------------ -------------
Income before interest income (expense) ..... 5,251,280 2,275,817 450,013
Interest income.............................. 226,555 110,486 46,633
Interest expense............................. (248,120) -- --
------------- ------------ -------------
Net income................................... $ 5,229,715 $2,386,303 $ 496,646
============= ============ =============
Net income per share......................... $ 0.64 $ 0.60 $ 0.30
============= ============ =============
Weighted average number of shares
outstanding................................. 8,176,803 4,000,558 1,662,944
============= ============ =============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK DISTRIBUTION
------------------------------ (GREATER) TOTAL
NUMBER DEFERRED LESS THAN SHAREHOLDERS'
OF SHARES AMOUNT COMPENSATION NET INCOME EQUITY
------------- --------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992.................... 10 $ 100 $ -- $ -- $ 100
Net proceeds from the sale of shares............ 2,974,782 27,622,382 -- -- 27,622,382
Net income...................................... -- -- -- 496,646 496,646
Capital contribution............................ -- 106,610 -- -- 106,610
Cash distributions paid to shareholders ($.273
per share)...................................... -- -- -- (359,427) (359,427)
Shares issued through Additional Share Option .. 20,418 224,601 -- -- 224,601
------------- --------------- -------------- --------------- ---------------
Balance at December 31, 1993 (as restated, see
note 6)....................................... 2,995,210 27,953,693 -- 137,219 28,090,912
Net proceeds from the sale of shares............ 2,294,773 22,223,000 -- -- 22,223,000
Net income...................................... -- -- -- 2,386,303 2,386,303
Shares issued to Cornerstone Realty Advisors,
Inc........................................... 40,000 440,000 -- -- 440,000
Cash distributions paid to shareholders ($.8855
per share).................................... -- -- -- (2,977,136) (2,977,136)
Shares issued through Additional Share Option .. 128,665 1,273,784 -- -- 1,273,784
------------- --------------- -------------- --------------- ---------------
Balance at December 31, 1994.................... 5,458,648 51,890,477 -- (453,614) 51,436,863
Net proceeds from the sale of shares............ 6,930,567 68,255,383 -- -- 68,255,383
Net income...................................... -- -- -- 5,229,715 5,229,715
Cash distributions paid to shareholders ($.9575
per share).................................... -- -- -- (6,316,185) (6,316,185)
Restricted stock grant.......................... 10,000 110,000 (110,000) -- --
Amortization of deferred compensation........... -- -- 33,000 -- 33,000
Shares issued through Additional Share Option .. 355,116 3,515,644 -- -- 3,515,644
------------- --------------- -------------- --------------- ---------------
Balance at December 31, 1995 ................... 12,754,331 $123,771,504 $ (77,000) $(1,540,084) $122,154,420
============= =============== ============== =============== ===============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
---- ---- ----
(AS RESTATED,
SEE NOTE 6)
<S> <C> <C> <C>
FROM OPERATING ACTIVITIES
Net income..................................... $ 5,229,715 $ 2,386,303 $ 496,646
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization ................ 2,819,382 1,241,446 273,170
Amortization of deferred compensation......... 33,000 -- --
Advisor fee................................... -- 440,000 106,610
Organization costs............................ -- -- (152,847)
Changes in operating assets and liabilities:
Prepaid expenses............................. (63,594) (39,377) (64,181)
Other assets................................. (305,072) (23,206) (97,159)
Accounts payable............................. 342,293 42,025 171,373
Accrued expenses............................. 1,026,414 (387,720) 618,537
Rent received in advance..................... 63,511 (55,156) 121,293
Tenant security deposits..................... 473,307 113,771 196,964
-------------- -------------- -------------
Net cash provided by operating activities... 9,618,956 3,718,086 1,670,406
FROM INVESTING ACTIVITIES
Acquisitions of rental property................ (68,482,525) (22,494,000) (23,259,144)
Capital improvements........................... (7,106,564) (6,063,568) (2,290,646)
-------------- -------------- -------------
Net cash used in investing activities....... (75,589,089) (28,557,568) (25,549,790)
FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings............ 38,300,000 5,000,000 --
Repayments of short-term borrowings............ (35,000,000) -- --
Net proceeds from issuance of shares........... 71,771,027 23,496,784 27,846,983
Cash distributions paid to shareholders........ (6,316,185) (2,977,136) (359,427)
-------------- -------------- -------------
Net cash provided by financing activities... 68,754,842 25,519,648 27,487,556
Increase in cash and cash equivalents....... 2,784,709 680,166 3,608,172
Cash and cash equivalents, beginning of period . 4,288,438 3,608,272 100
-------------- -------------- -------------
Cash and cash equivalents, end of period ....... $ 7,073,147 $ 4,288,438 $ 3,608,272
============== ============== =============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 -- GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Business: Cornerstone Realty Income Trust, Inc. (the "Company"), an externally
advised real estate investment trust, is a Virginia corporation formed in 1992
to invest primarily in residential apartment communities in the southeastern
region of the United States. Operations of rental property commenced on June 1,
1993. The company currently anticipates that it will hold its investment
properties for an indefinite length of time.
Cash and Cash Equivalents: Cash equivalents include highly liquid investments
with original maturities of three months or less. The fair market value of cash
and cash equivalents approximates their carrying value.
Investment in Rental Property: The investment in rental property is recorded at
the lower of depreciated cost or fair value and includes real estate brokerage
commissions paid to Cornerstone Realty Group, a related party (see Note 6). The
company records impairment losses on rental property used in operations if
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by the respective properties are less than their carrying
amount. The company will adopt SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," in the first
quarter of 1996 and, based on current circumstances, does not believe the effect
of adoption will be material.
Repairs and maintenance costs are expensed as incurred while significant
improvements, renovation, and replacements are capitalized. Depreciation is
computed on a straight-line basis over the estimated useful lives of the related
assets which are 27.5 years for buildings and major improvements and a range
from five to seven years for furniture and fixtures.
Income Recognition: Rental, interest and other income are recorded on an accrual
basis. The company's Properties are leased under leases that, typically, have
terms that do not exceed one year.
Use of Estimates: The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect amounts reported in the financial
statements and accompanying footnotes. Actual results may differ from those
estimates.
Stock Incentive Plans: The company accounts for stock option grants under the
Directors Plan and Incentive Plan (see additional details included in Note 5) in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and accordingly recognizes no compensation expense for stock option grants
priced at fair market value.
Advertising Costs: Cost incurred for the production and distribution of
advertising are expensed as incurred.
Income Per Share: Net income per share is computed based upon the weighted
average number of shares outstanding during the year. Unexercised stock options
are not included since their inclusion would not materially dilute net income
per share.
Federal Income Taxes: The company is operated as, and annually elects to be
taxed as, a real estate investment trust under the Internal Revenue Code of
1986, as amended (the "Code"). Generally, a real estate investment trust which
complies with the provisions of the Code and distributes at least 95% of its
taxable income to its shareholders does not pay federal income taxes on its
distributed income. Accordingly, no provision has been made for federal income
taxes.
F-7
<PAGE>
For income tax purposes, distributions paid to shareholders consist of ordinary
income and return of capital or a combination thereof. Distributions per share
were 95.75 cents, 88.55 cents and 27.30 cents in the years ended December 31,
1995, 1994 and 1993, respectively. In 1995, of the total distribution, 83% was
taxable as ordinary income and 17% was a non-taxable return of capital. In 1994,
79% was taxable as ordinary income and 21% was a non-taxable return of capital.
All distributions in 1993 were taxable as ordinary income.
Reclassifications: Certain previously reported amounts have been reclassified
to conform with the current financial statement presentation.
NOTE 2 -- INVESTMENT IN RENTAL PROPERTY
The following is a summary of rental property owned at December 31, 1995.
<TABLE>
<CAPTION>
INITIAL
ACQUISITION ACCUMULATED DATE
DESCRIPTION COST COST DEPRECIATION ACQUIRED
- ----------------- ---------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C>
The Hollows...... $ 4,200,000 $ 5,288,688 $ 375,794 June 1, 1993
Polo Club........ 4,300,000 6,427,607 642,401 June 3, 1993
Mayflower Seaside 7,634,144 8,819,334 516,607 October 26, 1993
County Green..... 3,800,000 4,921,858 324,186 December 1, 1993
Stone Ridge...... 3,325,000 5,340,562 379,073 December 8, 1993
Wimbledon Chase . 3,300,000 5,084,166 314,897 February 1, 1994
Harbour Club..... 5,250,000 5,672,670 282,393 May 1, 1994
Chase Mooring ... 3,594,000 4,586,234 208,802 August 1, 1994
The Trestles..... 10,350,000 11,021,668 357,460 December 30, 1994
Wind Lake........ 8,760,000 9,197,665 220,640 April 1, 1995
Magnolia Run..... 5,500,000 6,135,797 117,594 June 1, 1995
Breckinridge..... 5,600,000 5,989,522 92,200 June 21, 1995
Bay Watch Pointe. 3,372,525 4,074,141 57,292 July 18, 1995
Hanover Landing . 5,725,000 6,197,069 79,502 August 22, 1995
Mill Creek....... 8,550,000 8,795,664 89,817 September 1, 1995
Glen Eagles...... 7,300,000 7,490,073 64,476 October 1, 1995
Sailboat Bay..... 9,100,000 9,777,821 45,895 November 1, 1995
Tradewinds....... 10,200,000 10,407,351 58,946 November 1, 1995
Osprey Landing .. 4,375,000 4,468,557 26,999 November 1, 1995
---------------- -------------- ----------
$114,235,669 $129,696,447 $4,254,974
================ ============== ==========
</TABLE>
The following is a reconciliation of the carrying amount of real estate owned:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 31 ....... $ 54,107,358 $ 25,549,790 $ --
Real estate purchased ....... 68,482,525 22,494,000 23,259,144
Improvements ................ 7,106,564 6,063,568 2,290,646
------------ ------------ ------------
Balance at December 31 ...... $129,696,447 $ 54,107,358 $ 25,549,790
============ ============ ============
</TABLE>
The following is a reconciliation of accumulated depreciation:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1 ................. $1,466,156 $ 255,338 $ --
Depreciation expense for the year .... 2,788,818 1,210,818 255,338
---------- ---------- ----------
Balance at December 31 ............... $4,254,974 $1,466,156 $ 255,338
========== ========== ==========
</TABLE>
F-8
<PAGE>
NOTE 3 -- SHORT-TERM NOTES PAYABLE
In October 1995, the company purchased Glen Eagles Apartments for $7,300,000
with $5,000,000 in proceeds from the offering. At the request of the seller, an
unsecured non-interest-bearing promissory note was executed for the remaining
amount of $2,300,000. The note was repaid in full in January 1996 using proceeds
from the sale of additional shares.
In March 1995, the company entered into an agreement with a commercial bank for
a $10 million unsecured revolving line of credit which was subsequently
increased to $20 million in November 1995. This line of credit currently expires
in March 1996, but is renewable annually by mutual agreement between the company
and bank. This agreement allows the company to finance a portion of the purchase
price of future acquisitions. Borrowings under the current agreement are
evidenced by an unsecured promissory note and bear interest at the one-month
LIBOR plus 175 basis points. Borrowings under the agreement of $6,000,000 at
December 31, 1995 were repaid in full in January 1996 using proceeds from the
sale of additional shares.
In December 1994, the company entered into an agreement with a commercial bank
to facilitate the short-term financing of the acquisition of The Trestles. The
company repaid the full balance of the debt in February 1995 through the sale of
additional shares.
The average interest rate incurred under the line of credit was 7.8% in 1995.
The fair market value of the borrowings approximates the recorded amounts. No
interest was capitalized in 1995, 1994 or 1993.
NOTE 4 -- COMMON STOCK
The company is raising capital through an offering of shares. The company
received gross proceeds of $80,142,516, $26,630,317 and $31,634,513 from the
sale of 7,285,683, 2,423,438 and 2,995,210 shares for the years ended December
31, 1995, 1994 and 1993, respectively. David Lerner Associates, Inc. receives
selling commissions and a marketing expense allowance equal to 7.5% and 2.5%,
respectively, of the gross proceeds of shares sold. During 1995, 1994 and 1993,
David Lerner Associates, Inc. earned $8,014,252, $2,663,032 and $3,163,451,
respectively. The net proceeds of the offering, after deducting selling
commissions and other offering expenses, were $71,771,027 in 1995, $23,496,786
in 1994 and $27,846,983 in 1993.
The company provides an Additional Share Option which allows shareholders to
reinvest distributions in the purchase of additional shares of the company. Of
the total proceeds raised during the years ended December 31, 1995, 1994 and
1993, respectively, $3,906,276, $1,415,328 and $224,601 were provided through
the Additional Share Option.
NOTE 5 -- STOCK INCENTIVE PLANS
In December 1992, the shareholders approved a Directors Stock Option Plan which
provides automatic stock option grants to Directors who are not employees of the
company or "Cornerstone Companies" (see Note 6). Also in December 1992, the
shareholders approved an Incentive Plan whereby awards may be granted to certain
employees of the company or the "Cornerstone Companies." Both the Directors Plan
and Incentive Plan were amended by shareholder approval in July 1994.
Under the amended Directors Plan, the number of stock options to be granted is
equal to 45,000 plus 1.8% of the number of shares sold in excess of 1,000,000.
As of December 31, 1995, options to purchase 3,773 shares at $10 per share and
51,627 shares at $11 per share had been granted and 256,577 shares had been
reserved for issuance. All granted options have a term of 10 years, become
exercisable six months after the date of the grant, were distributed equally
among the eligible directors and were priced at fair market value at the time of
the grant.
Under the original Incentive Plan, the number of shares to be issued is equal to
35,000 plus 4.625% of the number of shares sold in excess of 1,000,000 in the
company's initial public offering of $50 million. In addition, the Incentive
Plan, as amended, provides for additional awards of 4.4% of the total number of
shares sold in excess of the initial public offering. As of December 31, 1995,
560,435 shares had been reserved for issuance under the Incentive Plan. During
1994, options to purchase 204,495 shares were granted with a 10-year term that
become exercisable in equal installments over a five-year period. These options
will be priced at fair market value when they become exercisable.
F-9
<PAGE>
During 1995, options to purchase 40,000 shares at $11.00 per share were granted.
The 1995 options have a 10-year term and were immediately exercisable.
At December 31, 1995, all options awarded under the Directors Plan were
exercisable and 111,798 shares awarded under the Incentive Plan were exercisable
at $11.00 per share. None of the stock options awarded under these plans had
been exercised at December 31, 1995.
Effective July 1, 1995, the company granted 10,000 shares of restricted stock to
certain officers of the company under the Incentive Plan. The restricted stock
awards vest over a four-year period.
NOTE 6 -- RELATED-PARTY TRANSACTIONS
Since inception, the company has had no paid employees, and certain services are
provided by the "Cornerstone Companies" as described below. The "Cornerstone
Companies," all of which are wholly owned by Glade M. Knight, a Director of the
company, include Cornerstone Advisors, Inc., Cornerstone Management Group, Inc.
and Cornerstone Realty Group, Inc.
Cornerstone Advisors, Inc. (the "Advisor") is the advisor to the company and
provides its day-to-day management. The Advisor earns a quarterly fee not to
exceed .25% of the company's assets, based on the company's financial
performance as defined in the agreement with the Advisor, which expires in June
1996. During 1995, the Advisor earned $219,930 under the terms of the agreement.
During 1994, the company terminated its former advisory arrangement with
Cornerstone Realty Advisors, Inc. (the "Old Advisor"). Under the former
arrangement, the fee for management services was 1% of the company's assets, as
defined in the agreement. In August 1994, the company purchased the assets of
the Old Advisor in exchange for 40,000 of the company's shares, with a market
value of $440,000, which were distributed to the beneficial owners of the Old
Advisor, all of whom were either Directors and/or officers of affiliates of the
company. The $440,000 market value of the shares issued was expensed in 1994.
The Old Advisor also waived its fee of $106,610 for 1993. Subsequently,
management of the company determined that the waiver of this fee should be
reflected in the financial statements as an expense and corresponding
contribution to shareholders' equity. Accordingly, the 1993 financial statements
were restated to reflect this contribution of services by the Old Advisor to the
company.
As properties are acquired, the company enters into agreements to manage the
properties with Cornerstone Management Group, Inc. (the "Management Company").
The Management Company earns a management fee equal to 5% of rental income and
is entitled to be reimbursed for certain expenses, including the salaries and
expenses for personnel employed to lease and maintain the company's properties.
For the respective years of 1995, 1994 and 1993, the Management Company was paid
$1,022,998, $581,520, and $240,615 for its management fee and certain
reimbursable items, exclusive of salary reimbursement for the staffs of the
company properties.
The staffs of the individual properties owned by the company were employees of
the Management Company through December 31, 1995. These employees perform the
leasing, collection and maintenance functions to run the properties on a
day-to-day basis. In 1995, 1994 and 1993 respectively, the Management Company
was reimbursed $1,663,206, $864,296, and $190,153 for the salary expenses of
these employees as a direct reimbursement of the actual salary expense.
Effective January 1, 1996, these employees were directly employed by the
company, and not the Management Company, and there will no longer be
reimbursement for these costs.
The company has contracted with Cornerstone Realty Group, Inc. to acquire and
dispose of the real estate assets held by the company for a fee of 2% of the
purchase or sale price of the property. The company paid $1,302,550, $349,880
and $465,183 for the years of 1995, 1994 and 1993, respectively, under the terms
of this contract. The company also paid $166,000 to Cornerstone Realty Group,
Inc. in January 1996, relating to commissions earned on 1995 Property
acquisitions, upon the January 1996 repayment of short-term borrowings as
described in Note 3.
F-10
<PAGE>
NOTE 7 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly results of operations for the years
ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
-------------------------------------------------- -----------------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
- ------------------------ ------------ ------------ ------------ ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rental income ......... $2,745,012 $3,410,692 $4,383,403 $5,761,714 $1,558,564 $1,940,806 $2,233,247 $2,444,959
Income before interest
income/expense ...... 915,752 1,027,628 1,473,164 1,834,736 431,722 499,328 481,825 862,942
Net income ............ 902,832 1,034,183 1,527,978 1,764,722 456,395 515,247 502,570 912,091
Net income per share .. .16 .15 .17 .16 .15 .14 .12 .19
Distributions per share $ .23 $ .24 $ .2425 $ .245 $ .2205 $ .2210 $ .2215 $ .2225
</TABLE>
NOTE 8 -- PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma information for the years ended December 31,
1995 and 1994 is presented as if (a) the company had owned all the Properties on
January 1, 1994; (b) the company had qualified as a REIT, distributed all of its
taxable income and, therefore, incurred no federal income tax expense during the
period; and (c) the company had used proceeds from its best efforts offering to
acquire the properties. The pro forma information does not purport to represent
what the company's results of operations would actually have been if such
transactions, in fact had occurred on January 1, 1994 nor does it purport to
represent the results of operations for future periods.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA TOTALS
-----------------------------
1995 1994
------------- --------------
<S> <C> <C>
Rental Income .......................... $24,078,845 $22,813,874
Net Income ............................. 7,705,165 7,211,637
Net Income Per Share ................... $ .61 $ .58
</TABLE>
The pro forma information reflects adjustments for the actual rental income and
rental expenses of Wimbledon Chase, Harbour Club, Chase Mooring, The Trestles,
Wind Lake, Breckinridge, Magnolia Run, Bay Watch Pointe, Hanover Landing, Mill
Creek, Glen Eagles, Sailboat Bay, Tradewinds and Osprey Landing, for the
respective periods in 1995 and 1994 prior to acquisition by the company. Net
income has been adjusted as follows: (1) property management and advisory
expenses have been adjusted based on the company's contractual arrangements; and
(2) Depreciation has been adjusted based on the company's basis in the
properties. The pro forma weighted average number of shares used to calculate
net income per share includes the number of shares necessary to provide proceeds
adequate to finance the purchase price of the acquired properties.
NOTE 9 -- SUBSEQUENT EVENTS
In January 1996, the company declared and paid a cash distribution to
shareholders of $2,728,444 of which $1,622,083 was reinvested in the Additional
Share Option. During January and February 1996, the company closed the sale to
investors of 1,724,299 shares at $11 per share representing net proceeds after
the payment of brokerage fees to the company of $18,530,429. These proceeds were
used primarily to repay the outstanding borrowings at December 31, 1995 and fund
the property acquisition, described below.
On January 31, 1996, the company purchased The Meadows Apartments in Asheville,
North Carolina. The 176-unit apartment community was purchased for $6,200,000.
The company borrowed $5,300,000 in conjunction with this purchase which was
repaid in full in February 1996 using proceeds from the sale of additional
shares as discussed above.
F-11
<PAGE>
REPORT OF INDEPENDENT AUDITORS, ERNST & YOUNG LLP
The Board of Directors and Shareholders
Cornerstone Realty Income Trust, Inc.
We have audited the accompanying balance sheets of Cornerstone Realty Income
Trust, Inc. as of December 31, 1995 and 1994, and the related statements of
operations, shareholders' equity, and cash flows for each of the two years in
the period ended December 1, 1995. Our audits also included the financial
statement schedule on page F-14. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cornerstone Realty Income
Trust, Inc. at December 31, 1995 and 1994 and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1995,
in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the financial statements as a whole, presents fairly in all material respects
the information set forth therein.
Ernst & Young LLP
Richmond, Virginia
February 6, 1996, except for Note 9,
as to which the date is February 22, 1996
F-12
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Cornerstone Realty Income Trust, Inc.:
We have audited the accompanying statements (as restated, see note 6) of
operations, shareholders' equity and cash flows of Cornerstone Realty Income
Trust, Inc. for the year ended December 31, 1993. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Cornerstone
Realty Income Trust, Inc. for the year ended December 31, 1993 in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Richmond, Virginia
March 7, 1994, except as to
the fourth paragraph of note 6,
which is as of October 25, 1994
F-13
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
(AS OF DECEMBER 31, 1995)
<TABLE>
<CAPTION>
PURCHASE PRICE SUBSEQUENTLY GROSS AMOUNT CARRIED
---------------------- CAPITALIZED ------------------------------ DATE OF DATE
DESCRIPTION LAND BLDG. & IMPR. CAP. COSTS LAND BLDG. & IMPR. TOTAL ACC. DEP. CONST ACQUIRED DEP. LIFE
- ------------------ ---- ------------ ---------- ---- ------------- ----- --------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1) Polo Club
Greenville, SC
Multi-family
housing...........$ 264,698 $4,035,302 $2,127,607 $ 264,698 $6,162,909 $ 6,427,607 $642,401 1972 June 3, 1993 27.5 yrs.
2) The Hollows
Raleigh, NC
Multi-family
housing ..........$1,374,840 $2,825,160 $1,088,688 $1,388,546 $3,900,142 $ 5,288,688 $375,794 1974 June 1, 1993 27.5 yrs.
3) Mayflower
Seaside
Virginia Beach,
Va
Multi-family
housing...........
Retail shops .....$2,258,169 $5,375,975 $1,185,190 $2,258,169 $6,561,165 $ 8,819,334 $516,607 1950 Oct. 26, 1993 27.5 yrs.
4) River Ridge
Columbia, SC
Multi-family
housing ..........$ 374,271 $2,950,729 $2,015,562 $ 374,271 $4,966,291 $ 5,340,562 $379,073 1975 Dec. 8, 1993 27.5 yrs.
5) County Green
Lynchburg, Va
Multi-family
housing ..........$ 319,250 $3,480,750 $1,121,858 $ 319,250 $4,602,608 $ 4,921,858 $324,186 1976 Dec. 1, 1993 27.5 yrs.
6) Wimbledon Chase
Wilmington, NC
Multi-family
housing ..........$ 304,590 $2,995,410 $1,784,166 $ 304,815 $4,779,351 $ 5,084,166 $314,897 1976 Feb. 1, 1994 27.5 yrs,
7) Harbour Club
Virginia Beach,
VA
Multi-family
housing ..........$1,019,895 $4,230,105 $ 422,670 $1,020,275 $4,652,395 $ 5,672,670 $282,393 1988 May 1, 1994 27.5 yrs.
8) Chase Mooring
Wilmington, NC
Multi-family
housing...........$ 258,126 $3,335,874 $ 992,234 $ 258,210 $4,328,024 $ 4,586,234 $208,802 1968 Aug. 1, 1994 27.5 yrs,
9) The Trestles
Raleigh, NC
Multi-family
housing...........$2,650,884 $7,699,116 $ 671,668 $2,686,004 $8,335,664 $11,021,668 $357,460 1987 Dec. 30, 1994 27.5 yrs.
10) Wind Lake
Greensboro, NC
Multi-family
housing ..........$1,051,200 $7,708,800 $ 437,665 $1,088,780 $8,108,885 $ 9,197,665 $220,640 1985 April 1, 1995 27.5 yrs.
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
PURCHASE PRICE SUBSEQUENTLY GROSS AMOUNT CARRIED
------------------------- CAPITALIZED --------------------------------------
DESCRIPTION LAND BLDG. & IMPR. CAP. COSTS LAND BLDG. & IMPR. TOTAL ACC. DEP.
- ------------------ ---- ------------ ---------- ---- ------------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
11) Magnolia Run
Greenville, SC
Multi-family
housing............. $ 495,000 $5,005,000 $635,797 $ 509,001 $5,626,796 $ 6,135,797 $117,594
12) Breckinridge
Greenville, SC
Multi-family
housing............. $1,512,000 $4,088,000 $389,522 $1,558,060 $4,431,462 $ 5,989,522 $ 92,200
13) Bay Watch Pointe
Virginia Beach, VA
Multi-family housing $ 775,680 $2,596,845 $701,616 $ 813,935 $3,260,206 $ 4,074,141 $ 57,292
14) Hanover Landing
Charlotte, NC
Multi-family
housing............. $ 801,500 $4,923,500 $472,069 $ 822,006 $5,375,063 $ 6,197,069 $ 79,502
15) Mill Creek
Winston-Salem, NC
Multi-family
housing............. $1,368,000 $7,182,000 $245,664 $1,417,593 $7,378,071 $ 8,795,664 $ 89,817
16) Glen Eagles
Winston-Salem, NC
Multi-family
housing............. $1,095,000 $6,205,000 $190,073 $ 875,840 $6,614,233 $ 7,490,073 $ 64,476
17) Sailboat Bay
Charlotte, NC
Multi-family
housing............. $2,002,000 $7,098,000 $677,821 $2,065,456 $7,712,365 $ 9,777,821 $ 45,895
18) Trandwinds
Hampton, VA
Multi-family
housing............. $1,428,000 $8,772,000 $207,351 $1,430,310 $8,977,041 $10,407,351 $ 58,946
19) Osprey Landing
Wilmington, NC
Multi-family
housing............. $ 393,750 $3,981,250 $ 93,557 $ 397,325 $4,071,232 $ 4,468,557 $ 26,999
Totals........... $19,746,853 94,488,816 $15,460,778 $19,852,544 $109,843,903 $129,696,447 (1) $4,254,974
=========== ============ ============ ========== ============= =============== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DATE OF DATE
DESCRIPTION CONST ACQUIRED DEP. LIFE
- ------------------ ------ -------- ---------
<S> <C> <C> <C>
11) Magnolia Run
Greenville, SC
Multi-family
housing............. 1972 June 1, 1995 27.5 yrs.
12) Breckinridge
Greenville, SC
Multi-family
housing............. 1973 June 21, 1995 27.5 yrs.
13) Bay Watch Pointe
Virginia Beach, VA
Multi-family housing 1972 July 18. 1995 27.5 yrs.
14) Hanover Landing
Charlotte, NC
Multi-family
housing............. 1972 Aug. 22, 1995 27.5 yrs.
15) Mill Creek
Winston-Salem, NC
Multi-family
housing............. 1984 Sept. 1, 1995 27.5 yrs.
16) Glen Eagles
Winston-Salem, NC
Multi-family
housing............. 1990 Oct. 1, 1995 27.5 yrs.
17) Sailboat Bay
Charlotte, NC
Multi-family
housing............. 1972 Nov. 1, 1995 27.5 yrs.
18) Trandwinds
Hampton, VA
Multi-family
housing............. 1988 Nov. 1, 1995 27.5 yrs.
19) Osprey Landing
Wilmington, NC
Multi-family
housing............. 1973 Nov. 1, 1995 27.5 yrs.
</TABLE>
(1) Represents the aggregate cost for Federal income tax purposes.
F-15
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
-------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Investment in rental property
Land ................................................ $ 23,094,078 $ 19,852,544
Building ............................................ 121,605,544 96,862,036
Property improvements ............................... 12,627,797 10,627,687
Furniture and fixtures .............................. 2,543,688 2,354,180
-------------- ------------
159,871,107 129,696,447
Less accumulated depreciation ....................... (5,490,668) (4,254,974)
-------------- ------------
154,380,439 125,441,473
Cash and cash equivalents ........................... 8,694,171 7,073,147
Prepaid expenses .................................... 382,221 167,152
Other assets ........................................ 620,995 499,260
-------------- ------------
9,697,387 7,739,559
-------------- ------------
$164,077,826 $133,181,032
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term notes payable ............................ $ 12,205,000 $ 8,300,000
Accounts payable .................................... 403,072 555,691
Accrued expenses .................................... 1,063,026 1,257,231
Rents received in advance ........................... 98,659 129,648
Tenant security deposits ............................ 856,794 784,042
-------------- ------------
14,626,551 11,026,612
Shareholders' equity
Common stock, no par value, authorized 50,000,000
shares; issued and outstanding 15,569,183 shares and
12,754,331 shares, respectively ..................... 151,615,748 123,771,504
Deferred compensation ............................... (67,833) (77,000)
Distributions greater than net income ............... (2,096,640) (1,540,084)
-------------- ------------
149,451,275 122,154,420
-------------- ------------
$164,077,826 $133,181,032
============== ============
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
1996 1995
------------------- ----------
<S> <C> <C>
REVENUE:
Rental income .............................. $ 6,552,688 $2,745,012
EXPENSES:
Utility expenses ........................... 610,146 277,680
Repairs and maintenance .................... 720,876 312,209
Taxes and insurance ........................ 580,250 238,545
Property management ........................ 349,665 159,506
Advertising ................................ 144,819 64,992
General and administrative ................. 217,912 113,922
Amortization expense ....................... 7,641 7,641
Depreciation of rental property ............ 1,238,249 459,175
Other ...................................... 540,701 195,590
------------------- ----------
Total expenses ........................... 4,410,259 1,829,260
------------------- ----------
Income before interest income (expense) .... 2,142,429 915,752
Interest income ............................ 76,338 29,162
Interest expense ........................... (46,880) (42,082)
------------------- ----------
Net income ................................. $ 2,171,887 $ 902,832
=================== ==========
Net income per share ........................ $ 0.16 $ 0.16
=================== ==========
Weighted average number of shares
outstanding................................. 13,944,419 5,681,330
=================== ==========
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
DISTRIBUTIONS
(GREATER) TOTAL
NUMBER DEFERRED LESS THAN SHAREHOLDERS'
OF SHARES AMOUNT COMPENSATION NET INCOME EQUITY
------------ --------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ........... 5,458,648 $ 51,890,477 -- $ (453,614) $ 51,436,863
Net proceeds from the sale of shares .. 6,930,567 68,255,383 -- -- 68,255,383
Net income ............................. -- -- -- 5,229,715 5,229,715
Cash distributions paid to shareholders
($.9575 per share) ................... -- -- -- (6,316,185) (6,316,185)
Restricted stock grant ................. 10,000 110,000 $(110,000) -- --
Amortization of deferred compensation . -- -- 33,000 -- 33,000
Shares issued through Additional Share
Option ............................... 355,116 3,515,644 -- -- 3,515,644
------------ --------------- -------------- --------------- -------------
Balance at December 31, 1995 ........... 12,754,331 $123,771,504 $ (77,000) $(1,540,084) $122,154,420
Net proceeds from the sale of shares .. 2,667,390 26,384,370 -- -- 26,384,370
Net income ............................. -- -- -- 2,171,887 2,171,887
Cash distributions paid to shareholders
($.2475 per share) ................... -- -- -- (2,728,443) (2,728,443)
Amortization of deferred compensation . -- -- 9,167 -- 9,167
Shares issued through Additional Share
Option ............................... 147,462 1,459,874 -- -- 1,459,874
------------ --------------- -------------- --------------- -------------
Balance at March 31, 1996 .............. 15,569,183 $151,615,748 $ (67,833) $(2,096,640) $149,451,275
============ =============== ============== =============== =============
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1996 1995
--------------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income .............................................. $ 2,171,887 $ 902,832
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization .......................... 1,245,890 466,816
Amortization of deferred compensation .................. 9,167 --
Changes in operating assets and liabilities:
Prepaid expenses ...................................... (215,069) 44,551
Other assets .......................................... (131,931) (25,974)
Accounts payable ...................................... (152,619) (54,582)
Accrued expenses ...................................... (194,205) 528,513
Rent received in advance .............................. (30,989) (33,176)
Tenant security deposits .............................. 72,752 13,613
--------------- -----------
Net cash provided by operating activities ............ 2,774,883 1,842,593
Cash flow from investing activities:
Acquisitions of rental property ......................... (27,405,000) --
Capital improvements .................................... (2,769,660) (1,053,815)
--------------- -----------
Net cash used in investing activities ................ (30,174,660) (1,053,815)
Cash flow from financing activities:
Proceeds from short-term borrowings ..................... 17,505,000 --
Repayments of short-term borrowings ..................... (13,600,000) (5,000,000)
Net proceeds from issuance of shares .................... 27,844,244 8,696,598
Cash distributions paid to shareholders ................. (2,728,443) (1,086,210)
--------------- -----------
Net cash provided by financing activities ............ 29,020,801 2,610,388
Increase in cash and cash equivalents ................ 1,621,024 3,399,166
Cash and cash equivalents, beginning of year ............. 7,073,147 4,288,438
--------------- -----------
Cash and cash equivalents, end of period ................. $ 8,694,171 $ 7,687,604
=============== ===========
</TABLE>
See accompanying notes to financial statements
F-19
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1996
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information required by generally
accepted accounting principles. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. These financial statements should
be read in conjunction with the Company's December 31, 1995 Form 10-K.
NOTE 2 -- SHORT-TERM NOTE PAYABLE
In April 1996, the Company renewed its unsecured line of credit with an
increased credit limit of $50 million. The terms of the renewed line are
unchanged except that the expiration is March 31, 1997.
The Company borrowed $12,205,000 against the line of credit in March 1996, in
conjunction with the purchase of Ashley Park Apartments. As of May 6, 1996, the
Company had repaid $4,500,000 of the balance of the debt through the sale of
additional shares.
NOTE 3 -- COMMON STOCK
During 1996, David Lerner Associates, Inc. has earned a total of $3,096,396 in
connection with the offering of the Company's shares. The Company provides an
Additional Share Option to the shareholders to reinvest distributions in the
purchase of additional shares of the Company. During 1996, approximately
$1,622,082 ($1,459,874 net of underwriter fees) has been invested in additional
shares of the Company through the Additional Share Option.
During January 1996, the Company paid distributions of $2,728,443 (24.75 cents
per share) to shareholders.
NOTE 4 -- RELATED PARTIES
As Properties are acquired, the Company enters into agreements to manage the
properties with Cornerstone Management Group, Inc. (The "Management Company").
The Management Company earns a management fee equal to 5% of rental income and
is entitled to be reimbursed for certain expenses. Effective January 1, 1996,
the staffs of the individual properties owned by the Company were directly
employed by the Company, and not the Management Company, and there will no
longer be reimbursements for those costs. The Management Company was paid
$368,931 and $172,293 for the three months ended March 31, 1996 and 1995
respectively, for its management fee and certain reimbursable items, exclusive
of salary reimbursement for the staffs of the Company's properties.
The Company has contracted with Cornerstone Realty Group, Inc. to acquire the
real estate assets held by the Company for a fee of 2% of the purchase price of
the property. The Company was paid $392,082 and $147,000 for the three months
ended March 31, 1996 and 1995, respectively.
Cornerstone Advisors, Inc. (the "Advisor") is the advisor to the Company and
provides its day-to-day management. The Advisor is paid a quarterly fee not to
exceed .25% of the Company's assets as defined in the agreement with the
Advisor. The Company's agreement with the Advisor which was to expire in June
1995 has been extended by approval of the Board of Directors for an additional
one year term under terms consistent with the expiring agreement. As of March
31, 1996 and 1995, the Advisor had earned a fee of approximately $93,616 and
$37,974, respectively.
NOTE 5 -- SUBSEQUENT EVENTS
In April, 1996, the Company distributed to its shareholders approximately
$3,393,770 (24.8 cents per share) of which approximately $2,023,408 was
reinvested in the purchase of additional shares through the Additional Share
Option.
F-20
<PAGE>
On April 30, 1996, effective April 1, 1996, the Company acquired two apartment
communities. Longmeadow Apartments, a 120-unit apartment community located in,
Charlotte, North Carolina, was purchased for $5,025,000. Trophy Chase Apartments
(formally Westfield Apartments), a 185-unit apartment community located in
Charlottesville, Virginia, was purchased for $3,710,000. Both Properties were
purchased with proceeds from the offering.
NOTE 6 -- ACQUISITIONS (UNAUDITED)
The following unaudited pro forma information for the three months ended March
31, 1996 and 1995 is presented as if (a) the Company had owned the properties
listed below on January 1, 1995, (b) the Company had qualified as a REIT,
distributed all of its taxable income and, therefore, incurred no federal income
tax expense during the period, and (c) the Company had used proceeds from its
best efforts offering to acquire the properties. The pro forma information does
not purport to represent what the Company's results of operations would actually
have been if such transactions, in fact, had occurred on January 1, 1995 nor
does it purport to represent the results of operations for future periods.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
3/31/96 3/31/95
-------------- --------------
<S> <C> <C>
Rental income....... $7,054,398 $6,031,996
Net income.......... $2,341,981 $2,123,528
Net income per share..$ .15 $ .14
</TABLE>
The pro forma information reflects adjustments for the actual rental income and
rental expenses of Wind Lake, Breckinridge, Magnolia Run, Bay Watch, Hanover
Landing, Mill Creek, Glen Eagles, Sailboat Bay, Tradewinds, Osprey Landing, The
Meadows, Scarlett Oaks and Ashley Park Apartments for the respective periods in
1996 and 1995 prior to acquisition by the Company. Net income has been adjusted
as follows: (1) property management and advisory expenses have been adjusted
based on the Company's contractual arrangements, and (2) depreciation has been
adjusted based on the Company's basis in the properties. The pro forma weighted
average number of shares used to calculate net income per share includes the
number of shares necessary to provide proceeds adequate to finance the purchase
price of the acquired properties.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property of LaVista Apartments located in Greenville, South Carolina for the
year ended December 31, 1992. This statement is the responsibility of the
management of Cornerstone Realty Income Trust, Inc. Our responsibility is to
express an opinion on the statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. Am audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in post effective amendments to be filed by Cornerstone Realty Income Trust,
Inc.), and excludes material expenses described in Note 1 to the statement, that
would not be comparable to those resulting from the proposed future operations
of the properties.
In our opinion, the statement referred to above presents fairly, in all material
respects, the operating income of the LaVista Apartments (as defined above) for
the year ended December 31, 1992, in conformity with generally accepted
accounting principles.
L.P. MARTIN & COMPANY, P.C.
Richmond, Virginia
May 24, 1993
F-22
<PAGE>
LAVISTA APARTMENTS
GREENVILLE, SOUTH CAROLINA
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
YEAR ENDED DECEMBER 31, 1992
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income................................. $993,450
---------
DIRECT OPERATING EXPENSES (NOTE 1)
Administrative.......................................... 97,787
Insurance............................................... 34,067
Repairs & Maintenance................................... 209,343
Taxes, Property ........................................ 73,742
Utilities............................................... 99,333
---------
TOTAL DIRECT OPERATING EXPENSES....................... 514,272
---------
Operating income exclusive of items not comparable to
the proposed future operations of the property....... $479,178
=========
</TABLE>
NOTE 1 -- BASIS OF PRESENTATION
In June, 1993, Cornerstone Realty Income Trust, Inc. acquired the LaVista
Apartments from an affiliate of Limehouse Properties.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest income and expenses not considered comparable to those resulting from
the proposed future operations of the property. Excluded expenses are property
depreciation, mortgage interest, legal fees, accounting fees and management
fees.
UNAUDITED STATEMENT OF INCOME AND DIRECT OPERATING
EXPENSES EXCLUSIVE OF ITEMS NOT COMPARABLE TO
PROPOSED FUTURE OPERATIONS OF THE PROPERTY
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED MAY 31,
1993
-------------
<S> <C>
INCOME
Rental and Other Income................................. $475,681
-------------
DIRECT OPERATING EXPENSES
Administrative.......................................... 86,518
Insurance............................................... 36,425
Repairs & Maintenance................................... 50,491
Taxes, Property ........................................ 13,894
Utilities............................................... 27,500
-------------
TOTAL DIRECT OPERATING EXPENSES....................... 214,828
Operating income exclusive of items not comparable to
the proposed future operations of the property....... $260,853
=============
</TABLE>
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property of The Hollows Apartments located in Raleigh, North Carolina for
the twelve months ended April 30, 1993. This statement is the responsibility of
the management of Cornerstone Realty Income Trust, Inc. Our responsibility is to
express an opinion on the statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in post effective amendments to be filed by Cornerstone Realty Income Trust,
Inc.), and excludes material expenses described in Note 1 to the statement, that
would not be comparable to those resulting from the proposed future operations
of the properties.
In our opinion, the statement referred to above presents fairly, in all material
respects, the operating income of The Hollows Apartments (as defined above) for
the twelve months ended April 30, 1993, in conformity with generally accepted
accounting principles.
L.P. MARTIN & COMPANY, P.C.
Richmond, Virginia
May 24, 1993
F-24
<PAGE>
THE HOLLOWS APARTMENTS
RALEIGH, NORTH CAROLINA
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED APRIL 30, 1993
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income................................. $910,812
---------
DIRECT OPERATING EXPENSES (NOTE 1)
Administrative.......................................... 111,505
Insurance .............................................. 17,806
Repairs & Maintenance................................... 248,201
Taxes, Property......................................... 41,147
Utilities............................................... 51,778
---------
TOTAL DIRECT OPERATING EXPENSES....................... 470,437
---------
Operating income exclusive of items not comparable to
the proposed future operations of the property....... $440,375
=========
</TABLE>
NOTE I -- BASIS OF PRESENTATION
In June 1993, Cornerstone Realty Income Trust, Inc. acquired The Hollows
Apartments from an affiliate of Drucker and Falk Realtors.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest income and expenses not considered comparable to those resulting from
the proposed future operations of the property. Excluded expenses are property
depreciation, mortgage interest expense and loan costs, legal fees and
management fees.
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property of Mayflower Seaside Tower Apartments located in Virginia Beach,
Virginia for the twelve month period ended June 30, 1993. This statement is the
responsibility of the management of Cornerstone Realty Income Trust, Inc. and
Pembroke Commerical Realty. Our responsibility is to express an opinion on the
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
examining, on a test basis, evidence supporting the amounts and disclosures in
the statement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the statement. We believe that our audit provides a reasonable
basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.), and excludes material
expenses described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the properties.
In our opinion, the statement referred to above presents fairly, in all material
respects, the operating income of the Mayflower Seaside Tower Apartments (as
defined above) for the twelve month period ended June 30, 1993 in conformity
with generally accepted accounting principles.
L.P. MARTIN & COMPANY, P.C.
Richmond, Virginia
September 10, 1993
F-26
<PAGE>
MAYFLOWER SEASIDE TOWER APARTMENTS
VIRGINIA BEACH, VIRGINIA
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED JUNE 30, 1993
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income................................. $1,832,309
----------
DIRECT OPERATING EXPENSES (NOTE 1)
Administrative and Other................................ 162,119
Insurance............................................... 23,812
Repairs and Maintenance................................. 344,374
Taxes, Property......................................... 138,915
Utilities............................................... 300,353
----------
TOTAL DIRECT OPERATING EXPENSES ...................... 969,573
Operating income exclusive of items not comparable to
the proposed future operations of the property....... $ 862,736
==========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Mayflower Seaside Tower Apartments is a 263 residential unit high-rise apartment
complex located in Virginia Beach, Virginia. Usable residential space totals
183,542 square feet. There is also an additional 17,406 commercial square feet
of space. Due to financial difficulties encountered by a previous owner, the
project was placed in receivership during December 1991 and Pembroke Commercial
Realty has managed the property since that time. The property was sold to T. R.
Mayflower Ltd. partnership on June 17, 1993. Cornerstone Realty Income Trust has
signed a contract to purchase the property from T. R. Mayflower Ltd.
Partnership. The transaction should be completed prior to October 1993.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest income and expenses not considered comparable to those resulting from
the proposed future operations of the property. Excluded expenses are property
depreciation, legal fees, accounting fees and management fees.
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property of River Ridge Apartments located in Columbia, South Carolina for
the twelve month period ended September 30, 1993. This statement is the
responsibility of the management of River Ridge Apartments. Our responsibility
is to express an opinion on the statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.), and excludes material
expenses described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the properties.
In our opinion, the statement referred to above presents fairly, in all material
respects, the operating income of River Ridge Apartments (as defined above) for
the twelve month period ended September 30, 1993 in conformity with generally
accepted accounting principles.
L.P. MARTIN & COMPANY, P.C.
Richmond, Virginia
December 6, 1993
F-28
<PAGE>
RIVER RIDGE APARTMENTS
COLUMBIA, SOUTH CAROLINA
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTH PERIOD ENDED SEPTEMBER 30,1993
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income................................. $925,398
---------
DIRECT OPERATING EXPENSES
Administrative and Other................................ 128,612
Insurance............................................... 15,578
Repairs and Maintenance................................. 138,426
Taxes, Property and Business............................ 83,336
Utilities............................................... 64,031
---------
TOTAL DIRECT OPERATING EXPENSES....................... 429,983
---------
Operating income exclusive of items not comparable to
the proposed future operations of the property....... $495,415
=========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
River Ridge Apartments is a 191 unit residential garden and townhouse style
apartment complex located on 14.65 acres in Columbia, South Carolina. Living
space totals 196,170 square feet. The assets comprising the property were held
as an investment by McGuire Investment Group #8, a limited partnership. On
December 6, 1993, the property and existing leases were sold to Cornerstone
Realty Income Trust.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest income and expenses not considered comparable to those resulting from
the proposed future operations of the property. Excluded expenses are property
depreciation, amortization, legal fees, accounting fees, management fees,
interest expense and other debt related expenses and partnership expenses which
are not attributable to the operation of the property.
Rental and other income includes $41,920 of insurance proceeds received for loss
of rental earnings as a result of fire damage incurred December 5, 1992.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property County Green Apartments located in Lynchburg, Virginia for the
eleven month period ended November 30, 1993 and twelve month periods ended
December 31, 1992 and 1991. These statements are the responsibility of the
management of County Green Apartments; Cornerstone Realty Group. Our
responsibility is to express an opinion on the 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 audits to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statement. We believe that
our audits provides a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.), and exclude material
expenses described in Note 1 to the statements, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statements referred to above present fairly, in all material
respects, the operating income of County Green Apartments (as defined above) for
the eleven month period ended November 30, 1993 and twelve month periods ended
December 31, 1992 and 1991 in conformity with generally accepted accounting
principles.
L.P. MARTIN & COMPANY, P.C.
Richmond, Virginia
January 7, 1994
F-30
<PAGE>
COUNTY GREEN APARTMENTS
LYNCHBURG, VIRGINIA
STATEMENTS OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
<TABLE>
<CAPTION>
ELEVEN
MONTHS
ENDED TWELVE MONTHS ENDED
---------- -------------------
11/30/93 12/31/92 12/31/91
---------- ---------- --------
<S> <C> <C> <C>
INCOME
Rental and Other Income................ $730,844 $787,776 $791,321
---------- ---------- --------
DIRECT OPERATING EXPENSES
Administrative and Other............... 66,056 82,002 73,024
Insurance.............................. 15,235 17,174 17,426
Repairs and Maintenance................ 146,689 124,851 150,199
Taxes, Property and Business........... 44,341 48,363 48,371
Utilities.............................. 41,457 44,455 44,315
---------- ---------- --------
TOTAL DIRECT OPERATING
EXPENSES............................ 313,778 316,845 333,335
---------- ---------- --------
Operating income exclusive of items
not comparable to the proposed
future operations of the property... $417,066 $470,931 $457,986
========== ========== ========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
County Green Apartments is a 180 unit residential garden style apartment complex
located on 21.11 acres in Lynchburg, Virginia. Living space totals 180,016
square feet.
Effective December 1, 1993, the property and existing leases were purchased from
County Green Associates Limited Partnership (the partnership). Glade Knight, a
fifty percent owner of Cornerstone Realty Advisors, Inc., the advisor to
Cornerstone Realty Income Trust, Inc., is a general partner in the partnership.
The company purchased the apartments at a price which approximates fair market
value based on independent appraisal. All partnership distribution as a result
of the sale were made to the limited partners.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, amortization, legal fees, accounting fees,
management fees, interest expense and other debt related expense and partnership
expenses which are not attributable to the operation of the property.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Fountain Head Manor Apartments located in Wilmington, North
Carolina for the year ended December 31, 1993. This statement is the
responsibility of the management of Fountain Head Manor Apartments. Our
responsibility is to express an opinion on this statement based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.), and excludes material
expenses described in Note 1 to the statements, that would not be comparable to
those resulting from the proposed operations of the property.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the operating income of Fountain Head Manor Apartments
(as defined above) for the year ended December 31, 1993, in conformity with
generally accepted accounting principles.
L.P. MARTIN & COMPANY, P.C.
Richmond, Virginia
February 4, 1994
F-32
<PAGE>
FOUNTAIN HEAD MANOR APARTMENTS
WILMINGTON, NORTH CAROLINA
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income ................................ $849,775
--------
DIRECT OPERATING EXPENSES
Administrative and Other ............................... 54,524
Insurance .............................................. 15,777
Repairs and Maintenance ................................ 187,285
Taxes, Property ........................................ 53,452
Utilities .............................................. 74,418
--------
TOTAL DIRECT OPERATING EXPENSES ..................... 385,456
--------
Operating income exclusive of items not comparable to
the proposed future operations of the property ..... $464,319
========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Fountain Head Manor Apartments is a 192 unit residential apartment complex
located on 13.20 acres in Wilmington, North Carolina. Living space totals
165,600 square feet.
The assets comprising the property are held by Rand Associates, a former lender
which acquired the property through foreclosure. Cornerstone Realty Income
Trust, Inc. has a contract to purchase the property and is scheduled to close in
late February, 1994.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, amortization, legal fees, accounting fees,
management fees, interest expense and other debt related expenses.
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Birdneck Lake Apartments (Phases I and II) located in Virginia
Beach, Virginia for the twelve month period ended March 31, 1994. This statement
is the responsibility of the management of Birdneck Lakes Apartment (Phases I
and II). Our responsibiity is to express an opinion on this statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statement. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statements, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Birdneck Lakes Apartments
(Phases I and II) (as defined above) for the twelve month period ended March 31,
1994, in conformity with generally accepted accounting principles.
L.P. MARTIN & COMPANY, P.C.
Richmond, Virginia
April 28, 1994
F-34
<PAGE>
BIRDNECK LAKES APARTMENTS
VIRGINIA BEACH, VIRGINIA
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED MARCH 31, 1994
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income ................................ $1,077,658
----------
DIRECT OPERATING EXPENSES
Administrative and Other ............................... 68,506
Insurance .............................................. 13,663
Repairs and Maintenance ................................ 186,538
Taxes, Property ........................................ 76,128
Utilities .............................................. 125,021
----------
TOTAL DIRECT OPERATING EXPENSES ..................... 469,856
----------
Operating income exclusive of items not comparable to
the proposed future operations of the property ..... $ 607,802
==========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Birdneck Lakes Apartments is a 214 unit residential apartment complex located on
13.6 acres in Virginia Beach, Virginia. Living space totals 173,972 square feet.
The assets comprising Phase I are held by T.R. Birdneck Corporation and the
assets comprising Phase II are held by Birdneck Apartment Associates II.
Cornerstone Realty Income Trust, Inc. has a contract to purchase the property
and is scheduled to April 29, 1994.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, amortization, legal fees, accounting fees,
management fees, interest expense and other debt related expenses.
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property The Palms Apartments located in Wilmington, North Carolina for the
twelve month period ended May 31, 1994. This statement is the responsibility of
the management of The Palms Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statement. We believe that
our audit provide a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statements, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of The Palms Apartments (as
defined above) for the twelve month period ended May 31, 1994, in conformity
with generally accepted accounting principles.
L.P. MARTIN & COMPANY, P.C.
Richmond, Virginia
August 3, 1994
F-36
<PAGE>
THE PALMS APARTMENTS
WILMINGTON, NORTH CAROLINA
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
YEAR ENDED MAY 31, 1994
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income ................................ $947,098
--------
DIRECT OPERATING EXPENSES
Administrative and Other ............................... 76,017
Insurance .............................................. 28,312
Repairs and Maintenance ................................ 259,681
Taxes, Property ........................................ 44,247
Utilities .............................................. 100,120
--------
TOTAL DIRECT OPERATING EXPENSES ..................... 508,377
--------
Operating income exclusive of items not comparable to
the proposed future operations of the property ..... $438,721
========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Palms Apartments is a 224 unit residential garden style apartment complex
located on 16 acres in Wilmington, North Carolina. Living space totals 194,221
square feet.
The assets comprising the property are owned by Malibu Wilmington, Inc.
Cornerstone Realty Income Trust, Inc. has a contract to purchase the property
and is scheduled to close August 10, 1994.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, amortization, legal fees, accounting fees,
management fees, interest expense and other debt related expenses.
F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property The Trestles Apartments located in Raleigh, North Carolina for the
twelve month period ended September 30, 1994. This statement is the
responsibility of the management of The Trestles Apartments. Our responsibility
is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statements, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of The Trestles Apartments
(as defined above) for the twelve month period ended September 30, 1994, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
December 6, 1994
F-38
<PAGE>
THE TRESTLES APARTMENTS
RALEIGH, NORTH CAROLINA
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income................................. $1,629,779
-----------
DIRECT OPERATING EXPENSES
Administrative and Other................................ 192,599
Insurance............................................... 20,759
Repairs and Maintenance................................. 232,685
Taxes, Property......................................... 98,536
Utilities............................................... 116,662
-----------
TOTAL DIRECT OPERATING EXPENSES....................... 661,241
-----------
Operating income exclusive of items not comparable to
the proposed future operations of the property....... $ 968,538
===========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Trestles Apartments is a 280 unit residential garden style apartment complex
located on 14.8 acres in Raleigh, North Carolina. Living space totals 217,320
square feet.
The assets comprising the property are owned by MXM Mortgage Corporation.
Cornerstone Realty Income Trust, Inc. has a contract to purchase the property
and is scheduled to close December, 1994.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, amortization, legal fees, accounting fees,
management fees, interest expense and other debt related expenses.
F-39
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Sterling Pointe Apartments located in Greensboro, North Carolina
for the twelve month period ended February 28, 1995. This statement is the
responsibility of the management of Sterling Pointe Apartments. Our
responsibility is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
aspects, the income and direct operating expenses of Sterling Pointe Apartments
(as defined above) for the twelve month period ended February 28, 1995, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
April 11, 1995
F-40
<PAGE>
STERLING POINTE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED FEBRUARY 28, 1995
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income............................................ $1,499,760
-----------
DIRECT OPERATING EXPENSES
Administrative and Other........................................... 189,705
Insurance.......................................................... 27,932
Repairs and Maintenance............................................ 224,187
Taxes, Property.................................................... 127,541
Utilities.......................................................... 70,727
-----------
TOTAL DIRECT OPERATING EXPENSES................................... 640,092
-----------
Operating income exclusive of items not comparable to the proposed
future operations of the property................................ $ 859,668
===========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Sterling Pointe Apartments is a 299 unit residential garden style apartment
complex located on 23.7 acres in Greensboro, North Carolina. Living space totals
217,477 square feet.
The assets comprising the property are owned by Walden Residential Properties,
Inc. Cornerstone Realty Income Trust, Inc. has a contract to purchase the
property and is scheduled to close April, 1995.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, legal fees and accounting fees.
F-41
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Breckinridge Apartments located in Greenville, South Carolina for
the twelve month period ended April 30, 1995. This statement is the
responsibility of the management of Breckinridge Apartments. Our responsibility
is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.) And excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Breckinridge Apartments
(as defined above) for the twelve month period ended April 30, 1995, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
June 9, 1995
F-42
<PAGE>
BRECKINRIDGE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED APRIL 30, 1995
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income.......................................... $974,334
---------
DIRECT OPERATING EXPENSES
Administrative and Other......................................... 108,067
Insurance........................................................ 31,351
Repairs and Maintenance.......................................... 224,087
Taxes, Property.................................................. 59,499
Utilities........................................................ 71,924
---------
TOTAL DIRECT OPERATING EXPENSES................................. 494,928
---------
Operating income exclusive of items not comparable to the
proposed future operations of the property..................... $479,406
=========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Breckinridge Apartments is a 236 unit residential garden style apartment
complex located at 12.0 acres in Greenville, South Carolina. Living space totals
171,444 square feet.
The assets comprising the property are owned by Breckinridge Associates
Limited Partnership. Cornerstone Realty Income Trust, Inc. has a contract to
purchase the property and is scheduled to close June, 1995.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, interest expense, legal, management and
accounting fees.
F-43
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Edgewood Apartments located in Greenville, South Carolina for the
twelve month period ended April 30, 1995. This statement is the responsibility
of the management of Edgewood Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards that we plan and perform the audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statement. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all
material respects, the income and direct operating expenses of Edgewood
Apartments (as defined above) for the twelve month period ended April 30, 1995,
in conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond , Virginia
May 23, 1995
F-44
<PAGE>
EDGEWOOD APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED APRIL 30, 1995
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income.......................................... $1,031,088
-----------
DIRECT OPERATING EXPENSES
Administrative and Other......................................... 83,834
Insurance ....................................................... 26,574
Repairs and Maintenance.......................................... 223,795
Taxes, Property.................................................. 86,035
Utilities........................................................ 72,693
-----------
TOTAL DIRECT OPERATING EXPENSES................................. 502,931
-----------
Operating income exclusive of items not comparable to the
proposed future operations of the property..................... $ 528,157
===========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Edgewood Apartments is a 212 unit residential garden style apartment complex
located on 12.0 acres in Greenville, South Carolina. Living space totals 179,988
square feet.
The assets comprising the property are owned by Reedy River Development
Corporation. Cornerstone Realty Income Trust, Inc. has a contract to purchase
the property and is scheduled to close May, 1995.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expense excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expense are property depreciation, amortization, mortgage interest expense,
legal, accounting and management fees.
F-45
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Board Meadows Apartments located in Virginia Beach, Virginia for
the twelve month period ended April 30, 1995. This statement is the
responsibility of the management of Broad Meadows Apartments. Our responsibility
is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statement. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all
material respects, the income and direct operating expenses of Broad Meadows
Apartments (as defined above) for the twelve month period ended April 30, 1995,
in conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
July 13, 1995
F-46
<PAGE>
BROAD MEADOWS APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED APRIL 30, 1995
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income.......................................... $966,209
---------
DIRECT OPERATING EXPENSES
Administrative and Other......................................... 126,271
Insurance........................................................ 5,139
Repairs and Maintenance.......................................... 171,222
Taxes, Property.................................................. 50,670
Utilities ....................................................... 142,607
---------
TOTAL DIRECT OPERATING EXPENSES ................................ 495,909
---------
Operating income exclusive of items not comparable to the
proposed future operations of the property..................... $470,300
=========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Broad Meadows Apartments is a 160 unit residential garden style apartment
complex located on 11.97 acres in Virginia Beach, Virginia. Living space totals
145,752 square feet.
The assets comprising the property are owned by the Federal Deposit Insurance
Corporation and were managed by Republic Management, Inc. throughout the period
of the financial statements. Cornerstone Realty Income Trust, Inc. has a
contract to purchase the property and is scheduled to close July 1995.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non-rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, legal, accounting and management fees.
F-47
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Lemon Tree Apartments located in Charlotte, North Carolina for the
twelve month period ended June 30, 1995. This statement is the responsibility of
the management of Lemon Tree Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Lemon Tree Apartments (as
defined above) for the twelve month period ended June 30, 1995, in conformity
with generally accepted accounting principles.
L. P. Martin & Co., P.C.
Richmond, Virginia
August 21, 1995
F-48
<PAGE>
LEMON TREE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income.......................................... $954,240
---------
DIRECT OPERATING EXPENSES
Administrative and Other......................................... 85,615
Insurance........................................................ 13,761
Repairs and Maintenance.......................................... 177,299
Taxes, Property.................................................. 57,270
Utilities........................................................ 67,474
---------
TOTAL DIRECT OPERATING EXPENSES................................. 401,419
---------
Operating income exclusive of items not comparable to the
proposed future operations of the property..................... $552,821
=========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Lemon Tree Apartments is a 192 unit residential garden style apartment
complex located on 14.05 acres in Charlotte, North Carolina. Living space totals
159,712 square feet.
The assets comprising the property are owned by Lemon Tree Limited
Partnership. Cornerstone Realty Income Trust, Inc. has a contract to purchase
the property and is scheduled to close August, 1995.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, mortgage interest, loan costs, legal fees,
accounting fees and management fees.
F-49
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Mill Creek Apartments located in Winston Salem, North Carolina for
the twelve month-period ended July 31, 1995. This statement is the
responsibility of the management of Mill Creek Apartments. Our responsibility is
to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Mill Creek Apartments (as
defined above) for the twelve month period ended July 31, 1995, in conformity
with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
September 20, 1995
F-50
<PAGE>
MILL CREEK APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED JULY 31, 1995
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income.................................... $1,208,746
-----------
DIRECT OPERATING EXPENSES
Administrative and Other................................... 96,596
Insurance.................................................. 37,954
Repairs and Maintenance.................................... 175,091
Taxes, Property............................................ 85,296
Utilities.................................................. 46,648
-----------
TOTAL DIRECT OPERATING EXPENSES.......................... 441,585
-----------
Operating income exclusive of items not comparable to the
proposed future operations of the property.............. $ 767,161
===========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Mill Creek Apartments is a 220 unit residential garden style apartment complex
located on 17.17 acres in Winston Salem, North Carolina. Living space totals
197,320 square feet.
The assets comprising the property are owned by MBL Life Assurance Corporation.
Cornerstone Realty Income Trust, Inc. has a contract to purchase the property
and is scheduled to close September, 1995.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, legal fees, accounting fees and management
fees.
F-51
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Glen Eagles Apartments located in Winston Salem, North Carolina for
the twelve month period ended July 31, 1995. This statement is the
responsibility of the management of Glen Eagles Apartments. Our responsibility
is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.) and excludes material
income and expenses, described in Note 1 to the statement, that would not be
comparable to those resulting from the proposed future operations of the
property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Glen Eagles Apartments (as
defined above) for the twelve month period ended July 31, 1995, in conformity
with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
October 18, 1995
F-52
<PAGE>
GLEN EAGLES APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED JULY 31, 1995
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income.......................................... $1,073,164
-----------
DIRECT OPERATING EXPENSES
Administrative and Other......................................... 86,204
Insurance........................................................ 15,692
Repairs and Maintenance.......................................... 183,309
Taxes, Property.................................................. 84,535
Utilities........................................................ 42,085
-----------
TOTAL DIRECT OPERATING EXPENSES................................ 411,825
-----------
Operating income exclusive of items not comparable to the
proposed future operations of the property.................... $ 661,339
===========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Glen Eagles Apartments is a 166 unit residential garden style apartment complex
located on approximately 17.159 acres in Winston Salem North Carolina. Living
space totals 158,028 square feet.
The assets comprising the property are owned by Braehill Way Limited
Partnership. Cornerstone Realty Income Trust, Inc. has a contract to purchase
the property and is scheduled to close October, 1995.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation, amortization, mortgage interest, legal fees,
accounting fees and management fees.
F-53
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Summer Hill Apartments located in Wilmington, North Carolina for
the twelve month period ended September 30, 1995. This statement is the
responsibility of the management of Summer Hill Apartments. Our responsibility
is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Summer Hill Apartments (as
defined above) for the twelve month period ended September 30, 1995, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
November 13, 1995
F-54
<PAGE>
SUMMER HILL APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income.......................................... $885,049
---------
DIRECT OPERATING EXPENSES
Administrative and Other......................................... 48,040
Insurance........................................................ 11,676
Repairs and Maintenance.......................................... 213,346
Taxes, Property.................................................. 59,368
Utilities........................................................ 96,187
---------
TOTAL DIRECT OPERATING EXPENSES................................ 428,617
---------
Operating income exclusive of items not comparable to the
proposed future operations of the property ................... $456,432
=========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Summer Hill Apartments is a 176 unit residential garden style apartment complex
located on 13.00 acres in Wilmington, North Carolina. Living space totals
172,720 square feet.
The assets comprising the property are owned by Summer Hill Associates Limited
Partnership. Cornerstone Realty Income Trust, Inc. has a contract to purchase
the property and is scheduled to close November, 1995.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation, legal fees, accounting
fees and management fees.
F-55
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Tradewinds Apartments located in Hampton, Virginia for the twelve
month period ended September 30, 1995. This statement is the responsibility of
the management of Tradewinds Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Tradewinds Apartments (as
defined above) for the twelve month period ended September 30, 1995, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
November 8, 1995
F-56
<PAGE>
TRADEWINDS APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income.......................................... $1,620,964
-----------
DIRECT OPERATING EXPENSES
Administrative and Other......................................... 158,217
Insurance........................................................ 14,415
Repairs and Maintenance.......................................... 227,914
Taxes, Property.................................................. 129,365
Utilities........................................................ 123,128
-----------
TOTAL DIRECT OPERATING EXPENSES................................ 653,039
-----------
Operating income exclusive of items not comparable to the
proposed future operations of the property ................... $ 967,925
===========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Tradewinds Apartments is a 284 unit residential garden style apartment complex
located on 12.925 acres in Hampton, Virgina. Living space totals 263,920 square
feet.
The assets comprising the property are owned by Tradewinds Associates.
Cornerstone Realty Income Trust, Inc. has a contract to purchase the property
and is scheduled to close November, 1995.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation, legal fees, accounting
fees and penalties.
F-57
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property The Lake Apartments located in Charlotte, North Carolina for the
twelve month period ended September 30, 1995. This statement is the
responsibility of the management of The Lake Apartments. Our responsibility is
to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.) and excludes material
income and expenses, described in Note 1 to the statement, that would not be
comparable to those resulting from the proposed future operations of the
property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of The Lake Apartments (as
defined above) for the twelve month period ended September 30, 1995, in
conformity with generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
November 28 , 1995
F-58
<PAGE>
THE LAKE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income.......................................... $1,784,084
-----------
DIRECT OPERATING EXPENSES
Administrative and Other......................................... 176,967
Insurance........................................................ 37,826
Repairs and Maintenance.......................................... 387,019
Taxes, Property.................................................. 105,729
Utilities........................................................ 139,296
-----------
TOTAL DIRECT OPERATING EXPENSES................................ 846,837
-----------
Operating income exclusive of items not comparable to the
proposed future operations of the property.................... $ 937,247
===========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Lake Apartments is a 358 unit residential garden style apartment complex
located on 27.13 acres in Charlotte, North Carolina. Living space totals 324,465
square feet.
The assets comprising the property are owned by EQR-Lake Vista, Inc. during the
financial statement period. Cornerstone Realty Income Trust, Inc. purchased the
property in November, 1995.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are property depreciation and management fees.
F-59
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property The Meadows Apartments located in Asheville, North Carolina for the
year ended December 31, 1995. This statement is the responsibility of the
management of The Meadows Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of company with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of The Meadows Apartments (as
defined above) for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
L.P. Martin & Co., P.C.
Richmond, Virginia
March 9, 1996
F-60
<PAGE>
THE MEADOWS APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C>
INCOME
Rental and Other Income................................. $1,080,070
-----------
DIRECT OPERATING EXPENSES
Administrative and Other................................ 71,233
Insurance............................................... 8,679
Repairs and Maintenance................................. 174,632
Taxes, Property......................................... 54,602
Utilities............................................... 94,834
-----------
TOTAL DIRECT OPERATING EXPENSES....................... 403,980
-----------
Operating income exclusive of items not comparable to
the proposed future operations of the property....... $ 676,090
===========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Meadows Apartments is a 176 unit residential garden style apartment complex
located on 18.31 acres in Asheville, North Carolina. Living space totals 187,628
square feet.
The assets comprising the property were owned by Forest Properties throughout
1995. Cornerstone Realty Income Trust, Inc. purchased the property in February
1996.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation, legal fees, accounting
fees and management fees.
F-61
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Scarlett Oaks Apartments located in Augusta, Georgia for the twelve
month period ended January 31, 1996. This statement is the responsibility of the
management of Scarlett Oaks Apartments. Our responsibility is to express an
opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Scarlett Oaks Apartments
(as defined above) for the twelve month period ended January 31, 1996, in
conformity with generally accepted accounting principles.
Richmond, Virginia L.P. Martin & Co., P.C.
April 24, 1996
F-62
<PAGE>
SCARLETT OAKS APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED JANUARY 31, 1996
<TABLE>
<CAPTION>
<S> <C>
INCOME...................................................
Rental and Other Income................................. $763,810
DIRECT OPERATING EXPENSES................................ --------
Administrative and Other................................ 73,586
Insurance............................................... 17,657
Repairs and Maintenance................................. 136,915
Taxes, Property......................................... 41,000
Utilities............................................... 43,960
--------
TOTAL DIRECT OPERATING EXPENSES....................... 313,118
Operating income exclusive of items not comparable to --------
the proposed future operations of the property....... $450,692
========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Scarlett Oaks Apartments is a 165 unit residential garden style apartment
complex located in Augusta, Georgia. Living space totals 131,340 square feet.
During the financial statement period, the assets comprising the property were
owned by Scarlett Oaks of Augusta, L.L.C. Cornerstone Realty Income Trust, Inc.
purchased the property in April, 1996.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, property depreciation, legal fees, accounting
fees and management fees.
F-63
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.:
We have audited the accompanying historical summary of operating revenue and
expenses, as defined in note 1, of Ashley Park Apartments for the year ended
December 31, 1995. This historical summary is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
historical summary based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the historical summary is free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the historical summary. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the historical summary. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying historical summary was prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission and is
not intended to be a complete presentation of the revenue and expenses of Ashley
Park Apartments.
In our opinion, the historical summary referred to above presents fairly, in all
material respects, the operating revenue and expenses described in note 1 of
Ashley Park Apartments for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Richmond, Virginia
April 25, 1996
F-64
<PAGE>
ASHLEY PARK APARTMENTS
HISTORICAL SUMMARY OF OPERATING REVENUE AND EXPENSES (NOTE 1)
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C>
OPERATING REVEUNE --
Rental and other income............... $1,706,415
OPERATING EXPENSES:
Repairs and maintenance............... 147,125
Salaries, wages and payroll taxes..... 170,663
Insurance............................. 18,509
Utilities............................. 100,612
Advertising........................... 19,275
Real estate taxes..................... 146,465
Other................................. 27,629
Total Operating Expenses............. 630,278
OPERATING REVENUE IN EXCESS OF
OPERATING
EXPENSES.............................. $1,076,137
</TABLE>
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE PROPERTY
Ashley Park Apartments is a 272 unit residential garden style apartment complex
located on approximately 27 acres of land on the southside of Richmond,
Virginia. The buildings were completed in 1988 and contain total living space of
approximately 208,000 square feet.
BASIS OF PRESENTATION
The accompanying historical summary of operating revenue and expenses is not
representative of the actual operations for the period presented as certain
revenues and expenses, which may not be comparable to those expected to be
incurred by Cornerstone Realty Income Trust, Inc. in the proposed future
operations of the apartments have been excluded. Interest and non-rent related
income have been excluded from revenue, and mortgage interest, management fees,
Property depreciation and amortization and other costs not directly related to
the future operations of Ashley Park Apartments have been excluded from
expenses. Management is not aware of any material factors relating to Ashley
Park Apartments that would cause the historical summary of operating revenue and
expenses to not be indicative of future operating results of the apartments.
(2) ACQUISITION TRANSACTION
Cornerstone Realty Income Trust, Inc. acquired Ashley Park Apartments on
March 29, 1996, effective March 1, 1996.
F-65
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We have audited the accompanying statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Colonial Ridge Apartments located in Virginia Beach, Virginia for
the twelve month period ended December 31, 1995. This statement is the
responsibility of the management of Colonial Ridge Apartments. Our
responsibility is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statement. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in a filing by Cornerstone Realty Income Trust, Inc.) and excludes material
expenses, described in Note 1 to the statement, that would not be comparable to
those resulting from the proposed future operations of the property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the income and direct operating expenses of Colonial Ridge Apartments
(as defined above) for the twelve month period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Richmond, Virginia L.P. Martin & Co., P.C.
June 4, 1996
F-66
<PAGE>
COLONIAL RIDGE APARTMENTS
STATEMENT OF INCOME AND DIRECT OPERATING EXPENSES EXCLUSIVE OF
ITEMS NOT COMPARABLE TO THE PROPOSED FUTURE
OPERATIONS OF THE PROPERTY
TWELVE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C>
INCOME...................................................
Rental and Other Income................................. $832,771
--------
DIRECT OPERATING EXPENSES................................
Administrative and Other................................ 77,159
Insurance............................................... 6,690
Repairs and Maintenance................................. 118,212
Taxes, Property......................................... 58,224
Utilities............................................... 89,092
--------
TOTAL DIRECT OPERATING EXPENSES....................... 349,377
--------
Operating income exclusive of items not comparable to
the proposed future operations of the property....... $483,394
========
</TABLE>
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Colonial Ridge Apartments is a 148 unit residential garden style apartment
complex located on 7.75 acres in Virginia Beach, Virginia. Living space totals
125,800 square feet.
The assets comprising the property were owned by Colonial Ridge, L.C. during the
financial statement period. Cornerstone Realty Income Trust, Inc. purchased the
property in April 1996.
In accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange
Commission, the statement of income and direct operating expenses excludes
interest and non rent related income and expenses not considered comparable to
those resulting from the proposed future operations of the property. Excluded
expenses are mortgage interest, loan amortization, property depreciation, legal
fees, management fees and accounting fees.
F-67
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS FOR YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
The accompanying unaudited Pro Forma Statement of Operations for the year ended
December 31, 1995 is presented as if (a) the Company had owned the acquired
properties shown below on January 1, 1995, (b) the Company had qualified as a
REIT, distributed all of its taxable income and, therefore, incurred no federal
income tax expense during the year, and (c) the Company had used proceeds from
its offering to acquire the properties. The unadjusted Pro Forma Statement of
Operations does not purport to represent what the Company's results of
operations would actually have been if such transactions, in fact, had occurred
on January 1, 1995, nor does it purport to represent the results of operations
for future periods.
<TABLE>
<CAPTION>
Historical 1995 Meadows West Eagle Ashley Park
Statement of 1995 Pro Forma Pro Forma Pro Forma Pro Forma
Operations Acquisitions(3) Adjustments Adjustments Adjustments Adjustments
---------- --------------- ----------- ----------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Date of acquisition................... -- -- -- 1/31/96 3/1/96 3/1/96
Revenues from rental properties ...... $16,300,821 $ 7,778,024 -- $1,080,070 $ 763,810$ 1,706,415
Rental expenses:
Utilities........................... 1,676,938 577,495 -- 94,834 43,960 100,612
Repairs and maintenance............. 2,042,819 1,442,619 -- 174,632 136,915 234,163
Taxes and insurance................. 1,342,427 677,381 -- 63,281 58,657 164,974
Property management................. 896,521 -- $ 451,856 -- -- --
Advertising......................... 378,089 180,896 -- 17,808 18,397 19,275
General and administrative.......... 609,969 -- 112,858 -- -- --
Amortization........................ 30,564 -- -- -- -- --
Depreciation of rental property..... 2,788,818 -- 1,316,783 -- -- --
Other............................... 1,283,396 542,686 -- 53,425 55,189 111,254
--------- ------- ------ ------ -------
11,049,541 3,421,077 1,881,497 403,980 313,118 630,278
---------- --------- --------- ------- ------- -------
Income before interest income
(expense)............................ 5,251,280 4,356,947 (1,881,497) 676,090 450,692 1,076,137
Interest income ...................... 226,555 -- -- -- -- --
Interest expense...................... (248,120) -- -- -- -- --
--------
Net income............................ $ 5,229,715 $ 4,356,947 ($1,881,497) $ 676,090 $ 450,692 $1,076,137
=========== =============== =========== ========= ========= ==========
Net income per share.................. $ 0.64
===========
Wgt. avg. number of shares
outstanding.......................... 8,176,803
=========
</TABLE>
Arbor Trace 1996
Pro Forma Pro Forma Total
Adjustments Adjustments Pro Forma
----------- ----------- ---------
Date of Acquisition................... 3/1/96 -- --
Revenues from rental properties ...... 832,771 -- $28,461,911
Rental expenses:
Utilities........................... 89,092 -- 2,582,931
Repairs and maintenance............. 118,212 -- 4,149,360
Taxes and insurance................. 64,914 -- 2,371,634
Property management................. -- $ 241,983 1,590,360
Advertising......................... 19,290 -- 633,755
General and administrative.......... -- 68,513 791,340
Amortization........................ -- -- 30,564
Depreciation of rental property..... -- 880,944 4,986,545
Other............................... 57,869 -- 2,103,819
------ -------- ---------
349,377 1,191,440 19,240,308
------- --------- ----------
Income before interest income
(expense)........................... $ 483,394 $1,191,440) 9,221,603
Interest income ...................... -- -- --
Interest expense...................... -- -- (248,120)
======= ========== ==========
Net income............................ 483,394 ($1,191,440) $ 9,200,038
Net income per share.................. $ 0.60
===========
Wgt. avg. number of shares
outstanding.......................... 15,389,944
==========
The pro forma adjustments give effect to the actual rental income and expenses
for the properties for the period in 1996 prior to their acquisition by the
Company. Notes to the Pro Forma Statement of Operations are as follows: (1)
property management expense has been adjusted based on the Company's contractual
arrangements, and (2) depreciation has been adjusted based on the Company's
depreciable basis of the acquired properties of $81,786,345, a 27.5 year life
and the respective periods prior to their acquisition. The pro forma rental
income and expenses of each property are based on the annual financial results
of each respective property as obtained in an audit by an independent auditor.
Management believes these results are representative of the actual results of
operations for the periods in which the Company did not own the properties. The
Company financed part of the purchase price of certain acquisitions with short
term borrowings, which were subsequently retired with proceeds of the Company's
on-going best efforts offering within approximately 60 days of acquisition. The
pro forma weighted average number of shares includes the number of shares
necessary to provide proceeds adequate to finance the purchase price. (3) See
F-69 for details of 1995 acquisitions.
F-68
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
The following schedule provides detail of 1995 acquisitions by property included
in the Pro Forma Statement of Operations for the year ended December 31, 1995.
(See F-68)
<TABLE>
<CAPTION>
Sterling Pointe Breckinridge Magnolia Bay Watch Hanover Mill Creek
Pro Forma Pro Forma Pro Forma Pro Forma Pro Forma Pro Forma
Adjustments Adjustments Adjustments Adjustments Adjustments Adjustments
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Date of Acquisition 4/1/95 6/21/95 6/1/95 7/18/95 8/22/95 9/22/95
Property Operations
Revenues from rental properties...... $ 374,940 $ 487,168 $ 429,620 $ 63,622 $ 636,160 $ 906,560
Rental expenses:
Utilities ......................... 17,682 35,962 30,289 83,187 44,983 34,986
Repairs and maintenance ........... 56,047 112,044 97,415 99,880 118,199 131,318
Taxes and insurance ............... 38,868 45,426 46,920 32,555 47,354 92,438
Property management ............... -- -- -- -- -- --
Advertising ....................... 11,857 13,508 8,733 18,415 14,269 18,112
General and administrative ........ -- -- -- -- -- --
Amortization ...................... -- -- -- -- -- --
Depreciation of rental property.... -- -- -- -- -- --
Other ............................. 35,570 40,526 26,198 55,244 42,808 54,335
------ ------ ------ ------ ------ ------
160,024 247,466 209,555 289,281 267,613 331,189
------- ------- ------- ------- ------- -------
Income before interest income -- -- -- -- -- --
------- ------- ------- ------ ------- -------
(expense)............................ 214,916 239,702 220,065 274,341 368,547 575,371
Interest income ...................... -- -- -- -- -- --
Interest expense...................... -- -- -- -- -- --
------- -------- ------- --------- ------ -------
Net income ........................... $ 214,916 $ 239,702 $ 220,065 $ 274,341 $ 368,547 $ 575,371
======= ====== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Glen Eagles Sailboat Tradewinds Osprey 1995
Pro Forma Pro Forma Pro Forma Pro Forma Acquisition
Adjustments Adjustments Adjustments Adjustments Adjustments
----------- ----------- ----------- ----------- -----------
10/26/95 11/1/95 11/9/95 11/16/95
<S> <C> <C> <C> <C> <C>
Property Operations................... $ 804,873 $ 1,486,737 $ 1,350,803 $ 737,541 $ 7,778,024
Rental expenses:
Utilities ......................... 31,564 116,080 102,607 80,155 577,495
Repairs and maintenance ........... 137,482 322,516 189,926 177,192 1,442,619
Taxes and insurance ............... 75,170 119,629 119,817 59,204 677,381
Property management ............... -- -- -- -- --
Advertising ....................... 16,163 36,868 32,962 10,009 180,896
General and administrative ........ -- -- -- -- --
Amortization ...................... -- -- -- -- --
Depreciation of rental property.... -- -- -- -- --
Other ............................. 48,490 110,604 98,888 30,023 542,686
------ ------- ------ ------ -------
308,869 705,697 544,200 357,183 3,421,077
------- ------- ------- ------- ---------
Income before interest income
(expense)............................ 496,004 781,040 806,603 380,358 4,356,947
Interest income ...................... -- -- -- -- --
Interest expense...................... -- -- -- -- --
-------- --------- ---------- ------- ----------
Net income ........................... $496,004 $ 781,040 $ 806,603 $ 380,358 $ 4,356,947
======== =========== =========== ========= ===========
</TABLE>
F-69
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
The accompanying unaudited Pro Forma Statement of Operations for the quarter
ended March 31, 1996 is presented as if (a) the Company had owned the acquired
properties shown below on January 1, 1996, (b) the Company had qualified as a
REIT, distributed all of its taxable income and, therefore, incurred no federal
income tax expense during the year, and (c) the Company had used proceeds from
its offering to acquire the properties. The unadjusted Pro Forma Statement of
Operations does not purport to represent what the Company's results of
operations would actually have been if such transactions, in fact, had occurred
on January 1, 1996, nor does it purport to represent the results of operations
for future periods.
<TABLE>
<CAPTION>
Historical Meadows West Eagle Ashley Park Arbor Trace 1996
Statement of Pro Forma Pro Forma Pro Forma Pro Forma Pro Forma Total
Operations Adjustments Adjustments Adjustments Adjustments Adjustments Pro Forma
<S> <C> <C> <C> <C> <C> <C>
Date of Acquisitions............. -- 1/31/96 3/1/96 3/1/96 -- --
Revenues from rental properties . $ 6,552,688 $ 90,006 $ 127,302 $ 284,403 $ 138,795 -- $ 7,193,194
Rental expenses:
Utilities...................... 610,146 7,903 7,327 16,769 14,849 -- 656,994
Repairs and maintenance........ 720,876 14,553 22,819 39,027 19,702 -- 816,977
Taxes and insurance............ 580,250 5,273 9,776 27,496 10,819 -- 633,614
Property management............ 349,665 -- -- -- -- 35,573 385,238
Advertising.................... 144,819 1,484 3,066 3,213 3,215 -- 155,797
General and administrative..... 217,912 -- -- -- -- 10,127 228,039
Amortization................... 7,641 -- -- -- -- -- 7,641
Depreciation of rental property 1,238,249 -- -- -- -- 128,600 1,366,849
Other.......................... 540,701 4,452 9,198 18,542 9,645 -- 582,538
------- ----- ----- ------ ----- ------- -------
4,410,259 33,665 52,186 105,047 58,230 174,300 4,833,687
--------- ------ ------ ------- ------ ------- ---------
Income before interest income
(expense)....................... 2,142,429 56,341 75,116 179,356 80,,565 (174,300) 2,359,507
Interest income ................. 76,338 -- -- -- -- -- 76,338
Interest expense................. (46,880) -- -- -- -- -- (46,880)
------- -------- ------- --------- ------- -------- -------
Net income....................... $ 2,171,887 $ 56,341 $ 75,116 $ 179,356 $ 80,565 ($174,300) $2,388,965
=========== =========== ========= =========== ========= ========= =========
Net income per share............. $ 0.16 $ 0.15
=========== ======
Wgt. avg. number of shares
outstanding..................... 13,944,419 15,599,509
========== ==========
</TABLE>
The pro forma adjustments give effect to the actual rental income and expenses
for the properties for the period in 1996 prior to their acquisition by the
Company. Notes to the Pro Forma Statement of Operations are as follows: (1)
property management expense has been adjusted based on the Company's contractual
arrangements, and (2) depreciation has been adjusted based on the Company's
depreciable basis of the acquired properties of $24,225,000, a 27.5 year life
and the respective periods prior to their acquisition. The pro forma rental
income and expenses of each property are based on the annual financial results
of each respective property as obtained in an audit by an independent auditor.
Management believes these results are representative of the actual results of
operations for the periods in which the Company did not own the properties. The
Company financed part of the purchase price of certain acquisitions with short
term borrowings, which were subsequently retired with proceeds of the Company's
on-going best efforts offering within approximately 60 days of acquisition. The
pro forma weighted average number of shares includes the number of shares
necessary to provide proceeds adequate to finance the purchase price.
F-70
<PAGE>
[SPECIMEN]
EXHIBIT A
SUBSCRIPTION AGREEMENT
To: Cornerstone Realty Income Trust, Inc.
306 East Main Street
Richmond, VA 23219
Gentlemen:
By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) hereby subscribe for the number of
shares of stock set forth on the reverse hereof in Cornerstone Realty Income
Trust, Inc. ("REIT") at a purchase price of Eleven and 00/100 Dollars ($11.00)
per Share. By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) further:
(a) acknowledge receipt of a copy of the Prospectus of Cornerstone Realty
Income Trust, Inc., of which this Subscription Agreement is a part, and
understand that the shares being acquired will be governed by the terms of such
Prospectus and any amendments and supplements thereto;
(b) represent that I am (we are) of majority age;
(c) represent that I (we) have adequate means of providing for my (our)
current needs and personal contingencies; have no need for liquidity from this
investment; and through employment experience, educational level attained,
access to advice from qualified advisors, prior experience with similar
investments, or a combination thereof, understand the financial risks and lack
of liquidity of an investment in the REIT;
(d) represent that I (we) have either: (i) a net worth (excluding home, home
furnishings and automobiles) of at least $50,000 and estimate that (without
regard to investment in the REIT) I (we) will have gross income during the
current year of $50,000, or (ii) a net worth (excluding home, home furnishings
and automobiles) of at least $100,000 ($150,000 in the case of North Carolina
purchasers); and, in either event, further represent that the purchase amount is
10% or less of my (our) net worth as defined above;
(e) represent (if purchasing in a fiduciary or other representative capacity)
that I (we) have due authority to execute the Subscription Agreement and to
thereby legally bind the trust or other entity of which I am (we are)
trustee(s), legal representative(s) or authorized agent(s); and agree to fully
indemnify and hold the REIT, its officers and directors, its affiliates and
employees, harmless from any and all claims, actions and causes of action
whatsoever which may result by a breach or an alleged breach of the
representations contained in this paragraph;
(f) certify, under penalties of perjury, (i) that the taxpayer identification
number shown on the signature page of this Subscription Agreement is true,
correct and complete (or I am (we are) waiting for a number to be issued to me
(us)), and (ii) that I am (we are) not subject to backup withholding either
because (a) I am (we are) exempt from backup withholding, or (b) I (we) have not
been notified by the Internal Revenue Service that I am (we are) subject to
backup withholding as a result of a failure to report all interest or
distributions, or (c) the Internal Revenue Service has notified me (us) that I
am (we are) no longer subject to backup withholding; and
(g) represent that I (we) have due authority to execute (or cause to be
executed on my (or our) behalf) the signature page hereto and to thereby legally
bind myself (ourselves) or the entity of which I am (we are) authorized
agent(s).
It is understood that the REIT shall have the right to accept or reject this
subscription in whole or in part in its sole and absolute discretion and that,
to the extent permitted by applicable law, the REIT intends to assert the
foregoing representations as a defense to any claim based on factual assertions
contrary to those set forth above.
(h) PRE-DISPUTE ARBITRATION CLAUSE. REGULATORY AUTHORITIES REQUIRE THAT ANY
BROKERAGE AGREEMENT CONTAINING A PRE-DISPUTE ARBITRATION AGREEMENT DISCLOSE THE
FOLLOWING:
1. ARBITRATION IS FINAL AND BINDING BETWEEN THE PARTIES.
2. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT,
INCLUDING THE RIGHT TO JURY TRIAL.
3. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND
DIFFERENT FROM COURT PROCEEDINGS.
4. THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS
OR LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR SEEK
MODIFICATION OR RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED.
5. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF
ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
6. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO
ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION
AGREEMENT AGAINST ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE
CLASS ACTION, OR WHO IS A MEMBER OF A PUTATIVE CLASS ACTION WHO HAS
OPTED OUT OF THE CLASS WITH RESPECT TO ANY CLAIMS ENCOMPASSED BY THE
PUTATIVE CLASS ACTION UNTIL: (1) THE CLASS CERTIFICATION IS DENIED;
OR (II) THE CLASS IS DECERTIFIED; OR (III) THE CUSTOMER IS EXCLUDED
FROM THE CLASS BY THE COURT. SUCH FORBEARANCE TO ENFORCE AN
AGREEMENT TO ARBITRATE SHALL NOT CONSTITUTE A WAIVER OF ANY RIGHTS
UNDER THIS AGREEMENT EXCEPT TO THE EXTENT STATED HEREIN.
THE CUSTOMER AGREES TO SETTLE BY ARBITRATION ANY CONTROVERSY BETWEEN HIM/HER
AND THE BROKER CONCERNING THIS AGREEMENT, HIS/HER ACCOUNTS(S), OR ACCOUNT
TRANSACTIONS, OR IN ANY WAY ARISING FROM HIS/HER RELATIONSHIP WITH BROKER
WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO THIS DATE. SUCH ARBITRATION WILL
BE CONDUCTED BEFORE AND ACCORDING TO THE ARBITRATION RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. (NASD) OR ANY OTHER SELF-REGULATORY
ORGANIZATION OF WHICH BROKER IS A MEMBER. EITHER THE BROKER OR THE CUSTOMER MAY
INITIATE ARBITRATION BY MAILING A WRITTEN NOTICE. IF THE CUSTOMER DOES NOT
DESIGNATE THE ARBITRATION FORUM IN HIS/HER NOTICE, OR RESPOND IN WRITING WITHIN
5 DAYS AFTER RECEIPT OF BROKER'S NOTICE, CUSTOMER AUTHORIZES BROKER TO DESIGNATE
THE ARBITRATION FORUM ON CUSTOMER'S BEHALF. JUDGMENT ON ANY ARBITRATION AWARD
MAY BE ENTERED IN ANY COURT HAVING JURISDICTION, AND CUSTOMER SUBMITS
HIMSELF/HERSELF AND PERSONAL REPRESENTATIVES TO THE JURISDICTION OF SUCH COURT.
<PAGE>
[SPECIMEN]
CORNERSTONE REALTY INCOME TRUST, INC.
SIGNATURE PAGE OF THE SUBSCRIPTION AGREEMENT
1. Social Security Number(s)____________________________________________________
Tax ID Number(s)_____________________________________________________________
Account # (If applicable)
2. Name(s) in which shares are to be registered:
_____________________________________________________________________________
_____________________________________________________________________________
3. Manner in which title is to be held (Please check one).
[]Individual []Joint Tenants WROS []Corporation []Community Property
[]Tenants in Common []Partnership []Trust
[]As Custodian for______________________________________________________________
[]For Estate of_________________________________________________________________
[]Other_________________________________________________________________________
4. Address for correspondence___________________________________________________
_____________________________________________________________________________
5. Are you a non-resident alien individual (other than a non-resident alien who
has elected to be taxed as a resident), a foreign corporation, a foreign
partnership, a foreign trust, a foreign estate, or otherwise not qualified as
a United States person? If so, transaction will not be executed without a
completed W-8 Form. [] Yes [] No
6. Amount of Investment $___________ for _____________ Shares (Investment must
be for a minimum of $5,000 in Shares or $2,000 in Shares for qualified
plans). Make check payable to: First Union National Bank, Escrow Agent (or as
otherwise instructed). [] Liquidate funds from money market [] Check enclosed
7. Instructions for cash distributions [] Deposit to money market [] Reinvest in
additional Shares
8. I (WE) UNDERSTAND THAT THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION
CLAUSE AT PARAGRAPH (h).
9. Signature(s) of Investor(s) (Please sign in same manner in which Shares are
to be registered. Read Subscription Agreement, an important legal document,
before signing.)
x____________________________________________________________________________
Signature Date
x____________________________________________________________________________
Signature Date
10. Broker/Dealer Information:
________________________________ __________________________________________
Registered Representative's Name Second Registered Representative's Name
________________________________ __________________________________________
Broker/Dealer Firm Registered Representative's Office Address
________________________________ __________________________________________
City/State/Zip Telephone Number
11.To substantiate compliance with Appendix F to Article III, Section 34 of the
NASD's Rules of Fair Practice, the undersigned Registered Representative
hereby certifies: I have reasonable grounds to believe, based on information
obtained from the investor(s) concerning investment objectives, other
investments, financial situation and needs and any other information known by
me, that investment in the REIT is suitable for such investor(s) in light of
financial position, net worth and other suitability characteristics.
_____________________________________________________________________________
Registered Representative Date
_____________________________________________________________________________
General Securities Principal Date
_____________________________________________________________________________
Cornerstone Use Only
This Subscription Agreement and Signature page will not be an effective
agreement until it is signed by a duly authorized agent of Cornerstone Realty
Income Trust, Inc.
Agreed and accepted by:
Cornerstone Realty Income Trust, Inc.
By______________________________________________________________________________
Date____________________________________________________________________________
<PAGE>
SUBSCRIPTION AGREEMENT
To: Cornerstone Realty Income Trust, Inc.
306 East Main Street
Richmond, VA 23219
Gentlemen:
By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) hereby subscribe for the number of
shares of stock set forth on the reverse hereof in Cornerstone Realty Income
Trust, Inc. ("REIT") at a purchase price of Eleven and 00/100 Dollars ($11.00)
per Share. By executing or having executed on my (our) behalf this Subscription
Agreement and submitting payment, I (we) further:
(a) acknowledge receipt of a copy of the Prospectus of Cornerstone Realty
Income Trust, Inc., of which this Subscription Agreement is a part, and
understand that the shares being acquired will be governed by the terms of such
Prospectus and any amendments and supplements thereto;
(b) represent that I am (we are) of majority age;
(c) represent that I (we) have adequate means of providing for my (our)
current needs and personal contingencies; have no need for liquidity from this
investment; and through employment experience, educational level attained,
access to advice from qualified advisors, prior experience with similar
investments, or a combination thereof, understand the financial risks and lack
of liquidity of an investment in the REIT;
(d) represent that I (we) have either: (i) a net worth (excluding home, home
furnishings and automobiles) of at least $50,000 and estimate that (without
regard to investment in the REIT) I (we) will have gross income during the
current year of $50,000, or (ii) a net worth (excluding home, home furnishings
and automobiles) of at least $100,000 ($150,000 in the case of North Carolina
purchasers); and, in either event, further represent that the purchase amount is
10% or less of my (our) net worth as defined above;
(e) represent (if purchasing in a fiduciary or other representative capacity)
that I (we) have due authority to execute the Subscription Agreement and to
thereby legally bind the trust or other entity of which I am (we are)
trustee(s), legal representative(s) or authorized agent(s); and agree to fully
indemnify and hold the REIT, its officers and directors, its affiliates and
employees, harmless from any and all claims, actions and causes of action
whatsoever which may result by a breach or an alleged breach of the
representations contained in this paragraph;
(f) certify, under penalties of perjury, (i) that the taxpayer identification
number shown on the signature page of this Subscription Agreement is true,
correct and complete (or I am (we are) waiting for a number to be issued to me
(us)), and (ii) that I am (we are) not subject to backup withholding either
because (a) I am (we are) exempt from backup withholding, or (b) I (we) have not
been notified by the Internal Revenue Service that I am (we are) subject to
backup withholding as a result of a failure to report all interest or
distributions, or (c) the Internal Revenue Service has notified me (us) that I
am (we are) no longer subject to backup withholding; and
(g) represent that I (we) have due authority to execute (or cause to be
executed on my (or our) behalf) the signature page hereto and to thereby legally
bind myself (ourselves) or the entity of which I am (we are) authorized
agent(s).
It is understood that the REIT shall have the right to accept or reject this
subscription in whole or in part in its sole and absolute discretion and that,
to the extent permitted by applicable law, the REIT intends to assert the
foregoing representations as a defense to any claim based on factual assertions
contrary to those set forth above.
(h) PRE-DISPUTE ARBITRATION CLAUSE. REGULATORY AUTHORITIES REQUIRE THAT ANY
BROKERAGE AGREEMENT CONTAINING A PRE-DISPUTE ARBITRATION AGREEMENT DISCLOSE THE
FOLLOWING:
1. ARBITRATION IS FINAL AND BINDING BETWEEN THE PARTIES.
2. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT,
INCLUDING THE RIGHT TO JURY TRIAL.
3. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND
DIFFERENT FROM COURT PROCEEDINGS.
4. THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS
OR LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR SEEK
MODIFICATION OR RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED.
5. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF
ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
6. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO
ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION
AGREEMENT AGAINST ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE
CLASS ACTION, OR WHO IS A MEMBER OF A PUTATIVE CLASS ACTION WHO HAS
OPTED OUT OF THE CLASS WITH RESPECT TO ANY CLAIMS ENCOMPASSED BY THE
PUTATIVE CLASS ACTION UNTIL: (1) THE CLASS CERTIFICATION IS DENIED;
OR (II) THE CLASS IS DECERTIFIED; OR (III) THE CUSTOMER IS EXCLUDED
FROM THE CLASS BY THE COURT. SUCH FORBEARANCE TO ENFORCE AN
AGREEMENT TO ARBITRATE SHALL NOT CONSTITUTE A WAIVER OF ANY RIGHTS
UNDER THIS AGREEMENT EXCEPT TO THE EXTENT STATED HEREIN.
THE CUSTOMER AGREES TO SETTLE BY ARBITRATION ANY CONTROVERSY BETWEEN HIM/HER
AND THE BROKER CONCERNING THIS AGREEMENT, HIS/HER ACCOUNTS(S), OR ACCOUNT
TRANSACTIONS, OR IN ANY WAY ARISING FROM HIS/HER RELATIONSHIP WITH BROKER
WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO THIS DATE. SUCH ARBITRATION WILL
BE CONDUCTED BEFORE AND ACCORDING TO THE ARBITRATION RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. (NASD) OR ANY OTHER SELF-REGULATORY
ORGANIZATION OF WHICH BROKER IS A MEMBER. EITHER THE BROKER OR THE CUSTOMER MAY
INITIATE ARBITRATION BY MAILING A WRITTEN NOTICE. IF THE CUSTOMER DOES NOT
DESIGNATE THE ARBITRATION FORUM IN HIS/HER NOTICE, OR RESPOND IN WRITING WITHIN
5 DAYS AFTER RECEIPT OF BROKER'S NOTICE, CUSTOMER AUTHORIZES BROKER TO DESIGNATE
THE ARBITRATION FORUM ON CUSTOMER'S BEHALF. JUDGMENT ON ANY ARBITRATION AWARD
MAY BE ENTERED IN ANY COURT HAVING JURISDICTION, AND CUSTOMER SUBMITS
HIMSELF/HERSELF AND PERSONAL REPRESENTATIVES TO THE JURISDICTION OF SUCH COURT.
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
SIGNATURE PAGE OF THE SUBSCRIPTION AGREEMENT
1. Social Security Number(s)____________________________________________________
Tax ID Number(s)_____________________________________________________________
Account # (If applicable)
2. Name(s) in which shares are to be registered:
_____________________________________________________________________________
_____________________________________________________________________________
3. Manner in which title is to be held (Please check one).
[]Individual []Joint Tenants WROS []Corporation []Community Property
[]Tenants in Common []Partnership []Trust
[]As Custodian for______________________________________________________________
[]For Estate of_________________________________________________________________
[]Other_________________________________________________________________________
4. Address for correspondence___________________________________________________
_____________________________________________________________________________
5. Are you a non-resident alien individual (other than a non-resident alien who
has elected to be taxed as a resident), a foreign corporation, a foreign
partnership, a foreign trust, a foreign estate, or otherwise not qualified as
a United States person? If so, transaction will not be executed without a
completed W-8 Form. [] Yes [] No
6. Amount of Investment $___________ for _____________ Shares (Investment must
be for a minimum of $5,000 in Shares or $2,000 in Shares for qualified
plans). Make check payable to: First Union National Bank, Escrow Agent (or as
otherwise instructed). [] Liquidate funds from money market [] Check enclosed
7. Instructions for cash distributions [] Deposit to money market [] Reinvest in
additional Shares
8. I (WE) UNDERSTAND THAT THIS AGREEMENT CONTAINS A PRE-DISPUTE ARBITRATION
CLAUSE AT PARAGRAPH (h).
9. Signature(s) of Investor(s) (Please sign in same manner in which Shares are
to be registered. Read Subscription Agreement, an important legal document,
before signing.)
x____________________________________________________________________________
Signature Date
x____________________________________________________________________________
Signature Date
10. Broker/Dealer Information:
________________________________ __________________________________________
Registered Representative's Name Second Registered Representative's Name
________________________________ __________________________________________
Broker/Dealer Firm Registered Representative's Office Address
________________________________ __________________________________________
City/State/Zip Telephone Number
11.To substantiate compliance with Appendix F to Article III, Section 34 of the
NASD's Rules of Fair Practice, the undersigned Registered Representative
hereby certifies: I have reasonable grounds to believe, based on information
obtained from the investor(s) concerning investment objectives, other
investments, financial situation and needs and any other information known by
me, that investment in the REIT is suitable for such investor(s) in light of
financial position, net worth and other suitability characteristics.
_____________________________________________________________________________
Registered Representative Date
_____________________________________________________________________________
General Securities Principal Date
_____________________________________________________________________________
Cornerstone Use Only
This Subscription Agreement and Signature page will not be an effective
agreement until it is signed by a duly authorized agent of Cornerstone Realty
Income Trust, Inc.
Agreed and accepted by:
Cornerstone Realty Income Trust, Inc.
By______________________________________________________________________________
Date____________________________________________________________________________
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH SUCH
OFFER MAY NOT LEGALLY BE MADE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES
NOT IMPLY THAT INFORMATION HEREIN HAS NOT CHANGED AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Available Information................... i
Summary of the Offering................. 1
Risk Factors............................ 10
Estimated Use of Proceeds............... 18
Compensation............................ 20
Conflicts of Interest................... 25
Investment Objectives and Policies ..... 27
Distribution Policy..................... 33
Business and Properties................. 34
Management.............................. 93
The Advisor and Affiliates.............. 102
Principal and Management Stockholders .. 106
Federal Income Tax Considerations ...... 107
Investment by Tax-Exempt Entities ...... 114
Dilution................................ 115
Selected Financial Data................. 117
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 118
Plan of Distribution.................... 122
Description of Capital Stock............ 123
Summary of Organizational Documents .... 126
Sales Literature........................ 128
Reports to Shareholders................. 128
Legal Opinions.......................... 128
Experts................................. 129
Change in Company's Certifying
Accountant............................. 129
Glossary................................ 130
Index to Financial Statements of the
Company................................ F-1
Subscription Agreement............. Exhibit A
</TABLE>
CORNERSTONE
REALTY
INCOME TRUST, INC.
PROSPECTUS
DAVID LERNER ASSOCIATES, INC.
July 19, 1996
