AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 1997
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
CORNERSTONE REALTY INCOME TRUST, INC.
Virginia 54-1589139
(State of Incorporation) (I.R.S. Employer Identification No.)
----------------
306 East Main Street
Richmond, Virginia 23219
-------------------
(804) 643-1761
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
GLADE M. KNIGHT
306 EAST MAIN STREET
RICHMOND, VIRGINIA 23219
(804) 643-1761
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
--------------------
with copies to:
Leslie A. Grandis, Esq Thurston R. Moore, Esq.
McGuire, Woods, Battle & Boothe, L.L.P. Hunton & Williams
One James Center, 901 East Cary Street Riverfront Plaza, East Tower
Richmond, Virginia 23219 951 East Byrd Street
(804) 775-4322 Richmond, Virginia 23219
(804) 788-8295
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Approximate date of commencement of proposed sale to the public. As soon as
practicable on or after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.[ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM PROPOSED
TITLE OF EACH AGGREGATE MAXIMUM AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE PRICE PER AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED SHARE OFFERING PRICE FEE
- --------------------------- ----------------- --------------- ---------------- ----------------
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Common Shares, no par value 5,175,000 Shares $12.50(1) $64,687,500 $19,603
</TABLE>
(1) Estimated solely for purposes of calculation of the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter becomes effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION
DATED MARCH , 1997
4,500,000 SHARES
CORNERSTONE REALTY INCOME TRUST, INC.
COMMON SHARES
Cornerstone Realty Income Trust, Inc. (the "Company") is a self-administered
and self-managed real estate investment trust ("REIT") engaged in the
management, acquisition and renovation of existing residential apartment
communities in Virginia, North Carolina, South Carolina and Georgia.
All of the Shares offered hereby (the "Shares") are being sold by the
Company. To ensure that the Company maintains its qualification as a REIT,
ownership by any person of the Company's Common Shares (the "Common Shares") is
limited to 9.8% of outstanding Common Shares.
Application has been made to list the Common Shares on the New York Stock
Exchange ("NYSE") under the symbol "TCR"("The Cornerstone REIT"). Prior to this
Offering, there has been no public market for the Common Shares. It is currently
estimated that the initial public offering price will be between $11.00 and
$12.50 per Share. See "Underwriting" for the factors to be considered in
determining the initial public offering price.
The Offering involves certain risks and investment considerations (see "Risk
Factors," beginning on page 9).
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.
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Price Underwriting Proceeds
to Discounts and to
Public Commissions (1) Company (2)
Per Share.... $ $ $
Total (3).... $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
See "Underwriting."
(2) Before deducting estimated expenses of $798,750 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
675,000 additional Shares solely to cover over-allotments, if any. To the extent
that the option is exercised, the Underwriters will offer the additional Shares
at the Price to Public shown above. If the option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, and Proceeds to
the Company will be $______, $_________ and $_________, respectively. See
"Underwriting."
The Shares are offered by the several Underwriters, subject to prior sale,
when, as and if delivered to and accepted by them, and subject to the right of
the Underwriters to reject any order in whole or in part. It is expected that
delivery of the Shares will be made at the offices of Alex. Brown & Sons
Incorporated, Baltimore, Maryland, on or about _________, 1997.
ALEX. BROWN & SONS
INCORPORATED
BRANCH, CABELL & CO.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
INTERSTATE/JOHNSON LANE
CORPORATION
The date of this Prospectus is _______ __, 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF COMMON SHARES PRIOR TO PRICING OF
THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON SHARES, THE
PURCHASE OF COMMON SHARES FOLLOWING THE PRICING OF THIS OFFERING TO COVER A
SYNDICATE SHORT POSITION IN THE COMMON SHARES OR FOR THE PURPOSE OF MAINTAINING
THE PRICE OF THE COMMON SHARES, AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
[INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto and pro forma financial
statements appearing elsewhere in, or incorporated by reference into, this
Prospectus. The offering by the Company of the 4,500,000 Shares pursuant to this
Prospectus is referred to herein as the "Offering." Unless otherwise indicated,
the information contained in this Prospectus assumes that the initial public
offering price (the "Offering Price") is $11.75 per Share (the midpoint of the
price range set forth on the cover page of the Prospectus). Except as otherwise
specified, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. See "Underwriting."
THE COMPANY
Cornerstone Realty Income Trust, Inc. (the "Company"), a self-administered
and self-managed equity REIT headquartered in Richmond, Virginia, is a fully
integrated real estate organization with expertise in the management,
acquisition and renovation of apartment communities. The Company focuses on the
ownership of apartment communities located in growing markets in Virginia, North
Carolina, South Carolina and Georgia. On February 28, 1997, the Company owned 42
apartment communities (the "Properties") comprising 9,613 apartment units with
an aggregate economic occupancy of 91% and an average monthly rent of $556 per
unit as compared to February 28, 1996, when the Company owned 20 Properties
comprising 4,565 apartment units with an aggregate economic occupancy of 88% and
an average monthly rent of $510 per unit . The Company's strategy is to own
apartment communities that cater to tenants with incomes equal to 90% to 115% of
the average local household income.
The Company maintains an intense focus on the operations of its Properties to
generate consistent, sustained growth in net operating income, which it believes
is the key to growing funds from operations per Common Share. Net operating
income growth is evidenced by the 1996 operating performance of the nine
Properties that the Company owned during all of 1995 and 1996 (the "Initial
Properties"). For the year ended December 31, 1996 as compared to the year ended
December 31, 1995, the Initial Properties achieved 8.8% growth in net operating
income.
The Company's objective is to increase distributable cash flow and Common
Share value by:
o Increasing rental rates, maintaining high economic occupancy rates,
and controlling costs at the Properties
o Acquiring additional properties at attractive prices that provide the
opportunity to improve operating performance through the application
of the Company's management, marketing, and renovation programs
The Company has six regional property management offices, located in
Blacksburg and Virginia Beach, Virginia; Raleigh, Charlotte and Wilmington,
North Carolina; and Columbia, South Carolina. The Company currently has
approximately 300 employees, including specialists in acquisition, management,
marketing, leasing, development, accounting and information systems. The
Company's executive officers have substantial experience with apartment
properties, having been responsible for the management, acquisition and
renovation of more than 20,000 apartment units over the last 24 years using the
strategies and techniques described below.
Glade M. Knight, the Company's Chairman and Chief Executive Officer,
currently owns approximately 4% of the outstanding Common Shares. Collectively,
the officers and directors of the Company currently own approximately 5% of the
outstanding Common Shares.
GROWTH THROUGH MANAGEMENT AND LEASING
The Company plans to grow net operating income through active property
management, which includes keeping rental rates at or above market levels,
maintaining high economic occupancy through tenant retention, creating a
property identity and effectively marketing each property, and
3
<PAGE>
controlling operating expenses at the property level. The Company's commitment
to growth is evidenced by the 15% increase in net operating income at the 19
Properties acquired before January 1, 1996 from their dates of acquisition
through December 31, 1996.
Management develops the overall management and leasing strategy, including
goals and budgets, for each Property. In order to achieve each Property's
objectives, management delegates significant decision-making responsibility to
regional and on-site employees, thereby instilling in its employees a sense of
ownership of their Property. Management believes that this strategy is an
effective way to maximize each Property's potential. In order to achieve desired
results, the Company emphasizes training for its on-site employees as well as
raising rents to be at or above the market for comparable properties. The
Company also ties on-site employees' bonuses to both net operating income
targets established for their respective Properties and the Company's overall
financial performance.
Management believes that tenant retention is critical to generating net
operating income growth. Tenant retention maintains or increases economic
occupancy and minimizes the costs associated with preparing apartments for new
occupants. The Company employs one person at each Property who has a primary
focus on tenant retention. The tenant retention specialist's objective is to
make tenants feel at home in the community through personal attention, which
includes organizing social functions and activities as well as responding
promptly to any tenant problems that may arise in conjunction with the apartment
or community. The Company's philosophy is to market its Properties continually
to existing tenants in order to achieve a low turnover rate. The Company
believes that the turnover rate at its Properties is below the average turnover
rate for comparable apartment communities.
The Company seeks to create a unique identity for each Property by
emphasizing curb appeal, signage, and attractive common area facilities such as
clubhouses and swimming pools. The Company has upgraded or renovated many of the
Properties' common area facilities after acquisition. Each Property is marketed
as a "Cornerstone Community" but typically has an individual Property name tied
to a local theme. Each Property has a dedicated on-site marketing person whose
responsibility is to position and market the Property within the local community
through such activities as media advertising, on-site promotional events and
personal calls to local businesses.
Operating expenses are controlled at each Property by setting budgets at the
corporate level and requiring that any expense over budget at a Property be
approved by management. Purchase discounts are sought at both the corporate
level and locally in those areas where the Company has a significant presence.
All contracts for goods and services are re-bid annually to ensure competitive
pricing. The Company has a preventive maintenance program and the ability to
perform work using in-house personnel which helps the Company to reduce expenses
at the Properties. For example, the maintenance manager at each Property is
qualified to perform HVAC and plumbing work which otherwise would be contracted
outside the Company.
An example of the success of the Company's active management strategy is the
Tradewinds Apartments in Hampton, Virginia. Upon acquisition, the Company's goal
was to increase net operating income by: (i) raising rents to prevailing market
rates; (ii) increasing economic occupancy; and (iii) reducing operating
expenses. The Company re-oriented the tenant mix toward private sector tenants
by reducing the Property's reliance on military personnel as tenants, improved
tenant screening, reduced on-site management personnel, implemented a program of
preventive maintenance, and changed the Property's marketing from newspapers to
apartment guides. The result was an increase in net operating income to
$1,214,000 from $968,000 (25.4%) over the first twelve months. The increase was
the result of a 3% rental increase, an 8% increase in economic occupancy, and a
9% decrease in operating expenses.
4
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GROWTH THROUGH ACQUISITIONS, RENOVATIONS AND EXPANSION
The Company also plans to generate growth in net operating income through
acquisitions by: (i) acquiring under-performing assets at less than replacement
cost; (ii) correcting operational problems; (iii) making selected renovations;
(iv) increasing economic occupancy; (v) raising rental rates; (vi) implementing
cost controls; and (vii) providing enhanced property and centralized management.
In markets that it targets for acquisition opportunities, the Company attempts
to gain a significant local presence in order to achieve operating efficiencies.
In analyzing acquisition opportunities, the Company considers acquisitions of
property portfolios as well as individual properties.
The Company has obtained a $100 million unsecured line of credit (the
"Unsecured Line of Credit") to fund property acquisitions. On March 1, 1997, the
Company had approximately $75.2 million outstanding under the Unsecured Line of
Credit and expects to have approximately $26.8 million outstanding after the
closing of the Offering. As of March 1, 1997, the Company had no secured
indebtedness and will have no secured indebtedness following the Offering. After
giving effect to the use of proceeds from the Offering, the Company will have
approximately $37.8 million of total indebtedness outstanding, which is
approximately 8% of the Company's Total Market Capitalization (as defined
herein).
The Company believes it will be able to purchase properties at less than
replacement cost because of the presence of deferred maintenance, management
neglect, or prior owner's financial distress. Upon acquisition, the Company
seeks to improve both operating results and property identity through a 24-month
renovation policy which includes selective renovations such as new roofs, new
exterior siding, exterior painting, clubhouse renovation and construction, and
interior refurbishment. The Company has invested in renovations to its
Properties approximately $19.0 million on 36 communities in 1996, approximately
$7.1 million on 16 communities in 1995 and approximately $6.1 million on eight
communities in 1994. Approximately $8.0 million of additional capital
improvements on the Properties are budgeted for 1997. To date, these actions
have permitted the Company to increase rental rates and improve economic
occupancy rates at the Properties.
Because the Company has grown and plans to grow through property
acquisitions, management has created a system establishing "Takeover Teams" to
provide immediate transitional management and leasing services to newly-acquired
properties and to implement quickly the Company's operations and policies. A
Takeover Team consists of senior property management personnel as well as
marketing and maintenance specialists from other communities owned by the
Company. The Takeover Team remains at a property until the Company's management
and leasing programs have been installed and the new on-site team is fully
operational. Typically, this process takes two to four weeks to complete.
An example of the Company's acquisition strategy is the Chase Mooring
Apartments, a 224-unit apartment community located in Wilmington, North
Carolina. This community was purchased in August 1994 for $3,594,000, or $16,045
per apartment unit. Although the community is well located, the Property lacked
curb appeal, did not have a clubhouse, and had been managed and maintained on a
marginal basis by the original owner. After acquiring the Property, the Company
spent approximately $1.2 million, or $5,414 per unit, on various renovations,
including the addition of a clubhouse and rental center that has become the
focus of the Property's community activity. At acquisition, the average monthly
rent at the Property was $382 per apartment unit. As of December 1996, the
average monthly rent at the Property was $513 per unit, representing an average
annual increase of 14.2%. See "Risk Factors -- Rapid Growth."
If sufficient tenant demand exists and suitable land is available, the
Company may construct additional apartment units ("Expansion Units") on land
adjacent to properties it owns. The Company believes that its successful
experience with large-scale property renovation will also permit strategic and
cost-effective property expansion. It is the Company's policy to acquire
Expansion Units on a "turn-key" basis from a third party contractor, thereby
minimizing the risks normally associated with development and lease-up.
Currently, the Company has planned expansion projects for two existing
Properties: Glen Eagles and The Meadows. The Company does not have interests in
any land adjacent to any other Properties it now owns, but may acquire land or
options to acquire land of this type adjacent to other properties it may acquire
in the future.
5
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APPLE RESIDENTIAL INCOME TRUST
In August 1996, Mr. Knight organized Apple Residential Income Trust, Inc.
("Apple") for the purpose of acquiring apartment communities in Texas. Apple
plans to elect to be taxed as a REIT. Mr. Knight is Apple's Chairman and Chief
Executive Officer. Mr. Knight formed Apple as a separate corporation in an
attempt to insulate the Company from the risks associated with a start-up
company. The Company will participate in Apple's growth through the Company's
direct or indirect receipt of acquisition, disposition, management and advisory
fees, ownership of Apple common shares and possible future acquisition of Apple.
The Company will provide advisory, property management and brokerage services to
Apple in exchange for fees and expense reimbursements. As of February 28, 1997,
Apple had raised approximately $39.6 million in gross proceeds in an ongoing
best-efforts equity offering and had acquired four properties in the Dallas,
Texas area.
The Company has a continuing right to own up to 9.8% of the common shares of
Apple. The Company has committed to purchase at or before the closing of the
Offering sufficient common shares of Apple so that it will own approximately
9.5% of the total common shares of Apple outstanding as of March 1, 1997.
Thereafter, the Company intends, if the board of directors of the Company
determines it is in the best interest of the Company and its shareholders, to
purchase additional common shares of Apple at the end of each calendar quarter
so as to maintain its ownership of approximately 9.5% of the outstanding common
shares of Apple.
The Company also has a right of first refusal to purchase the properties and
business of Apple. In addition, by the end of 1997, the Company will evaluate
the acquisition of Apple, and if the board of directors of the Company
determines it is in the best interests of the Company and its shareholders,
offer to acquire Apple or its assets. Any decision to combine the Company and
Apple can be made only by the respective boards of directors, and depending on
the structure of the transaction, the respective shareholders, of the two
companies. It is the current intent of Mr. Knight and the board of directors of
the Company to seek to acquire Apple and expand the geographic diversity and
size of the Company's portfolio of properties if the board of directors of the
Company determines such an acquisition is in the best interests of the Company.
DISTRIBUTIONS
In January 1997, the Company increased its quarterly distribution to $0.25
per Common Share, which is equivalent to $1.00 per Common Share on an annualized
basis.
THE OFFERING
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Shares offered hereby ....................... 4,500,000 Common Shares
Common Shares to be outstanding after the
Offering..................................... 36,523,131 Common Shares(1)
Use of proceeds.............................. The net proceeds will be used to repay
indebtedness.
Proposed NYSE symbol......................... TCR ("The Cornerstone REIT")
</TABLE>
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(1) Includes 700,000 Common Shares to be issued to an affiliate of Mr. Knight
in connection with the Company's conversion to self-administration and
includes an estimate (150,995) of the Common Shares to be issued to Mr.
Knight in connection with the Company's acquisition of the assets of ARG
(see "Certain Transactions") but does not include 371,256 Common Shares
covered by options held by directors, officers and employees (See
"Management-Stock Incentive Plans").
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SUMMARY SELECTED PRO FORMA AND HISTORICAL INFORMATION
The following table sets forth summary selected historical financial
information for the Company from its inception on June 1, 1993, and summary
selected pro forma information as of and for the year ended December 31, 1996.
The unaudited summary selected pro forma information is presented as if: (i) the
Company had owned 38 of the 42 Properties on January 1, 1996; and (ii) the
Offering had occurred on January 1, 1996 and the net proceeds therefrom had been
used as described herein. The following unaudited summary selected pro forma
information should be read in conjunction with the unaudited pro forma financial
statements included elsewhere in this Prospectus. The following summary selected
financial information should be read in conjunction with the discussion set
forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and all of the financial statements and notes thereto
included elsewhere in or incorporated into this Prospectus. The pro forma
financial information is not necessarily indicative of what the actual financial
position or results of operations of the Company would have been as of and for
the period presented, nor does it purport to represent the Company's future
financial position or results of operation.
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YEARS ENDED DECEMBER 31, PRO FORMA
------------------------------------------------------------ 1996 (A)
1993 1994 1995 1996
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OPERATING DATA
Revenues from rental properties............... $ 1,784,868 $ 8,177,576 $ 16,300,821 $ 40,352,955 $ 51,430,900
Operating expenses............................ 1,334,855 5,901,759 11,005,558 26,860,354 34,542,326
Management contract termination expense (b) .. -- -- -- 16,526,012 16,526,012
-------------- -------------- -------------- --------------- ---------------
Income (loss) before interest income
(expense)..................................... 450,013 2,275,817 5,295,263 (3,033,411) 362,562
Interest income (expense)..................... 46,633 110,486 (65,548) (1,136,438) (246,027)
-------------- -------------- -------------- --------------- ---------------
Net income (loss)............................. $ 496,646 $ 2,386,303 $ 5,229,715 $ (4,169,849) $ 116,535
============== ============== ============== =============== ===============
Weighted average common shares outstanding ... 1,662,944 4,000,558 8,176,803 20,210,432 28,626,979
Per share:
Net income (loss) ........................... $ 0.30 $ 0.60 $ 0.64 $ (0.21) $ 0.00
Common distributions declared and paid....... 0.27 0.89 0.96 0.99 0.99
BALANCE SHEET DATA (at end of period)
Investment in rental property................. $ 25,549,790 $ 54,107,358 $129,696,447 $ 329,715,853 $ 329,715,853
Notes payable................................. -- 5,000,000 8,300,000 55,403,000 7,028,000
Shareholders' equity.......................... 28,090,912 51,436,863 122,154,420 254,569,705 302,944,705
Common shares outstanding..................... 2,995,210 5,458,648 12,754,331 28,141,509 32,641,509
OTHER DATA
Cash provided by operating activities ........ $ 1,670,406 $ 3,718,086 $ 9,618,956 $ 20,162,776 $ 26,859,202
Cash used in investing activities............. (25,549,790) (28,557,568) (75,589,089) (194,519,406) (194,519,406)
Cash provided by financing activities ........ 27,487,556 25,519,648 68,754,842 170,466,134 170,466,134
FUNDS FROM OPERATIONS
Net income (loss)............................. $ 496,646 $ 2,386,303 $ 5,229,715 $ (4,169,849) $ 116,535
Plus: Depreciation of real estate............. 255,338 1,210,818 2,788,818 8,068,063 10,478,105
Management contract termination (b)..... -- -- -- 16,526,012 16,526,012
-------------- -------------- -------------- --------------- ---------------
Funds from operations (c)..................... $ 751,984 $ 3,597,121 $ 8,018,533 $ 20,424,226 $ 27,120,652
============== ============== ============== =============== ===============
OTHER INFORMATION (at end of period)
Total rental communities ..................... 5 9 19 40 38
Total number of apartment units 1,175 2,085 4,388 9,033 8,641
Economic occupancy ........................... 93% 93% 94% 93% 93%
Weighted average monthly
revenue per apartment........................ $ 398 $ 433 $ 463 $ 488 $ 496
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(a) The pro forma information includes 19 of the 21 Properties acquired during
1996 for which the Company had previously reported the 12 month audited
operations in Reports on Form 8-K and gives effect to an assumed offering
of 4,500,000 Shares at $11.75 per Share, less estimated underwriting
discounts and Offering costs, which was assumed to pay down the Unsecured
Line of Credit by $48,375,000.
(b) Included in the 1996 operating results is $16,526,012 of management
contract termination expense resulting from the Company's conversion to
"self-administered" and "self-managed" status. See Note 6 to the financial
statements included herein.
(c) The Company considers funds from operations to be an appropriate measure of
the performance of an equity REIT. Funds from operations ("FFO") is defined
as income before gains (losses) on sales and debt restructuring (computed
in accordance with generally accepted accounting principles) plus real
estate depreciation, and after adjustments for nonrecurring items if any.
The Company computes FFO in accordance with the recommendations set forth
in a White Paper adopted on March 3, 1995 by the National Association of
Real Estate Investment Trusts ("NAREIT"). The Company considers FFO in
evaluating property acquisitions and its operating performance, and
believes that FFO 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. FFO, 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.
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TAX STATUS OF THE COMPANY
The Company elected to be taxed as a REIT under Sections 856-860 of the
Internal Revenue Code of 1986, as amended (the "Code") commencing with its short
taxable year ended December 31, 1993. If the Company qualifies for taxation as a
REIT, with certain exceptions, the Company will not be subject to federal income
tax at the Company level on its taxable income that is distributed to its
shareholders. A REIT is subject to a number of organizational and operational
requirements, including a requirement that it currently distribute at least 95%
of its annual taxable income. Failure to qualify as a REIT will render the
Company subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates and distributions
to the holders of Common Shares in any such year will not be deductible by the
Company. Although the Company does not intend to request a ruling from the
Internal Revenue Service (the "Service") as to its REIT status, the Company will
receive at the closing of the Offering an opinion of its legal counsel that the
Company qualifies as a REIT, which opinion will be based on certain assumptions
and representations and will not be binding on the Service or any court. Even if
the Company qualifies for taxation as a REIT, the Company may be subject to
certain federal, state and local taxes on its income and property. The Company
has adopted the calendar year as its taxable year. In connection with the
Company's election to be taxed as a REIT, the Company's Bylaws impose
restrictions on the transfer of Common Shares. See "Risk Factors -- Federal
Income Tax Risks" and "Limits on Change of Control Resulting from Ownership
Limitation, Staggered Board and Virginia Law" and "Federal Income Tax
Considerations -- Federal Income Taxation of the Company."
This Prospectus and documents incorporated herein by reference contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
forward-looking statements include, without limitation, statements concerning
anticipated lower expenses from the Company's conversion to self-administration,
anticipated improvements in Property operations from completed and planned
Property renovations, and expected benefits from the Company's ownership of
shares in Apple and providing acquisition, disposition, advisory and property
management services to Apple directly or through its ownership interests in ARA
and ARMG. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from the results of
operations or plans expressed or implied by such forward-looking statements.
Such factors include, among other things, unanticipated adverse business
developments affecting the Company, the Properties or Apple, as the case may be,
adverse changes in the real estate markets and general and local economic and
business conditions. Investors should review the more detailed risks and
uncertainties set forth under the caption "Risk Factors" in this Prospectus.
Although the Company believes that the assumptions underlying the
forward-looking statements contained or incorporated herein are reasonable, any
of the assumptions could be inaccurate, and therefore there can be no assurance
that the forward-looking statements included or incorporated by reference in
this Prospectus will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included or
incorporated herein, the inclusion of such information should not be regarded as
a representation by the Company or any other person that the results or
conditions described in such forward-looking statements or the objectives and
plans of the Company will be achieved.
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RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the Shares
offered by this Prospectus.
NO PRIOR MARKET FOR THE COMMON SHARES
Prior to the Offering, there has been no public trading market for the Common
Shares. Although the Company has applied for the Common Shares, including the
Shares, to be listed on the NYSE upon the pricing of the Offering, there can be
no assurance that an active market for the Common Shares will develop or that
the Offering Price will be indicative of the market price of the Common Shares
following the Offering.
COMMON SHARES AVAILABLE FOR TRADING
Sales of a substantial number of Common Shares, or the perception that such
sales could occur, could adversely affect prevailing market prices of the Common
Shares, including the Shares. Although there has been no trading market for the
Common Shares, the Company currently has approximately 12,000 shareholders who
hold approximately 28,142,000 Common Shares. These shareholders acquired their
Common Shares in a series of best-efforts public offerings of Common Shares
undertaken by the Company between January 1993 and October 1996. Approximately
1,313,000 of the Common Shares sold in such offerings were sold at $10.00 per
Common Share in 1993, and the balance was thereafter sold at $11.00 per Common
Share. At the time of their purchase of Common Shares, such shareholders were
informed that the Company would, if in the best interests of the Company and the
shareholders, use its best efforts to cause the Common Shares to be listed on a
securities exchange or quoted on The NASDAQ Stock Market. Accordingly, such
shareholders purchased their Common Shares with the expectation that such
listing or quotation would provide ultimate liquidity for their holdings. There
is no way to predict how many of the Company's current shareholders will seek to
dispose of their Common Shares when the Common Shares are listed on the NYSE.
The Company expects that all of the Common Shares, including the Shares, will be
listed immediately after the pricing of the Offering, and that the Common
Shares, including the Shares, will begin trading at the same time. Furthermore,
there can be no assurance that the possibility of a large number of shareholders
seeking to sell their Common Shares will not lower the price at which the Common
Shares are traded.
PURCHASE OF FORMER ADVISOR'S AND FORMER MANAGER'S RIGHTS NOT AT ARM'S-LENGTH
On October 1, 1996, the Company became a self-administered and self-managed
REIT when it acquired the advisory rights of Cornerstone Advisors, Inc. and the
management rights of Cornerstone Management Group, Inc. for $100 in cash and a
total of 1,400,000 Common Shares, respectively. In addition, the Company paid
Cornerstone Realty Group, Inc. $1,325,000 cash for its rights in a property
acquisition agreement. Cornerstone Advisors, Inc., Cornerstone Management Group,
Inc. and Cornerstone Realty, Inc. were each wholly-owned by Mr. Knight. Mr.
Knight, however, held a portion of the shares in such companies for the benefit
of Debra A. Jones and Stanley J. Olander, Jr., the Company's Chief Operating
Officer and Chief Financial Officer, respectively. Mr. Knight transferred
109,091 Common Shares and $100,000 in cash to each of these officers from the
proceeds of these transactions. In connection with becoming self-administered
and self-managed, the Company executed employment agreements with Mr. Knight,
Ms. Jones and Mr. Olander. See "Management-Officer Compensation-Employment
Agreements."
In addition, the Company purchased the building housing its headquarters from
Mr. Knight for $350,000 in cash and purchased essentially all the personal
property in that building and seven automobiles from Cornerstone Realty Group,
Inc. for $100,000 in cash and the repayment of $138,000 in debt.
Although the foregoing transactions involving the Company were unanimously
approved by the Company's board of directors, the transactions were not the
result of arm's-length negotiations. The Company did obtain a fairness opinion
regarding these transactions from Arthur Andersen LLP, but it did not obtain
independent valuations or appraisals of the rights and assets acquired by the
Company. See "Certain Transactions -- Conversion to Self-Administration."
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ACQUISITION OF ASSETS OF APPLE REALTY GROUP, INC. NOT AT ARM'S-LENGTH
On or before the closing of the Offering, the Company will acquire all of the
assets of Apple Realty Group, Inc. ("ARG") in exchange for $350,000 in cash and
Common Shares valued at $1,650,000. The number of Common Shares issued will be
based upon the Offering Price, net of underwriting discounts and commissions.
Assuming that the Offering Price is $11.75 per Share (the midpoint of the price
range set forth on the cover page of the Prospectus), the number of Common
Shares to be issued to Mr. Knight would be 150,995. The sole material asset of
ARG is its Property Acquisition/Disposition Agreement with Apple. The Company
will succeed by assignment to the rights, powers, benefits, duties and
obligations of ARG under the Property Acquisition/Disposition Agreement and in
such regard will provide property acquisition and disposition services to Apple
in exchange for certain fees. See "Certain Transactions -- Apple Residential
Income Trust -- Acquisition, Advisory and Property Management Services --
Acquisition Services."
Although the acquisition of the assets of ARG was unanimously approved by the
Company's board of directors, the transaction was not the result of arm's-length
negotiations. Further, although the board of directors, in the course of
determining the consideration to be issued in exchange for the assets of ARG,
evaluated certain information concerning the anticipated benefits to be realized
by the Company under the Property Acquisition/Disposition Agreement, many of the
factors that will ultimately affect such value are not now determinable.
Accordingly, there can be no assurance either that the acquisition price for the
assets of ARG is as favorable as would be determined by arm's-length
negotiations, or that such acquisition price will ultimately reflect the
realized value to the Company of the Property Acquisition/Disposition Agreement
to which it has succeeded.
CONFLICT OF INTEREST IN CONTINUATION OR ENFORCEMENT OF ADVISORY AGREEMENT AND
PROPERTY MANAGEMENT AGREEMENTS
Mr. Knight owns 170,000 class B convertible shares of Apple. Ms. Jones (the
Company's Chief Operating Officer) and Mr. Olander (the Company's Chief
Financial Officer) each own 15,000 class B convertible shares of Apple, which
they purchased from Mr. Knight. In the event that all of Apple's stock, assets
or business are transferred or acquired by another entity (including the
Company) or that Apple terminates or does not renew the advisory agreement with
Apple Realty Advisors, Inc. ("ARA") (the "Advisory Agreement") or ceases to use
Apple Residential Management Group, Inc. ("ARMG") to provide property management
services, each of the class B convertible shares of Apple will be convertible
into a number of common shares of Apple ranging from one to eight depending on
the gross proceeds raised from sales of Apple common shares (ranging from $50
million to $250 million) as of such time. Because Mr. Knight, Ms. Jones and Mr.
Olander would realize a substantial economic benefit upon the non-renewal of the
Advisory Agreement or ARMG's cessation of property management services from ARMG
to Apple, Mr. Knight could experience a conflict of interest in making a
decision to continue, terminate or execute the Advisory Agreement or any
Property Management Agreement. See "The Company -- Apple Residential Income
Trust." In addition, because the number of common shares of Apple into which
each class B convertible share is convertible depends upon the amount of
proceeds raised from sales of Apple common shares, and the sales of Apple common
shares would cease upon acquisition of Apple by the Company, Mr. Knight could
experience a conflict of interest in considering a proposed acquisition of Apple
by the Company.
In addition, because Mr. Knight serves as President of each of the Company,
Apple, ARA and ARMG, he could experience a conflict of interest in enforcing the
terms of the Advisory Agreement, the Property Management Agreements and the
related subcontracts.
CONFLICT REGARDING CONTINUATION OF PROPERTY ACQUISITION/DISPOSITION AGREEMENT
As described above under "-- Acquisition of Assets of Apple Realty Group,
Inc. Not at Arm's-Length" and in "Certain Transactions -- Apple Residential
Income Trust -- Acquisition, Advisory and Property Management Services --
Acquisition Services," the Company has acquired from ARG a Property
Acquisition/Disposition Agreement, which is expected to result in the payment of
fees for services to the Company during the entire period Apple sells its common
shares and invests the net proceeds of such sales in properties. If the Company
acquires Apple (which acquisition the Company intends to evaluate by
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the end of 1997), the fees under the Property Acquisition/Disposition Agreement
would cease at the time of such acquisition of Apple. Thus, unless Apple
completes the sale of its common shares and the investment of the net proceeds
from such sales in properties before the Company considers the acquisition of
Apple, the Company could face a conflict in deciding between acquisition of
Apple or receiving fees under the Property Acquisition/Disposition Agreement.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers,
particularly Mr. Knight, Ms. Jones and Mr. Olander. While the Company believes
that it could find replacements for these key personnel, if necessary, the loss
of their services could have an adverse effect on the operations of the Company.
Messrs. Knight and Olander and Ms. Jones have entered into employment agreements
with the Company. See "Management -- Compensation of Officers -- Employment
Agreements."
Under the terms of his employment agreement, Mr. Knight, who is the Company's
Chief Executive Officer, is not required to devote all of his time to the
Company. Mr. Knight also serves as Chairman of the Board and President of Apple.
Accordingly, Mr. Knight could have a conflict of interest in allocating his time
between the Company, Apple and other ventures in which he is or may be involved.
RAPID GROWTH
The Company began operations in 1993, at which time it had no assets. As of
February 28, 1997, the Company had raised approximately $300 million in gross
proceeds through best-efforts public offerings of Common Shares, and had
acquired 42 apartment communities containing an aggregate of 9,613 apartment
units. Although, as described under "The Company," the Company plans to continue
to expand operations through the acquisition of additional properties and, if
appropriate, property portfolios and other REIT's, there can be no assurance
that the Company will continue to grow at the rate experienced during its first
four years of operations.
As part of its rapid growth, the Company has instituted management, leasing
and renovation programs that have had the effect of improving net operating
income at the Properties. There can be no assurance that the Company will be
able to continue to achieve net operating income growth at rates experienced in
the past.
PRIOR PERFORMANCE DIFFICULTIES OF CERTAIN AFFILIATES
Certain private partnerships organized by affiliates of Mr. Knight prior to
1987 have experienced certain operating difficulties. These operating
difficulties led to (i) filings by seven partnerships for reorganization under
Chapter 11 of the United States Bankruptcy Code, some of which filings ended in
the partnership property being conveyed back to the lender, and (ii) certain
other partnerships consenting to negotiated foreclosures on their properties.
Management of the Company believes that these partnerships experienced financial
difficulties due to a combination of factors, including high leverage, changes
in tax laws, a general downturn in economic conditions and the unavailability of
favorable financing.
RISKS ASSOCIATED WITH ACQUISITION, RENOVATION, DEVELOPMENT AND CONSTRUCTION
The Company intends to acquire apartment communities to the extent that they
can be acquired on advantageous terms and meet the Company's investment
criteria. See "The Company -- Growth through Acquisitions, Renovations and
Expansion." Acquisitions of apartment communities entail risks that investments
will fail to perform in accordance with expectations. Estimates of the costs of
improvements to bring an acquired property up to standards established for the
market position intended for that property may prove inaccurate. In addition,
there are general investment risks associated with any new real estate
investment.
The Company intends to continue redevelopment and possibly development of
apartment communities in accordance with the Company's growth policies. See "The
Company -- Growth through Acquisitions, Renovations and Expansion." Risks
associated with the Company's renovation and possible development activities may
include: abandonment of redevelopment or development opportunities;
construction
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costs of a property exceeding original estimates, possibly making the property
uneconomical; occupancy rates and rents at a newly renovated or completed
property may not be sufficient to make the property profitable; financing may
not be available on favorable terms for redevelopment or development of a
property; and permanent financing may not be available on favorable terms to
replace a short-term construction loan and construction and lease-up may not be
completed on schedule, resulting in increased debt service expense and
construction costs. In addition, new renovation or development activities,
regardless of whether they are ultimately successful, typically require a
substantial portion of management's time and attention. Renovation or
development activities are also subject to risks relating to the inability to
obtain, or delays in obtaining, all necessary zoning, land-use, building,
occupancy and other required governmental permits and authorizations.
FINANCING RISKS
Potential Adverse Effects on Cash Flow. The Company generally intends to
purchase properties either on an all-cash basis or using the Unsecured Line of
Credit or other interim borrowings of the type described under "The
Company-Financing Policy." The Company will endeavor to repay any interim
borrowing with proceeds from the sale of Common Shares. However, there can be no
assurance that the Company will be able to sell sufficient Common Shares to
repay interim borrowings it may make from time to time.
For the purpose of flexibility in operations, the Company also has the right,
subject to the approval of the board of directors, to borrow on other than an
interim basis. 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.
There can be no assurance that the Company would be able to borrow on favorable
terms, if at all, if borrowing became necessary or desirable.
Rising Interest Rates. The Company's Unsecured Line of Credit bears interest
at a variable rate equal to one-month LIBOR plus 160 basis points (currently
approximately 7.2% per annum). In addition, the Company may incur additional
indebtedness in the future that also bears interest at variable rates of
interest. Variable rate debt creates higher debt service requirements if market
interest rates increase, which would adversely affect the Company's cash flow
and the amounts available for distribution to its shareholders.
Risks of Default. The Company might obtain financing with
"due-on-encumbrance" or "due-on-sale" clauses in which future refinancing or
sale of 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. 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.
LACK OF GEOGRAPHIC DIVERSIFICATION
All of the Company's Properties are located in Virginia, North Carolina,
South Carolina, and Georgia. The operations of the Properties and therefore the
profitability of the Company may be adversely impacted by adverse economic
developments in this region. The concentration of Properties in a limited number
of states and in a limited number of markets within those states may expose the
Company to risks of adverse economic developments which are greater than the
risks if the Company owned properties in more states and markets. The Company's
revenues and the value of its Properties may be affected by a number of factors,
including the local economic climate (which may be adversely impacted by
business
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layoffs, downsizing or industry slowdowns), changing demographics and other
factors. There can be no assurance as to the continued growth of the Virginia,
North Carolina, South Carolina or Georgia economies or the future growth rate of
the Company.
LIMITS ON CHANGES IN CONTROL RESULTING FROM OWNERSHIP LIMITATION, STAGGERED
BOARD AND VIRGINIA LAW
Potential Effect of Ownership Limitation. The Company's Bylaws prohibit
direct or indirect ownership of more than 9.8% of the Company's outstanding
Common Shares by one investor. 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 Common Share
ownership also may have the effect of deterring the acquisition of, or a change
of control in, the Company.
Potential Effect of Staggered Board. In addition to the foregoing, the board
of directors of the Company has three classes of directors, and only one class
is elected each year for a three-year term. Staggered terms for directors may
affect the shareholders' ability to change control of the Company even if a
change of control were in the shareholders' interests.
Potential Effect of Virginia Law. The Virginia Stock Corporation Act ("VSCA")
contains provisions governing "Affiliated Transactions" designed to deter
uninvited takeovers of Virginia corporations. These provisions, with several
exceptions discussed below, generally require approval of material acquisition
transactions between a Virginia corporation and any holder of more than 10% of
any class of its outstanding voting shares (an "Interested Shareholder") by the
holders of at least two-thirds of the remaining voting shares. For three years
following the time that a person becomes an Interested Shareholder, a Virginia
corporation cannot engage in an Affiliated Transaction with such Interested
Shareholder without approval of two-thirds of the voting shares other than those
shares beneficially owned by the Interested Shareholder, and approval of a
majority of the corporation's "Disinterested Directors." After expiration of the
three-year period, the statute requires approval of Affiliated Transactions by
two-thirds of the voting shares other than those beneficially owned by the
Interested Shareholder absent an exception. The principal exceptions to the
special voting requirements apply to transactions proposed after the three-year
period has expired and require either that the transaction be approved by a
majority of the corporation's Disinterested Directors or that the transaction
satisfy the fair-price requirements of the law. The VSCA also provides that
shares acquired in a transaction that would cause the acquiring person's voting
strength to cross any of three thresholds (20%, 33% or 50%) have no voting
rights unless granted by a majority vote of shares not owned by the acquiring
person or any officer or employee-director of the Company. An acquiring person
may require the Company to hold a special meeting of shareholders to consider
the matter within 50 days of its receipt of the request by such acquiring person
to hold such meeting. The provisions of the VSCA described above may discourage
a third party from making an acquisition proposal for the Company and may
inhibit a change in control under circumstances that could otherwise give the
holders of the Company's Common Shares the opportunity to realize a premium over
then prevailing market prices.
RISKS OF CONCENTRATION IN APARTMENTS
The Company's concentration on equity real estate investments in apartment
properties will tend to limit the ability of the Company to vary its portfolio
promptly in response to changing economic, financial and other investment
conditions. 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.
RISKS ASSOCIATED WITH ILLIQUIDITY OF REAL ESTATE
Equity real estate investments are relatively illiquid. Such illiquidity will
tend to limit the ability of the Company to vary its portfolio promptly in
response to changes in economic, financial and other investment conditions. In
addition, the Code limits the ability of a REIT to sell properties held for
fewer than four years, which may affect the Company's ability to sell properties
without adversely affecting returns to its shareholders.
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COMPETITION FOR PROPERTIES
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 properties to be acquired,
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 and more experience than the Company.
ADVERSE EFFECT OF INCREASE IN MARKET INTEREST RATES ON PRICE OF SHARES
An increase in market interest rates may lead prospective purchasers of the
Common Shares to demand a higher annual yield from future dividends on the
Common Shares. Such an increase in the required dividend yield may adversely
affect the market price of the Common Shares.
RISK OF INSUFFICIENT CASH AVAILABLE FOR DISTRIBUTION
If the Company were to incur significant unanticipated cash expenditures, the
amount of cash available for distribution to its shareholders would decrease.
Furthermore, there can be no assurance that the Company will continue 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 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.
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 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 uninsured losses.
Although the Company will seek to minimize the effect of factors such as these,
some of these factors are beyond the control of the Company. There can be no
assurance that the Company's Properties will operate profitably, appreciate in
value or generate cash for distribution.
RISKS ASSOCIATED WITH EXPENSES OF APPLE
As described in "The Company -- Apple Residential Income Trust," the Company
will provide certain advisory services to Apple under a contract that requires
the Company to bear certain of Apple's operating expenses and organization and
offering expenses if they exceed certain limits. It is possible that the Company
could be required to fund such expenses and that the Company's liability
therefor could exceed the fees it receives under the contract.
FEDERAL INCOME TAX RISKS
The Company has conducted and intends to continue to conduct its operations
in a manner that will permit it to qualify as a REIT for federal income tax
purposes. The Company elected to be treated as a REIT under Sections 856 through
860 of the Code, beginning with its taxable year ended December 31, 1993. The
Company has not requested, and does not expect to request, a ruling from the
Service that it has and will continue to qualify as a REIT. However, it will
receive at the closing of the Offering an opinion of its counsel, McGuire,
Woods, Battle & Boothe, L.L.P. that, based upon certain representations made by
the Company and assumptions described in "Federal Income Tax Considerations," it
does so qualify. Investors should be aware that opinions of counsel are not
binding upon the Service. Furthermore,
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both the validity of the opinion and the continued qualification of the Company
as a REIT will depend on its continuing ability to meet various requirements
concerning, among other things, the ownership of its Common 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 the revocation of the Company's election
to be a REIT, effective for the year of such failure and the four succeeding
taxable years.
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 income (including
gains from sales of Properties) to taxation at both the Company and shareholder
levels. The resulting tax liability of the Company would reduce substantially
the amount of Company cash available for distribution to the shareholders.
Future distributions by the Company will be at the discretion of the board of
directors and will depend on the actual funds from operations of the Company,
its financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Code (see "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT"), and such other
factors as the board of directors deems relevant. 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" and "-- Requirements
for Qualification as a REIT."
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 upon their
particular situations.
REIT MINIMUM DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, the Company generally is required each year to
distribute to its shareholders at least 95% of its net taxable income (excluding
any net capital gain). In addition, the Company is subject to a 4% nondeductible
excise tax on the amount, if any, by which certain distributions paid by it with
respect to any calendar year are less than the sum of (i) 85% of its ordinary
income for that year, (ii) 95% of its capital gain net income for that year, and
(iii) 100% of its undistributed taxable income from prior years. See "Federal
Income Tax Considerations -- Requirements for Qualification as a REIT."
The Company has made, and intends to continue to make, distributions to its
shareholders to comply with the 95% distribution requirement and to avoid the
nondeductible excise tax. The requirement to distribute a substantial portion of
the Company's net taxable income could cause the Company to distribute amounts
that would otherwise be spent on future acquisitions, unanticipated capital
expenditures or repayment of debt, which could require the Company to borrow
funds or sell assets to fund the costs of such items.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state, and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. In addition, the presence of hazardous or toxic
substances, or the failure to remediate such property properly, may adversely
affect the owner's ability to borrow using such real property as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be liable for the cost of removal or remediation of
hazardous substances at the disposal or treatment facility, whether or not such
facility is or ever was owned or operated by such person. Certain environmental
laws and common law principles could be used to impose liability for release of
and exposure to hazardous substances, including asbestos-containing materials
("ACMs") into the air, and third parties may seek recovery from owners or
operators of real properties for personal injury or property damage associated
with
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exposure to released hazardous substances, including ACMs. As the owner of the
Properties, the Company may be potentially liable for any such costs. Operating
costs and the value of the Properties may be affected by the obligation to pay
for the cost of complying with existing environmental laws, ordinances and
regulations, as well as the cost of future legislation. Phase I environmental
site assessments ("ESAs") have been obtained on all of the Properties. The
purpose of Phase I ESAs is to identify potential sources of contamination for
which the Company may be responsible and to assess the status of environmental
regulatory compliance. The ESAs have not revealed any environmental condition,
liability or compliance concern that the Company believes would have a material
adverse affect on the Company's business, assets or results of operations, nor
is the Company aware of any such condition, liability or concern. However, it is
possible that the ESAs relating to any one of the Properties do not reveal all
environmental conditions, liabilities or compliance concerns or that there are
material environmental conditions, liabilities or compliance concerns that arose
at a property after the related ESA report was completed of which the Company is
otherwise unaware.
UNINSURED LOSS
The Company currently carries comprehensive liability, fire, flood (where
appropriate), workers' compensation extended coverage and rental loss insurance
with respect to its properties with policy specifications, limits and
deductibles customarily carried for similar properties. There are, however,
certain types of losses (such as from wars, hurricanes or earthquakes) that may
be either uninsurable or not economically insurable. Should an uninsured loss or
a loss in excess of insured limits occur, the Company could lose both its
capital invested in a property, as well as the anticipated future revenue from
such property. Any such loss would adversely affect the business of the Company
and its financial condition and results of operations.
POSSIBLE CHANGES IN CERTAIN 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. The
exercise of such discretion could result in the Company adopting new certain
objectives and policies which differ materially from those described in this
Prospectus.
RESPONSIBILITIES OF DIRECTORS AND OFFICERS -- POSSIBLE INADEQUACY OF
REMEDIES; DIRECTORS AND OFFICERS BENEFIT FROM EXCULPATION AND INDEMNIFICATION
PROVISIONS
The directors and officers of the Company are accountable to the Company and
its shareholders as fiduciaries and consequently must exercise good faith and
integrity in handling the Company's affairs. 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. The Articles of
Incorporation also provide that the Company shall indemnify a present or former
director or officer 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 reasonably believed to be
the scope of his authority and for a purpose which he 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. As a result of the exculpation and indemnification provisions of
the Company's Articles of Incorporation, 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 have been adopted to help induce the beneficiaries of such
provisions to agree to serve on behalf of the Company 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.
16
<PAGE>
EFFECT OF AMERICANS WITH DISABILITIES ACT COMPLIANCE ON CASH FLOW AND
DISTRIBUTIONS
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations and commercial facilities are required to meet certain federal
requirements related to access and use by disabled persons. Compliance with the
ADA requirements could require removal of access barriers and non-compliance
could result in imposition of fines by the U.S. government or an award of
damages to private litigants. Although the Company believes that the Properties
are substantially in compliance with these requirements, a determination that
the Company is not in compliance with the ADA could result in the imposition of
fines or an award of damages to private litigants. If the Company were required
to make unanticipated expenditures to comply with the ADA, the Company's cash
flow and the amounts available for distributions to its shareholders may be
adversely affected.
17
<PAGE>
THE COMPANY
Cornerstone Realty Income Trust, Inc., a self-administered and self-managed
equity REIT headquartered in Richmond, Virginia, is a fully integrated real
estate organization with expertise in the management, acquisition and renovation
of apartment communities. The Company focuses on the ownership of apartment
communities located in growing markets in Virginia, North Carolina, South
Carolina and Georgia. On February 28, 1997, the Company owned the 42 Properties
comprising 9,613 apartment units with an aggregate economic occupancy of 91% and
an average monthly rent of $556 per unit as compared to February 28, 1996, when
the Company owned 20 Properties comprising 4,565 apartment units with an
aggregate economic occupancy of 88% and an average monthly rent of $510 per
unit. The Company's strategy is to own apartment communities that cater to
tenants with incomes equal to 90% to 115% of the average local household income.
The Company maintains an intense focus on the operations of its Properties to
generate consistent, sustained growth in net operating income, which it believes
is the key to growing funds from operations per Common Share. Net operating
income growth is evidenced by the 1996 operating performance of the Initial
Properties. For the year ended December 31, 1996 as compared to the year ended
December 31, 1995, the Initial Properties achieved 8.8% growth in net operating
income. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Comparison of the Years Ended December 13, 1996 and
December 31, 1995 -- Comparable Property Results."
The Company's objective is to increase distributable cash flow and Common
Share value by:
o Increasing rental rates, maintaining high economic occupancy rates, and
controlling costs at the Properties
o Acquiring additional properties at attractive prices that provide the
opportunity to improve operating performance through the application of
the Company's management, marketing, and renovation programs
The Company has six regional property management offices, located in
Blacksburg and Virginia Beach, Virginia; Raleigh, Charlotte and Wilmington,
North Carolina; and Columbia, South Carolina. The Company currently has
approximately 300 employees, including specialists in acquisition, management,
marketing, leasing, development, accounting and information systems. The
Company's executive officers have substantial experience with apartment
properties, having been responsible for the management, acquisition and
renovation of more than 20,000 apartment units over the last 24 years using the
strategies and techniques described below.
Glade M. Knight, the Company's Chairman and Chief Executive Officer,
currently owns approximately 4% of the outstanding Common Shares. Collectively,
the officers and directors of the Company currently own approximately 5% of the
outstanding Common Shares.
GROWTH THROUGH MANAGEMENT AND LEASING
The Company plans to grow net operating income through active property
management, which includes keeping rental rates at or above market levels,
maintaining high economic occupancy through tenant retention, creating a
property identity and effectively marketing each property, and controlling
operating expenses at the property level. The Company's commitment to growth is
evidenced by the 15% increase in net operating income at the 19 Properties
acquired before January 1, 1996 from their dates of acquisition through December
31, 1996.
Management develops the overall management and leasing strategy, including
goals and budgets, for each Property. In order to achieve each Property's
objectives, management delegates significant decision-making responsibility to
regional and on-site employees, thereby instilling in its employees a sense of
ownership of their Property. Management believes that this strategy is an
effective way to maximize each Property's potential. In order to achieve desired
results, the Company emphasizes training for its on-site employees as well as
raising rents to be at or above the market for comparable properties. The
Company also ties on-site employees' bonuses to both net operating income
targets established for their respective Properties and the Company's overall
financial performance.
18
<PAGE>
Management believes that tenant retention is critical to generating net
operating income growth. Tenant retention maintains or increases economic
occupancy and minimizes the costs associated with preparing apartments for new
occupants. The Company employs one person at each Property who has a primary
focus on tenant retention. The tenant retention specialist's objective is to
make tenants feel at home in the community through personal attention, which
includes organizing social functions and activities as well as responding
promptly to any tenant problems that may arise in conjunction with the apartment
or community. The Company's philosophy is to market its Properties continually
to existing tenants in order to achieve a low turnover rate. The Company
believes that the turnover rate at its Properties is below the average turnover
rate for comparable apartment communities.
The Company seeks to create a unique identity for each Property by
emphasizing curb appeal, signage, and attractive common area facilities such as
clubhouses and swimming pools. The Company has upgraded or renovated many of the
Properties' common area facilities after acquisition. Each Property is marketed
as a "Cornerstone Community" but typically has an individual Property name tied
to a local theme. Each Property has a dedicated on-site marketing person whose
responsibility is to position and market the Property within the local community
through such activities as media advertising, on-site promotional events and
personal calls to local businesses.
Operating expenses are controlled at each Property by setting budgets at the
corporate level and requiring that any expense over budget at a Property be
approved by management. Purchase discounts are sought at both the corporate
level and locally in those areas where the Company has a significant presence.
All contracts for goods and services are re-bid annually to ensure competitive
pricing. The Company has a preventive maintenance program and the ability to
perform work using in-house personnel which helps the Company to reduce expenses
at the Properties. For example, the maintenance manager at each Property is
qualified to perform HVAC and plumbing work which otherwise would be contracted
outside the Company.
An example of the success of the Company's active management strategy is the
Tradewinds Apartments in Hampton, Virginia. Upon acquisition, the Company's goal
was to increase net operating income by: (i) raising rents to prevailing market
rates; (ii) increasing economic occupancy; and (iii) reducing operating
expenses. The Company re-oriented the tenant mix toward private sector tenants
by reducing the Property's reliance on military personnel as tenants, improved
tenant screening, reduced on-site management personnel, implemented a program of
preventive maintenance, and changed the Property's marketing from newspapers to
apartment guides. The result was an increase in net operating income to
$1,214,000 from $968,000 (25.4%) over the first twelve months. The increase was
the result of a 3% rental increase, an 8% increase in economic occupancy, and a
9% decrease in operating expenses.
GROWTH THROUGH ACQUISITIONS, RENOVATIONS AND EXPANSION
The Company also plans to generate growth in net operating income through
acquistions by: (i) acquiring under-performing assets at less than replacement
cost; (ii) correcting operational problems; (iii) making selected renovations;
(iv) increasing economic occupancy; (v) raising rental rates; (vi) implementing
cost controls; and (vii) providing enhanced property and centralized management.
In markets that it targets for acquisition opportunities, the Company attempts
to gain a significant local presence in order to achieve operating efficiencies.
In analyzing acquisition opportunities, the Company considers acquisitions of
property portfolios as well as individual properties.
The Company has demonstrated an ability to grow through acquisitions. The
Company's first two Properties were acquired in June of 1993. Since that time,
the Company has acquired 40 additional Properties. Twenty-one of the Properties
were acquired in 1996.
The Company analyzes specific criteria in connection with a proposed
acquisition. These criteria include: (i) the market in which a property is
located and whether it has a diversified economy, stable employment base and
increasing average household income; (ii) the property's current and projected
cash flow and the ability to increase net operating income; (iii) the condition
and design of the property and
19
<PAGE>
whether the property can benefit from renovations; (iv) historical and projected
occupancy rates; (v) geographic location in light of the Company's
diversification objectives; and (vi) the purchase price of the property as its
relates to the cost of new construction.
The Company believes it will be able to purchase properties at less than
replacement cost because of the presence of deferred maintenance, management
neglect, or prior owner's financial distress. Upon acquisition, the Company
seeks to improve both operating results and property identity through a 24-month
renovation policy which includes selective renovations such as new roofs, new
exterior siding, exterior painting, clubhouse renovation and construction, and
interior refurbishment. The Company has invested in renovations to its
Properties approximately $19.0 million on 36 communities in 1996, approximately
$7.1 million on 16 communities in 1995 and approximately $6.1 million on eight
communities in 1994. Approximately $8.0 million of additional capital
improvements on the Properties are budgeted for 1997. To date, these actions
have permitted the Company to increase rental rates and improve economic
occupancy rates at the Properties.
Because the Company has grown and plans to grow through property
acquisitions, management has created a system establishing "Takeover Teams" to
provide immediate transitional management and leasing services to newly-acquired
properties and to implement quickly the Company's operations and policies. A
Takeover Team consists of senior property management personnel as well as
marketing and maintenance specialists from other communities owned by the
Company. The Takeover Team remains at a property until the Company's management
and leasing programs have been installed and the new on-site team is fully
operational. Typically, this process takes two to four weeks to complete.
An example of the Company's acquisition strategy is the Chase Mooring
Apartments, a 224-unit apartment community located in Wilmington, North
Carolina. This community was purchased in August 1994 for $3,594,000, or $16,045
per apartment unit. Although the community is well located, the Property lacked
curb appeal, did not have a clubhouse, and had been managed and maintained on a
marginal basis by the original owner. After acquiring the Property, the Company
spent approximately $1.2 million, or $5,414 per unit, on various renovations,
including the addition of a clubhouse and rental center that has become the
focus of the Property's community activity. At acquisition, the average monthly
rent at the Property was $382 per apartment unit. As of December 1996, the
average monthly rent at the property was $513 per unit, representing an average
annual increase of 14.2%. See "Risk Factors -- Rapid Growth."
The Company has also made, and may in the future make, acquisitions of
established apartment communities involved in foreclosure proceedings. In this
situation, the Company seeks properties that have below market-rate leases,
correctable vacancy problems or inefficient property management. The Company
also may make acquisitions of properties from over-leveraged owners of
properties, governmental regulatory authorities, lending institutions that have
taken control of such properties, mortgagees-in-possession and, possibly,
through bankruptcy reorganization proceedings.
If sufficient tenant demand exists and suitable land is available, the
Company may construct Expansion Units on land adjacent to certain Properties.
The Company believes that its successful experience with large-scale property
renovation will also permit strategic and cost-effective property expansion. It
is the Company's policy to acquire Expansion Units on a "turn-key" basis from a
third party contractor, thereby minimizing the risks normally associated with
development and lease-up.
Currently, the Company has planned expansion projects for two existing
Properties: Glen Eagles and The Meadows. Glen Eagles is a 166-unit apartment
community located in Winston-Salem, North Carolina. The land adjacent to the
community will accommodate approximately 220 Expansion Units which can be served
by existing amenities. At The Meadows, a 176-unit community in Asheville, North
Carolina there is additional land for approximately 250 Expansion Units. The
Company has acquired these parcels and transferred them to a developer for
construction and lease-up of the Expansion Units with the agreement that the
developer will transfer the completed Expansion Units back to the Company. The
Company does not have interests in any land adjacent to any other Properties it
now owns, but may acquire land or options to acquire land of this type adjacent
to other properties it may acquire in the future.
20
<PAGE>
APPLE RESIDENTIAL INCOME TRUST
In August 1996, Mr. Knight organized Apple for the purpose of acquiring
apartment communities in Texas. Apple plans to elect to be taxed as a REIT for
its taxable year ended December 31, 1996. Mr. Knight is Apple's Chairman and
Chief Executive Officer. Mr. Knight formed Apple as a separate corporation in an
attempt to insulate the Company from the risks associated with a start-up
company. The Company will participate in Apple's growth through its direct or
indirect receipt of acquisition, disposition, management and advisory fees,
ownership of Apple common shares and possible future acquisition of Apple. As of
February 28, 1997, Apple had raised gross proceeds of approximately $39.6
million in gross proceeds in an ongoing best-efforts equity offering and had
acquired four properties in the Dallas, Texas area.
The Company has a continuing right to own up to 9.8% of the common shares of
Apple. The purchase price under the option equals the public offering price for
the common shares of Apple (currently $10.00 per common share) less the related
selling commissions (currently $1.00 per common share). The Company has
committed to purchase at or before the closing of the Offering sufficient common
shares of Apple so that it will own approximately 9.5% of the total common
shares of Apple outstanding as of March 1, 1997. Thereafter, the Company
intends, if the board of directors of the Company determines it is in the best
interest of the Company and its shareholders, to purchase additional common
shares of Apple at the end of each calendar quarter so as to maintain its
ownership of approximately 9.5% of the outstanding common shares of Apple.
The Company also has a right of first refusal to purchase the properties and
business of Apple. In addition, by the end of 1997, the Company will evaluate
the acquisition of Apple and, if the board of directors of the Company
determines it is in the best interests of the Company and its shareholders,
offer to acquire Apple or its assets. Any decision to combine the Company and
Apple can be made only by the respective boards of directors, and depending on
the structure of the transaction, the respective shareholders, of the two
companies. It is the current intent of Mr. Knight and the board of directors of
the Company to seek to acquire Apple and expand the geographic diversity and
size of the Company's portfolio of properties if the board of directors of the
Company determines that such an acquisition is in the best interests of the
Company.
The Company will provide advisory, property management and brokerage services
to Apple in exchange for fees and expense reimbursements under a contract with
Apple and subcontracts with Apple Residential Advisors, Inc. ("ARA") and Apple
Residential Management Group, Inc. ("ARMG"), the companies that originally
contracted with Apple for such services. The Company also owns all of the
nonvoting preferred shares of ARA and ARMG, which entitle it to 95% of the
economic benefits of such corporations.
FINANCING POLICY
The Company's objective is to seek capital as needed at the lowest possible
cost. In addition to obtaining capital from future sales of Common Shares, the
Company may obtain lines of credit or other unsecured borrowings. The Company is
also not precluded from engaging in secured borrowings, although its current
policy is to hold its Properties on an unmortgaged basis, and as of the date of
this Prospectus, it has no secured debt. The Company may also seek eventually to
issue investment-grade debt, although there is no assurance that this will
occur.
On February 14, 1997, the Company obtained the $100 million Unsecured Line of
Credit from a consortium of three banks headed by First Union National Bank of
Virginia. The Unsecured Line of Credit replaced, and was used to repay the
outstanding balance on, an $85 million unsecured line of credit previously
obtained from First Union National Bank of Virginia. The Unsecured Line of
Credit may be used only for property acquisitions.
The Unsecured Line of Credit bears interest equal to the one-month London
interbank offered rate ("LIBOR") plus 1.60% (subject to certain other possible
adjustments). The interest rate is adjusted monthly. In addition, the Company is
obligated to pay the lenders a quarterly commitment fee equal to 0.25% per annum
of the unused portion of the loan commitment. The entire balance of the
Unsecured Line of Credit is due on March 31, 1998. On March 1, 1997, the
interest rate on the Unsecured Line of Credit was 7.03%, and the outstanding
balance was approximately $75.2 million.
21
<PAGE>
The Company has also obtained from First Union National Bank of Virginia a
$7.5 million unsecured line of credit for general corporate purposes. This line
of credit also bears interest at LIBOR plus 1.60%, adjusted monthly, and is due
on March 31, 1998. On March 1, 1997, the outstanding balance on this loan was
approximately $1.7 million. The Company intends to use approximately $3.8
million of proceeds borrowed under this line of credit to purchase common shares
of Apple prior to or contemporaneous with the closing of the Offering.
In connection with the acquisition of the Trolley Square East Apartments in
1996, the Company issued the seller a $5.5 million unsecured promissory note,
which bears interest at an effective rate of 6.65% per annum and is due on June
1, 1999. This promissory note will remain outstanding after the completion of
the Offering.
The Company intends to maintain a debt policy (the "Debt Limitation")
limiting the Company's total combined indebtedness plus its pro rata share of
indebtedness of any unconsolidated investments ("Joint Venture Debt") to 40% of
the Company's total equity market capitalization plus its combined indebtedness
(including its pro rata share of Joint Venture Debt) ("Total Market
Capitalization"). At the closing of the Offering, the Company will have
outstanding indebtedness of approximately $37.8 million or approximately 8% of
Total Market Capitalization based on the midpoint of the Offering Price range
set forth in this Prospectus.
COMPANY HISTORY
The Company was formed in 1993 to continue and expand the apartment community
acquisition, renovation and management strategies of Glade M. Knight, the
Company's Chairman and President. From January 1993 through October 1996, the
Company raised approximately $300 million in equity through a series of
best-efforts public offerings of its Common Shares. A total of 1,312,794 Common
Shares was sold at $10.00 per Common Share in 1993 and the remaining amount was
sold thereafter at $11.00 per Common Share. The last in the series of
best-efforts offerings was completed on October 21, 1996 and raised
approximately $50 million (4,545,455 Common Shares at $11.00 per Common Share).
From time to time, the Company has also utilized short-term unsecured borrowings
to fund property acquisitions.
During his career, Mr. Knight has been involved in the ownership and
management of over 20,000 apartment units, mainly located in the mid-Atlantic
region of the United States. See "Risk Factors -- Prior Performance Difficulties
of Certain Affiliates." Senior management of the Company, which consists of Mr.
Knight, Debra A. Jones, Chief Operating Officer, and Stanley J. Olander, Jr.,
Chief Financial Officer, has worked together, in the same business as the
Company, for more than 16 years. Management believes that its long-term
operating experience is invaluable in enabling the Company to operate its
Properties efficiently and to identify and act upon acquisition opportunities.
Glade M. Knight, the Company's Chairman and Chief Executive Officer,
currently owns approximately 4% of the outstanding Common Shares. The combined
Common Share current ownership of senior management is approximately 5% of the
outstanding Common Shares.
The Company's executive offices are located at 306 East Main Street,
Richmond, Virginia 23219 and its telephone number is (804) 643-1761.
22
<PAGE>
PROPERTIES
PROPERTY DESCRIPTIONS AND CHARACTERISTICS
As of February 28, 1997, the Company owned 42 apartment communities
comprising 9,613 apartment units. The Properties are located in North Carolina
(22 communities), Virginia (12 communities), South Carolina (six communities)
and Georgia (two communities).
The following table sets forth the Company's Properties in each of its 15
metropolitan markets as of February 28, 1997:
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
NUMBER OF NUMBER OF CARRYING COST PORTFOLIO
COMMUNITIES APARTMENT UNITS AT 2-28-97 CARRYING COST
------------ ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Georgia
- -------
Augusta............... 2 621 $ 16,630,320 5%
North Carolina
- --------------
Asheville............. 1 176 6,952,362 2
Charlotte............. 8 1,873 75,844,241 21
Greenville............ 1 171 5,994,281 2
Raleigh/Durham........ 6 1,390 64,325,186 18
Wilmington............ 3 592 16,446,131 5
Winston Salem/
Greensboro............ 3 685 26,597,379 8
South Carolina
- --------------
Charleston............ 1 352 11,014,351 3
Columbia.............. 2 419 16,357,294 5
Greenville............ 3 813 19,770,026 6
Virginia
- --------
Charlottesville....... 1 185 5,278,053 1
Fredericksburg........ 1 258 11,315,775 3
Lynchburg............. 1 180 5,156,673 1
Richmond.............. 4 829 35,885,593 10
Virginia Beach........ 5 1,069 36,414,536 10
Total.................. 42 9,613 $353,982,201 100%
</TABLE>
Typically, the Company acquires apartment communities that have between 150
and 400 units. The current Properties have an average of 229 units. The average
unit size is approximately 857 square feet. The unit mix of each property
acquisition candidate is evaluated relative to the Company's assessment of the
needs of the local tenant market. The current Properties have an average
acquisition cost of $32,692 per unit (approximately $38 per square foot) and
average monthly rent of $556 per unit.
Typically, the Company's apartment communities consist of multiple two- and
three-story garden-style buildings on a site. In addition, the Company also owns
three high-rise apartment buildings. The Properties generally feature mature
landscaping, paved parking areas and walkways, and various amenities. The
amenities for a typical Property include an outdoor swimming pool, tennis
courts, a clubhouse, an exercise facility, laundry rooms and a play area. The
Company looks for properties that are in close proximity to employment centers,
shopping areas and entertainment. Most of the Properties were built in the
1970's and 1980's.
The Properties generally consist of wood-frame structures on concrete slabs
with pitched roofs covered with asphalt or composition shingles. Interiors are
generally unfurnished, except for modern kitchen appliances. All kitchens have a
refrigerator, stove and garbage disposal. Most also have a dishwasher. Some
Properties include individual washers and dryers or washer/dryer connections.
Units are generally individually metered for electric and gas service and have
individually-controlled heating and air-conditioning systems. The Properties
consist of approximately 42% one-bedroom units, 49% two-bedroom units, 8%
three-bedroom units, and 1% units of other types.
The Company acquires and operates apartment communities that cater to tenants
who have incomes equal to 90% to 115% of the average local household income. The
Company believes that residents in this category are value-driven, but also look
for certain amenities, such as swimming pools, clubhouses, exercise facilities
and tennis courts. Tenants include young professionals, manager-level white
collar workers, medical personnel, members of the military, young families and
single parents. Generally, the residents at a Property are employed by a mix of
employers.
The Company believes that tenant demand for the Properties is primarily
dependent on the general condition of each market's economy and employment
climate, as well as the rate of household formation and the number of available
apartment units in that market. In evaluating a prospective property and its
market, the Company intensively studies and analyzes the area's economic,
demographic and employment conditions and expected future trends. The Company
also analyzes the expected growth in population and number of households in
relation to existing and planned competing apartment communities.
23
<PAGE>
The following table sets forth specific information regarding the Properties:
<TABLE>
<CAPTION>
CARRYING AVERAGE
COST UNIT
INITIAL CARRYING NUMBER PER SIZE
YEAR DATE OF ACQUISITION COST AT OF UNIT AT (SQUARE
PROPERTY LOCATION COMPLETED ACQUISITION COST 2-28-97 (1) UNITS 2-28-97 FEET)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Georgia
- -----------
Savannah West.......... Augusta 1976 July 1996 $ 9,843,620 $11,059,252 456 $24,253 877
West Eagle Greens...... Augusta 1974 March 1996 4,020,000 5,571,068 165 33,764 796
North Carolina
- -----------
The Meadows............ Asheville 1974 January 1996 6,200,000 6,952,362 176 39,502 1,068
Highland Hills(3)...... Carrboro 1987 September 1996 12,100,000 12,826,027 264 48,583 1,000
Beacon Hill............ Charlotte 1985 May 1996 13,579,203 14,173,343 349 40,611 734
Bridgetown Bay......... Charlotte 1986 April 1996 5,025,000 5,526,261 120 46,052 867
Hanover Landing........ Charlotte 1972 August 1995 5,725,000 7,032,279 192 36,626 832
Heatherwood............ Charlotte 1980 September 1996 10,205,457 10,379,553 272 38,160 699
Meadow Creek........... Charlotte 1984 May 1996 11,100,000 11,748,118 250 46,992 860
Paces Glen............. Charlotte 1986 July 1996 7,425,000 7,730,487 172 44,945 907
Sailboat Bay........... Charlotte 1973 November 1995 9,100,000 12,727,982 358 35,553 906
Summerwalk............. Concord 1983 May 1996 5,660,000 6,526,218 160 40,789 963
Deerfield.............. Durham 1985 November 1996 10,675,000 10,776,378 204 52,825 888
The Landing............ Durham 1984 May 1996 8,345,000 9,318,561 200 46,593 960
Parkside at Woodlake... Durham 1996 September 1996 14,663,886 14,698,093 266 55,256 865
Wind Lake.............. Greensboro 1985 April 1995 8,760,000 9,599,748 299 32,106 727
Signature Place........ Greenville 1981 August 1996 5,462,948 5,994,281 171 35,054 1,037
The Hollows............ Raleigh 1974 June 1993 4,200,000 5,454,234 176 30,990 903
The Trestles........... Raleigh 1987 December 1994 10,350,000 11,251,893 280 40,185 776
Chase Mooring.......... Wilmington 1968 August 1994 3,594,000 4,999,181 224 22,318 867
Osprey Landing......... Wilmington 1973 November 1995 4,375,000 6,152,147 176 34,955 981
Wimbledon Chase........ Wilmington 1976 February 1994 3,300,000 5,294,803 192 27,577 818
Glen Eagles............ Winston Salem 1986 October 1995 7,300,000 7,853,256 166 47,309 952
Mill Creek............. Winston Salem 1984 September 1995 8,550,000 9,144,375 220 41,565 897
<CAPTION>
FEBRUARY STATISTICS
AVERAGE ECONOMIC
RENT PER MONTH OCCUPANCY
-------------------- -------------
1996 (2) 1997 1996 (2) 1997
-------- ------ -------- -------
<S> <C> <C> <C> <C>
Georgia
- -----------
Savannah West.......... -- $456 -- 88%
West Eagle Greens...... -- 451 -- 83%
North Carolina
- --------------
The Meadows............ $558 585 90% 94%
Highland Hills(3)...... -- 692 -- 99%
Beacon Hill............ -- 555 -- 96%
Bridgetown Bay......... -- 589 -- 92%
Hanover Landing........ 472 504 91% 93%
Heatherwood............ -- 546 -- 88%
Meadow Creek........... -- 596 -- 89%
Paces Glen............. -- 616 -- 86%
Sailboat Bay........... 508 539 82% 83%
Summerwalk............. -- 532 -- 92%
Deerfield.............. -- 739 -- 90%
The Landing............ -- 582 -- 98%
Parkside at Woodlake... -- 709 -- 88%
Wind Lake.............. 494 506 84% 84%
Signature Place........ -- 492 -- 92%
The Hollows............ 559 608 99% 88%
The Trestles........... 545 570 95% 92%
Chase Mooring.......... 484 517 73% 88%
Osprey Landing......... 458 540 85% 95%
Wimbledon Chase........ 482 539 89% 97%
Glen Eagles............ 604 631 92% 91%
Mill Creek............. 526 560 88% 84%
24
<PAGE>
CARRYING AVERAGE
COST UNIT
INITIAL CARRYING NUMBER PER SIZE
YEAR DATE OF ACQUISITION COST AT OF UNIT AT (SQUARE
PROPERTY LOCATION COMPLETED ACQUISITION COST 2-28-97 (1) UNITS 2-28-97 FEET)
--------- --------- --------- ------------- ----------- ---------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
South Carolina
- ------------------------
Westchase(3)........... Charleston 1985 January 1997 $ 11,000,000 $ 11,014,351 352 $31,291 706
Arbors at Windsor
Lake(3)............... Columbia 1991 January 1997 10,875,000 10,875,000 228 47,697 948
Stone Ridge............ Columbia 1975 December 1993 3,325,000 5,482,294 191 28,703 1,047
Breckinridge........... Greenville 1973 June 1995 5,600,000 6,504,753 236 27,563 726
Magnolia Run........... Greenville 1972 June 1995 5,500,000 6,586,150 212 31,067 993
Polo Club.............. Greenville 1972 June 1993 4,300,000 6,679,123 365 18,299 807
Virginia
- -----------
Trophy Chase........... Charlottesville 1970 April 1996 3,710,000 5,278,053 185 28,530 803
Greenbrier............. Fredericksburg 1970 and 1990 October 1996 11,099,525 11,315,775 258 43,860 851
Tradewinds............. Hampton 1988 November 1995 10,200,000 10,752,883 284 37,862 930
County Green........... Lynchburg 1976 December 1993 3,800,000 5,156,673 180 28,648 1,000
Ashley Park............ Richmond 1988 March 1996 12,205,000 12,771,523 272 46,954 765
Hampton Glen........... Richmond 1986 August 1996 11,599,931 12,074,674 232 52,046 788
Trolley Square East.... Richmond 1968 June 1996 6,000,000 6,657,892 197 33,796 606
Trolley Square West(3). Richmond 1964 December 1996 4,242,575 4,381,504 128 34,231 571
Arbor Trace............ Virginia Beach 1985 March 1996 5,000,000 5,658,916 148 38,236 850
Bay Watch Pointe....... Virginia Beach 1972 July 1995 3,372,525 4,750,121 160 29,688 911
Harbour Club........... Virginia Beach 1988 May 1994 5,250,000 5,873,957 214 27,448 813
Mayflower Seaside...... Virginia Beach 1950 October 1993 7,634,144 9,378,659 263 35,660 698
------------ ------------ -------- -------- ---------
Total/Average........... $314,272,814 $353,982,201 9,613 $36,823 857
============ ============ ======== ======== =========
<CAPTION>
FEBRUARY STATISTICS
AVERAGE ECONOMIC
RENT PER MONTH OCCUPANCY
--------------- --------------
1996(2) 1997 1996(2) 1997
------ ---- ------- ----
<S> <C> <C> <C> <C>
South Carolina
- ------------------------
Westchase(3)........... -- $493 -- 93%
Arbors at Windsor
Lake(3)............... -- 641 -- 81%
Stone Ridge............ $503 513 88% 91%
Breckinridge........... 406 433 93% 92%
Magnolia Run........... 471 513 98% 95%
Polo Club.............. 382 407 92% 88%
Virginia
- -----------
Trophy Chase........... -- 484 -- 87%
Greenbrier............. -- 591 -- 93%
Tradewinds............. 558 571 80% 92%
County Green........... 475 495 90% 95%
Ashley Park............ -- 572 -- 96%
Hampton Glen........... -- 646 -- 94%
Trolley Square East.... -- 514 -- 95%
Trolley Square West(3). -- 488 -- 93%
Arbor Trace............ -- 530 -- 95%
Bay Watch Pointe....... 556 578 79% 91%
Harbour Club........... 527 552 83% 91%
Mayflower Seaside...... 637 674 91% 93%
------ ----- ----- ------
Total/Average........... $510 $556 88% 91%
====== ===== ===== ======
</TABLE>
Notes to Table of Properties:
(1) "Carrying Cost" includes the purchase price of the Property plus real
estate commissions, closing costs and improvements capitalized since the date of
acquisition.
(2) An open item denotes that the Company did not own the Property during the
month indicated.
(3) The results of operations of the Westchase and Arbors at Windsor Lake
Apartments (which were purchased in January, 1997) and the Trolley Square West
and Highland Hills Apartments (for which audited financial statements were not
available at the time of purchase) are not reflected in the pro forma statements
of operations.
25
<PAGE>
MULTIFAMILY PROPERTIES IN THE COMPANY'S PRINCIPAL MARKETS
Market Demographics. The Company believes that the demographic and economic
trends and conditions in the Company's principal markets indicate a potential
for long term growth in funds from operations. While the Company owns 42
Properties in 15 markets, the majority of the Properties are located in five
metropolitan areas. Based on a survey conducted by M/PF Research, Inc., the
average physical occupancy rate for multifamily properties in the Company's
principal markets equaled 92% for the fourth quarter of 1996. The following
table illustrates the Company's presence in each of its five principal markets:
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL MARKET COMPANY
APARTMENT UNITS APARTMENT PHYSICAL PHYSICAL
NUMBER OF OWNED BY THE UNITS OWNED OCCUPANCY OCCUPANCY
METROPOLITAN AREA COMMUNITIES COMPANY BY THE COMPANY 4th qtr.1996 4th qtr.1996
- ------------------------- ------------- ---------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Charlotte, NC............ 8 1,873 19% 93% 92%
Raleigh/Durham, NC....... 6 1,390 14 96 95
Virginia Beach, VA....... 5 1,069 11 89 93
Richmond, VA............. 4 829 9 94 96
Greenville, SC .......... 3 813 8 89 93
Total/Average...... 26 5,974 61% 92% 94%
</TABLE>
Each of these metropolitan areas is characterized by a diverse economic base,
as indicated below:
<TABLE>
<CAPTION>
ESTIMATED
METROPOLITAN 1996 KEY ECONOMIC
AREA POPULATION CHARACTERISTICS
- --------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------
Charlotte, NC 1,758,000 o regional/national/international business
center
o 3rd largest banking center in the U.S.
o 42nd largest metropolitan area
o 6th largest wholesale center in the U.S.
o 11th largest distribution center in the U.S.
- --------------------------------------------------------------------------------
Raleigh/Durham, 1,025,000 o Capital of North Carolina
NC o home to three major universities:
Duke University
University of North Carolina
North Carolina State University
o high tech industries in the Research Triangle
- --------------------------------------------------------------------------------
Virginia Beach, 1,430,000 o largest and fastest growing city in Virginia
VA o federal government employment
o wholesale trade/warehousing
o high tech/electronics manufacturing
o transportation equipment manufacturing
-------------------------------------------------------------------------------
Richmond, VA 942,000 o Capital of Virginia
o Federal Reserve Bank's Fifth District
o diverse economy with 14 Fortune 500 companies
o home to two major universities
Virginia Commonwealth University/Medical
College of Virginia
University of Richmond
-------------------------------------------------------------------------------
Greenville, SC 860,000 o highest per capita foreign investment of any
MSA in the nation
o manufacturing
o textiles
o automobiles and automobile parts (Michelin,
BMW)
o distribution (regional and national)
-------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
The Company's belief in the growth potential of its principal markets is
based on a multifamily investment environment characterized by increasing
demand, limited new supply and steady job and population growth. The Company
also believes that its growing market share in these markets will further
enhance the Company's growth opportunities.
Demand for Multifamily Housing. The Company believes that there will be an
increase in demand for multifamily housing in its principal markets during the
next decade due to the estimated employment, population and household formation
growth in these markets. During the period from 1985 to 1996, the Company's
principal markets experienced growth in these three areas in excess of national
averages. According to U.S. Department of Commerce statistics, job, population
and household formation growth in the Company's principal markets are projected
to continue to be greater than national averages. Based on calculations derived
from data tabulated by the U.S. Department of Commerce, Bureau of Economic
Analysis, the percentage change in employment, population, and household
formation growth for the Company's principal markets for the period from 1996 to
2005 is estimated to be 17.1%, 11.6% and 14.8%, respectively. All of these
statistics are greater than the national average estimated for each category for
the period 1996 through 2005.
[GRAPHIC OMMITTED]
<TABLE>
<CAPTION>
1985-1996 1996-2005
------------------------------------- -------------------------------------
PROJECTED
HOUSEHOLD PROJECTED PROJECTED HOUSEHOLD
EMPLOYMENT POPULATION FORMATION EMPLOYMENT POPULATION FORMATION
METROPOLITAN AREA GROWTH GROWTH GROWTH GROWTH GROWTH GROWTH
- ------------------------- ------------ ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Charlotte, NC............ 34.5% 23.5% 28.1% 18.1% 12.7% 15.9%
Raleigh/Durham, NC....... 45.4 35.4 40.8 24.5 18.5 21.9
Virginia Beach, VA ...... 15.4 18.1 22.4 13.5 8.9 12.0
Richmond, VA............. 23.5 17.3 22.3 13.7 8.7 11.3
Greenville, SC........... 27.9 13.9 20.5 15.6 9.9 13.1
Company's Principal
Markets................ 28.2% 21.2% 26.4% 17.1% 11.6% 14.8%
United States Total..... 22.8% 11.6% 15.6% 11.8% 7.9% 9.0%
</TABLE>
Source: M/PF Research, Inc. (calculations based on data from NPA Data
Services, Inc.).
27
<PAGE>
Supply of Multifamily Housing. Construction of new multifamily apartments has
declined significantly since the mid-1980's in both the United States generally
and the Company's principal markets. The number of multifamily residential
building permits granted in the Company's principal markets for the period
1991-1996 decreased by 50.8% (43,794 permits) as compared to the earlier period
of 1985-1990 (88,652 permits).
MULTIFAMILY RESIDENTIAL BUILDING PERMITS GRANTED
METROPOLITAN AREA 1985-1990 1991-1996 % CHANGE
------------------------- ----------- ----------- ----------
Charlotte, NC............ 27,145 15,747 -42.0%
Raleigh/Durham, NC....... 18,719 13,707 -26.8
Virginia Beach, VA....... 25,234 7,864 -68.8
Richmond, VA............. 9,304 2,215 -76.2
Greenville, SC........... 8,250 4,261 -50.2
Company's Principal
Markets................ 88,652 43,794 -50.8%
Source: M/PF Research, Inc. (calculations based on data from U.S. Dept. of
Commerce, Bureau of the Census).
As compared to the building permit peak in 1985 of 26,373 apartment units,
the Company's principal markets are experiencing moderate multifamily
construction levels with 1996 building permits for apartment units (11,931)
being less than one-half of the peak level experienced in the 1985. At the same
time, renter household growth in these markets has remained positive, thus
creating a favorable supply/demand relationship.
Other Factors. In addition to the foregoing demographic factors, the Company
believes that demand for multifamily housing in its principal markets will be
positively affected by the following trends: (i) a growing percentage of renters
in the median income brackets whose decision to rent is a lifestyle choice as
well as a financial choice; and (ii) initial high cash costs of home ownership
due to downpayments and closing costs making home ownership a less attractive
housing alternative for an increasing number of people. The Company believes
that these trends will offset to some extent the general trend of a decline in
the growth rate of the adult population in the primary rental population of 20
to 35 year olds and the effect of current low interest rates for home mortgages.
The Company believes that the trends discussed above will keep the demand for
multifamily housing growing at a faster rate than the supply of apartments
during the next several years. However, there can be no assurances that any
projected future conditions will be achieved or realized or that the trends
discussed above will continue.
ENVIRONMENTAL MATTERS
It is the Company's policy to obtain a Phase I ESA from a qualified
environmental engineer before the acquisition of any property to identify
potential sources of contamination for which the owner of the property may be
responsible, and to assess the status of environmental regulatory compliance.
The Phase I ESA's include a historical review of a subject property, reviews
of certain public records, preliminary investigations of the surrounding
properties, screening for the presence of asbestos, PCBs and underground storage
tanks, and the preparation and issuance of a written report. The Phase I ESA's
do not include invasive procedures such as soil sampling or ground water
analysis. The Phase I ESA's for the Properties have not revealed any condition
that could have a material adverse effect on the Company's business, assets or
results of operations nor is the Company aware of any such condition, liability
or concern. It is possible that the Phase I ESA's related to any one of the
Properties do not reveal all environmental conditions, liabilities or compliance
concerns or that there are material environmental conditions, liabilities or
compliance concerns that arose at a Property after the related Phase I ESA's
report was completed of which the Company is otherwise unaware. The Company
believes that the Properties are in compliance in all material respects with all
federal, state and local laws, ordinances and regulations regarding hazardous or
toxic substances and other environmental matters. The Company has not been
notified
28
<PAGE>
by any governmental authority of any material noncompliance, liability or claim
relating to hazardous or toxic substances or other environmental substances in
connection with any of the Properties. See "Risk Factors -- Possible
Environmental Liabilities."
INSURANCE
The Company currently carries comprehensive liability, fire, flood (where
appropriate), worker's compensation, extended coverage and rental loss
insurance, with policy specifications, limits and deductibles customarily
carried for similar properties. Certain types of losses, however (generally of a
catastrophic nature such as acts of war, hurricane coverage in certain areas,
and earthquakes) are either uninsurable or are not economically insurable. See
"Risk Factors-Uninsured Loss." The Company believes, however, that the
Properties are adequately insured in accordance with industry standards.
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.
29
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of Shares offered hereby, after
payment of all expenses of the Offering, are expected to be approximately $48.4
million ($55.8 million if the Underwriters' over-allotment option is exercised
in full). The net cash proceeds of the Offering will be used for repayment of
indebtedness under the Company's Unsecured Line of Credit. The Unsecured Line of
Credit is used to fund the acquisition of apartment communities. After the
completion of the Offering, the outstanding balance on the Unsecured Line of
Credit is estimated to be approximately $26.8 million. As of March 1, 1997, the
outstanding balance under the Unsecured Line of Credit was approximately $75.2
million and the interest rate was 7.03%. The current maturity date for the
Unsecured Line of Credit is March 31, 1998.
To the extent that the Underwriters' over-allotment option to purchase
675,000 Common Shares is exercised in full, the Company expects to use the
additional net proceeds of up to approximately $7.4 million for repayment of
indebtedness under the Company's Unsecured Line of Credit. If the Underwriter's
over-allotment option is exercised in full and the proceeds therefrom are used
to repay outstanding indebtedness, the outstanding balance on the Unsecured Line
of Credit would be approximately $19.4 million and the Company would have
approximately $80.6 million of available credit under the Unsecured Line of
Credit.
DISTRIBUTION POLICY
The Company has in the past made, and intends to continue to make, regular
quarterly distributions to its shareholders. The timing and amounts of
distributions to shareholders are within the discretion of the board of
directors.
Prior to this Offering, the Common Shares have not been publicly traded.
Application has been made to list the Common Shares on the NYSE under the symbol
"TCR." The following table sets forth for the indicated periods the cash
distributions declared and paid per Common Share:
CASH
DISTRIBUTION
PER COMMON SHARE
-----------------
1994
-------
First Quarter $0.2205
Second Quarter 0.2210
Third Quarter 0.2215
Fourth Quarter 0.2225
1995
-------
First Quarter $0.2300
Second Quarter 0.2400
Third Quarter 0.2425
Fourth Quarter 0.2450
1996
-------
First Quarter $0.2475
Second Quarter 0.2480
Third Quarter 0.2485
Fourth Quarter 0.2490
1997
-------
First Quarter $0.2500
As of February 28, 1997, the Company had approximately 12,000 shareholders.
The first quarter 1997 distribution represents a $1.00 per Common Share
annual distribution rate. For 1997 and subsequent years, the Company intends to
examine and, as appropriate, adjust its per Common Share dividend rate on an
annual rather than a quarterly basis. Future distributions will depend on the
30
<PAGE>
Company's results of operations, cash flow from operations, economic conditions
and other factors, such as working capital, cash requirements to fund investing
and financing activities, capital expenditure requirements, including
improvements to and expansions of properties and the acquisition of additional
properties, as well as the distribution requirements under federal income tax
provisions for qualification as a REIT.
For federal income tax purposes, distributions paid to shareholders may
consist of ordinary income, capital gains distributions, non-taxable return of
capital, or a combination thereof. Distributions which exceed the Company's
current and accumulated earnings and profits constitute a return of capital
rather than a dividend to the extent of a shareholders' basis in his Common
Shares and reduce the shareholder's basis in the Common Shares. Distributions
constitute ordinary income to the extent of the Company's current and
accumulated earnings and profits. To the extent that a distribution exceeds both
current and accumulated earnings and profits and the shareholder's basis in his
Common Shares, it is generally treated as gain from the sale or exchange of that
shareholder's Common Shares. The Company notifies shareholders annually as to
the taxability of distributions paid during the preceding year. In 1996,
approximately 14% of distributions represented a return of capital, and the
balance represented ordinary income.
The Company has adopted a Dividend Reinvestment and Share Purchase Plan under
which any record holder of Common Shares may reinvest cash dividends and may
invest voluntary cash payments of up to $15,000 per quarter in additional Common
Shares.
31
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 on a historical basis, and as adjusted to reflect the receipt
of net proceeds from the sale of 4,500,000 Shares pursuant to this Offering at
the assumed Offering Price of $11.75 per share and the application of the
estimated net proceeds (after offering expenses and discounts and fees to the
underwriters estimated at $4,500,000) of $48,375,000 therefrom. The information
set forth in the following table should be read in conjunction with the
consolidated financial statements and notes thereto and the pro forma financial
information and notes thereto included elsewhere in this Prospectus, and the
discussions under "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
HISTORICAL AS ADJUSTED
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Notes payable (1)........................................ $ 55,403 $ 7,028
Shareholders' Equity:
Common Shares, no par value, 50,000,000 Common Shares
authorized; 28,141,509 Common Shares issued and
outstanding (32,641,509 as adjusted)................... 276,270 324,645
Distributions less (greater) than net income, net ....... (21,700) (21,700)
-------------
Total shareholders' equity .............................. 254,570 302,945
------------ -------------
Total capitalization..................................... $309,973 $309,973
=============
</TABLE>
(1) Consisting of the Unsecured Line of Credit, which had an outstanding
balance of $49,903,000 at December 31, 1996, and the note issued to the
seller of the Trolley Square East Apartments, which had an outstanding
balance of $5,500,000 at December 31, 1996. See "The Company -- Financing
Policy."
32
<PAGE>
SELECTED PRO FORMA AND HISTORICAL INFORMATION
The following table sets forth selected historical financial information for
the Company from its inception on June 1, 1993, and selected pro forma
information as of and for the year ended December 31, 1996. The unaudited
selected pro forma information is presented as if: (i) the Company had owned 38
of the 42 Properties on January 1, 1996; and (ii) the Offering had occurred on
January 1, 1996 and the net proceeds therefrom had been used as described
herein. The following unaudited selected pro forma information should be read in
conjunction with the unaudited pro forma financial statements included elsewhere
in this Prospectus. The following selected financial information should be read
in conjunction with the discussion set forth in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and all of the
financial statements and notes thereto included elsewhere in or incorporated
into this Prospectus. The pro forma financial information is not necessarily
indicative of what the actual financial position or results of operations of the
Company would have been as of and for the period presented, nor does it purport
to represent the Company's future financial position or results of operation.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PRO FORMA
------------------------------------------------------------ 1996 (A)
1993 1994 1995 1996
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues from rental properties.............. $ 1,784,868 $ 8,177,576 $ 16,300,821 $ 40,352,955 $ 51,430,900
Operating expenses........................... 1,334,855 5,901,759 11,005,558 26,860,354 34,542,326
Management contract termination expense (b) . -- -- -- 16,526,012 16,526,012
-------------- -------------- -------------- --------------- ---------------
Income (loss) before interest income
(expense)................................... 450,013 2,275,817 5,295,263 (3,033,411) 362,562
Interest income.............................. 46,633 110,486 226,555 287,344 287,344
Interest expense............................. -- -- (292,103) (1,423,782) (533,371)
-------------- -------------- -------------- --------------- ---------------
Net income (loss)............................ $ 496,646 $ 2,386,303 $ 5,229,715 $ (4,169,849) $ 116,535
============== ============== ============== =============== ===============
Weighted average common shares outstanding .. 1,662,944 4,000,558 8,176,803 20,210,432 28,626,979
Per share:
Net income (loss) .......................... $ 0.30 $ 0.60 $ 0.64 $ (0.21) $ 0.00
Common distributions declared and paid...... 0.27 0.89 0.96 0.99 0.99
BALANCE SHEET DATA (at end of period)
Investment in rental property................ $ 25,549,790 $ 54,107,358 $129,696,447 $ 329,715,853 $ 329,715,853
Accumulated depreciation..................... 255,338 1,466,156 4,254,974 12,323,037 12,323,037
Total assets................................. 29,199,079 57,257,950 133,181,032 322,870,574 322,870,574
Notes payable................................ -- 5,000,000 8,300,000 55,403,000 7,028,000
Shareholders' equity......................... 28,090,912 51,436,863 122,154,420 254,569,705 302,944,705
Common shares outstanding.................... 2,995,210 5,458,648 12,754,331 28,141,509 32,641,509
OTHER DATA
Cash provided by operating activities ....... $ 1,670,406 $ 3,718,086 $ 9,618,956 $ 20,162,776 $ 26,859,202
Cash used in investing activities............ (25,549,790) (28,557,568) (75,589,089) (194,519,406) (194,519,406)
Cash provided by financing activities ....... 27,487,556 25,519,648 68,754,842 170,466,134 170,466,134
FUNDS FROM OPERATIONS
Net income (loss)............................ $ 496,646 $ 2,386,303 $ 5,229,715 $ (4,169,849) $ 116,535
Plus: Depreciation of real estate............ 255,338 1,210,818 2,788,818 8,068,063 10,478,105
Management contract termination (b).... -- -- -- 16,526,012 16,526,012
-------------- -------------- -------------- --------------- ---------------
Funds from operations (c).................... $ 751,984 $ 3,597,121 $ 8,018,533 $ 20,424,226 $ 27,120,652
============== ============== ============== =============== ===============
OTHER INFORMATION (at end of period)
Total rental communities .................... 5 9 19 40 38
Total number of apartment units 1,175 2,085 4,388 9,033 8,641
Economic occupancy .......................... 93% 93% 94% 93% 93%
Weighted average monthly
revenue per apartment....................... $ 398 $ 433 $ 463 $ 488 $ 496
</TABLE>
- ----------
(a) The pro forma information includes 19 of the 21 Properties acquired during
1996 for which the Company had previously reported the 12 month audited
operations in Reports on Form 8-K and gives effect to an assumed offering
of 4,500,000 Shares at $11.75 per Share, less estimated underwriting
discounts and Offering costs, which was assumed to pay down the Unsecured
Line of Credit by $48,375,000.
(b) Included in the 1996 operating results is $16,526,012 of management
contract termination expense resulting from the Company's conversion to
"self-administered" and "self-managed" status. See Note 6 to the financial
statements included herein.
(c) The Company considers funds from operations to be an appropriate measure of
the performance of an equity REIT. Funds from operations ("FFO") is defined
as income before gains (losses) on sales and debt restructuring (computed
in accordance with generally accepted accounting principles) plus real
estate depreciation, and after adjustments for nonrecurring items if any.
The Company computes FFO in accordance with the recommendations set forth
in a White Paper adopted on March 3, 1995 by the National Association of
Real Estate Investment Trusts ("NAREIT"). The Company considers FFO in
evaluating property acquisitions and its operating performance, and
believes that FFO 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. FFO, 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.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is based on the financial statements of the Company
as of December 31, 1996, 1995 and 1994. This information should be read in
conjunction with the selected financial data, the Company's financial statements
and notes thereto and the pro forma financial statements and notes thereto of
the Company included elsewhere in this Prospectus. The Company is operated and
has elected to be treated as a REIT for federal income tax purposes.
RESULTS OF OPERATIONS
COMPARISON OF PRO FORMA RESULTS OF OPERATIONS TO HISTORICAL RESULTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996.
The pro forma statement of operations for the year ended December 31, 1996
assumes 19 of the 21 Properties acquired during 1996 were acquired as of January
1, 1996. Two Properties were acquired during 1996 for which 1996 audited
financial statements were not available for the period of time the Properties
were not owned by the Company. The pro forma statement of operations also
assumes the Offering had occurred on January 1, 1996. The historical and pro
forma statements of operations include $16,526,012 of management contract
termination expense associated with the Company's conversion to
"self-administered" and "self-managed" status on October 1, 1996.
On a pro forma basis, rental income increased by $11,077,945 or 27.4% over
historical rental income for the year ended December 31, 1996. This increase is
attributable to rental revenues from the 19 Properties acquired during 1996, all
of which were assumed to have been acquired on January 1, 1996 for purposes of
the pro forma statement of operations. Average revenues per unit per month for
1996 was $496 on a pro forma basis versus $488 on a historical basis. This
increase is attributable to the higher average rents for Properties acquired in
1996, offset in part by lower occupancy at these Properties during the period of
time that the Properties were not owned by the Company.
Total expenses, exclusive of depreciation of rental property, amortization
and the management contract termination expense, increased by $5,271,930 or 28%
from $18,745,158 on a historical basis to $24,017,088 on a pro forma basis. This
increase is attributable to expenses from the 19 Properties acquired in 1996 for
the period of time they were not owned by the Company. On a weighted average
apartment unit basis, monthly pro forma total expenses per unit, exclusive of
depreciation of rental property, amortization and management contract
termination expense increased to $232 on a pro forma basis versus $227 on a
historical basis. This increase is consistent with the increase in average
monthly rental income per unit and the Company's experience in reducing costs at
newly acquired Properties.
On a pro forma basis, depreciation or real estate owned increased by
$2,410,042 or 30%. This increase is attributable to the depreciation of the 19
Properties acquired in 1996, as if they were acquired January 1, 1996.
Interest expense decreased by $890,411 or 63% from $1,423,782 on a historical
basis to $533,371 on a pro forma basis. This decrease is attributable to use of
the estimated net proceeds from the Offering of $48,375,000 to repay
indebtedness used to acquire certain of the 19 Properties.
As a result of the foregoing, the pro forma net income for the year ended
December 31, 1996 was $116,535 or $.00 per share compared to net loss of
$4,169,849 or $.21 per share on a historical basis.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
CONVERSION TO SELF ADMINISTRATION
Effective October 1, 1996, the Company agreed with its affiliated advisor and
management company on a series of transactions, the effect of which was to
convert the Company into a "self-administered" and "self-managed" REIT. The
transactions were unanimously approved by the Board of Directors of the Company.
The conversion was approved because it is expected to reduce future operating
expenses compared
34
<PAGE>
to what those expenses would have been under the Company's former "externally
managed and advised" arrangements. The net effect of these savings on earnings
per Common Share will be partially offset by the issuance of Common Shares to
effect the transaction as described below.
Pursuant to this conversion, the Company agreed to issue 1,400,000 Common
Shares, with 700,000 Common Shares issued in October 1996 and 700,000 Common
Shares to be issued on September 30, 1997, and paid approximately $1,913,000 to
the various entities for several assets and various contracts. This transaction
was accounted for as the termination of management contracts and resulted in a
one-time expense of $16,526,012. The remaining amounts paid relate primarily to
fixed assets acquired, net of imputed interest. This expense was the primary
factor in the Company's net loss of $4,169,849 ($.21 per Common Share) for 1996
versus net income of $5,229,715 ($.64 per Common Share) in 1995. See Note 6 of
the "Notes to Financial Statements," "Risk Factors -- Purchase of Former
Advisor's and Former Manager's Rights not at Arm's-Length" and "Certain
Transactions -- Conversion to Self-Administration."
INCOME AND OCCUPANCY
The results of the Company's Property operations for the year ended December
31, 1996 include the results of operations from the 19 Properties acquired
before 1996 and from the 21 Properties acquired in 1996 from their respective
acquisition dates. The increased rental income and operating expenses for the
year ended December 31, 1996, over the year ended December 31, 1995, are
primarily due to a full year of operation in 1996 of the 19 Properties acquired
before 1996 as well as the incremental effect of the 21 Properties acquired in
1996.
Substantially all of the Company's revenue is from the rental operation of
its Properties. Rental income increased to $40,352,955 (148 percent) in 1996
from $16,300,821 in 1995 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.
Overall average economic occupancy was 91% in 1996 and 92% in 1995. The
average rental rate per unit for the Properties increased to $520 (9 percent) in
1996 from $479 in 1995. This increase is due to a combination of increased
rental rates from new leases and the acquisition of Properties with higher
average rental rates. Management believes that the implementation of its
property renovation program at 36 Properties was also a major factor in enabling
the Company to increase rental rates. The Properties acquired prior to 1996 had
an average economic occupancy of 90% during 1996 and 92% during 1995. The
decrease in occupancy is partially due to the effects of repositioning and
renovation activities taking place at recently acquired Properties as well as
the effect of acquiring Properties with occupancies below those reflective of
their respective markets as a result of substandard property management. The
Properties acquired in 1996 provided 37% of the Company's 1996 income and had an
average economic occupancy of 93% during 1996.
COMPARABLE PROPERTY RESULTS
On a comparative basis, the nine Initial Properties, which were owned during
all of 1996 and 1995, provided rental and net operating income of $12,546,624
and $7,082,130 in 1996 and $11,644,096 and $6,226,431 in 1995, respectively.
This represents an increase from 1995 to 1996 of 7.8% and 13.7%, respectively.
The conversion to "self management" took place in October 1996. Therefore, the
actual results for Property operations contained a full year of external
management expense in 1995 and a partial year of external management expense in
1996. In order to make a meaningful comparison of net operating income for these
Properties between 1995 and 1996, management believes Property external
management expenses need to be eliminated from both years. This adjustment
allows for a comparison of the results of the Initial Properties on a
"self-administered" and "self-managed" basis. As adjusted, the Initial
Properties would have provided net operating income of $7,537,707 in 1996 and
$6,928,227 in 1995. This represents a net operating income increase of 8.8%. The
eliminated expenses include management fees of $553,471 in 1995 and $414,505 in
1996. In addition, other expenses related to the management contracts of
$148,325 in 1995 and $41,072 in 1996 were also eliminated.
35
<PAGE>
EXPENSES
Total Property expenses, excluding management contract termination expense,
increased to $26,860,354 (144 percent) in 1996 from $11,005,558 in 1995, due
largely to the increase in the number of apartments owned by the Company. The
operating expense ratio (the ratio of operating expenses, excluding depreciation
and amortization, to rental income) was 43% in 1996 and 46% in 1995. The decline
in the operating expense ratio is attributable to increasing economies of scale
based on the Company's growing portfolio of Properties and the elimination of
management and advisory fees in the fourth quarter of 1996.
General and administrative expenses totaled 3.7% of revenues in both 1996 and
1995. These expenses represent the administrative expenses of the Company as
distinguished from the operations of the Properties. In 1996, the Company has
continued to expand its internal administrative infrastructure to keep pace with
its rapid growth.
Depreciation of real estate increased to $8,068,063 from $2,788,818 in 1995
and is directly attributable to the acquisition of additional Properties.
INTEREST INCOME AND EXPENSE
The Company's other source of income is from the investment of its cash and
cash reserves. Interest income was $287,344 in 1996 and $226,555 in 1995. The
Company incurred $1,272,530 and $292,103 of interest expense in 1996 and 1995,
respectively, associated with short-term borrowings under its line of credit.
The Company also incurred $151,252 of interest expense in 1996 associated with
an unsecured promissory note held by a seller of one Property. The increase in
interest expense associated with the line of credit is a result of the increased
use of its line of credit to fund acquisitions. The weighted average interest
rate on the line of credit during 1996 was 7.2% compared to 7.8% in 1995.
CHANGES IN ACCOUNTING POLICIES
During the first quarter of 1996, the Company adopted the provisions of FASB
No 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The adoption of this statement did not have an impact
on the Company's financial statements (See Note 1 to the financial statements).
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
INCOME AND OCCUPANCY
The Company had increased rental income, expenses and net income in 1995 and
1994 due to the full year of operations from the four Properties acquired in
1994 and the five Properties acquired in 1993, respectively, as well as the
effect of the operations of the ten Properties acquired in 1995 and the four
Properties acquired in 1994 from their respective acquisition dates.
Rental income in 1995 increased to $16,300,821 (99 percent), from $8,177,576
in 1994, due to the factors described above. The Company's Properties had an
average economic occupancy of 92% during 1995 and 90% in 1994. On a comparative
basis, the five Properties owned during all of 1995 and 1994 provided rental and
operating income of $6,681,121 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 ten Properties acquired in 1995 had an average occupancy of 92% during
1995. As noted, the nine Properties acquired prior to 1995 had an average
occupancy of 92% in 1995.
Overall, average rental rates for the Properties increased from $450 per
month in 1994 to $479 per month (6 percent) in 1995. This increase was due to a
combination of increased rental rates from new leases and the acquisition of
Properties with higher average rental rates. Management believes that the
implementation of its property renovation programs at its various Properties was
a major factor in enabling the Company to increase rental rates.
EXPENSES
Total expenses increased to $11,005,558 (86 percent) in 1995 from $5,901,759
in 1994 due largely to the increased number of Properties. The operating expense
ratio (the ratio of operating expenses to rental income) was 46% in 1995 and 48%
for 1994. General and administrative expenses totaled 3.7% of revenues in 1995
and 8.8% in 1994. The decline in operating expense ratio was attributable to
increasing economics of scale based on the Company's growing portfolio of
Properties.
36
<PAGE>
INTEREST INCOME AND EXPENSE
Interest income was $226,555 in 1995 and $110,486 in 1994. The Company
incurred $292,103 of interest expense in 1995 associated with short-term
borrowings under its line of credit for acquisitions. The Company did not borrow
any funds and, thus, had no interest expense in 1994.
LIQUIDITY AND CAPITAL RESOURCES
EQUITY
There was a significant change in the Company's liquidity during the year
ended December 31, 1996 as the Company continued to grow. During 1996, the
Company sold 14,687,178 of its Common Shares to investors bringing the total
number of Common Shares outstanding to 28,141,509. The total gross proceeds from
the Common Shares sold in 1996 was $161,558,958, which netted $144,798,035 to
the Company after the payment of brokerage fees and other offering-related
costs. This increased the total gross common equity raised of the Company from
$138,434,847 at December 31, 1995 to approximately $300,000,000 at December 31,
1996.
Using proceeds from the sale of Common Shares and supplemented by short-term
borrowings when necessary, the Company acquired 4,645 apartment units in 21
residential rental communities during 1996. These acquisitions brought the total
number of Properties to 40 and the total number of apartment units owned to
9,033 at year-end.
NOTES PAYABLE
The Company intends to acquire additional properties and may seek to fund
these acquisitions through a combination of equity offerings and unsecured
corporate debt. To meet this objective, the Company, in February 1997, secured a
$100 million Unsecured Line of Credit through a consortium of three banks headed
by First Union National Bank of Virginia. The Unsecured Line of Credit bears
interest at the one-month LIBOR rate plus 160 basis points and is due on March
31, 1998. The Unsecured Line of Credit may be used only for property
acquisitions. The Company anticipates curtailing the Unsecured Line of Credit
with the proceeds of offerings of Common Shares.
At year-end, the Company had an outstanding balance of $49,903,000 on its
previous line of credit. This line of credit was fully repaid with proceeds from
the Unsecured Line of Credit in February 1997. In addition, the Company had a
$5,500,000 unsecured promissory note bearing an effective interest rate of 6.65%
per annum. This debt is to a private lender and is due in June 1999.
In January 1997, the Company acquired the Arbors at Windsor Lake Apartments,
a 228-unit apartment community located in Columbia, South Carolina for
$10,875,000 and the Westchase Apartments, a 352-unit apartment community located
in Charleston, South Carolina for $11,000,000. The Company used its unsecured
line of credit to effect these acquisitions. Not adjusting for the intended use
of proceeds of this Offering (See "Use of Proceeds"), the Company has
approximately $25 million of currently available borrowing capacity for future
acquisitions. Upon completion of the Offering and after giving effect to the
intended use of proceeds of the Offering, the Company expects to have
approximately $73.2 million of available credit under the Unsecured Line of
Credit.
The Company also has a $7.5 million unsecured revolving line of credit for
general corporate purposes. This line of credit also bears interest at the
one-month LIBOR rate plus 160 basis points and is due on March 31, 1998. On
March 1, 1997, the outstanding balance on this loan was $1,735,000. The Company
intends to use $3.8 million of proceeds borrowed under this line of credit to
purchase common shares of Apple at or before the closing of the Offering.
CAPITAL REQUIREMENTS
The Company has ongoing capital expenditure commitments to fund its
renovation programs for recently acquired Properties. In addition, the Company
expects to acquire new properties during the year. The Company anticipates that
it will continue to operate as it did in 1996 and fund these cash needs from a
variety of sources including equity, cash reserves and debt provided by its line
of credit.
37
<PAGE>
The Company continues to renovate its Properties. In connection with these
renovations, the Company capitalized improvements of approximately $19 million
in 1996. Approximately $8 million of additional capital improvements are
budgeted for 1997 on the existing Property portfolio. The Company's budgeted
capital improvements are expected to be funded through cash reserves and
dividend reinvestment.
Historically, the rental income generated from the Properties has provided
ample cash to provide for the payment of operating expenses and the payment of
distributions.
The Company is operated as, and has made an election to be taxed as, a REIT
under the Code. As a result, the Company has no provision for income taxes and
thus there is no effect on the Company's liquidity from income taxes.
Capital resources are expected to grow with the future sale of its Common
Shares and from cash flow from operations. Approximately 60% of all 1996
distributions were reinvested in additional Common Shares. In general, the
Company's liquidity and capital resources are believed to be more than adequate
to meet its cash requirements during 1997.
DEBT LIMITATION
Pursuant to the Debt Limitation, the Company's outstanding indebtedness is
limited so that at the time such debt is incurred, it does not exceed 40% of the
Company's Total Market Capitalization. After the completion of the Offering, the
Company expects to have a total of approximately $37.8 million in outstanding
indebtedness which will represent approximately 8% of the Company's Total Market
Capitalization based on the midpoint of the Offering Price range set forth in
this Prospectus.
IMPACT OF INFLATION
The Company does not believe that inflation had any significant impact on
it's operations in 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.
38
<PAGE>
MANAGEMENT
The executive officers and directors of the Company are:
NAME AGE POSITION
- ----------------------- ----- -----------------------------------------------
Glade M. Knight........ 53 Chairman, Chief Executive Officer and President
Debra A. Jones......... 41 Chief Operating Officer
Stanley J. Olander, Jr. 42 Director, Chief Financial Officer and Secretary
Glenn W. Bunting, Jr... 52 Director
Leslie A. Grandis...... 52 Director
Penelope W. Kyle....... 49 Director
Harry S. Taubenfeld ... 67 Director
Martin Zuckerbrod...... 66 Director
GLADE M. KNIGHT. Mr. Knight is Chairman, Chief Executive Officer and
President of the Company. Mr. Knight is also a Director, Chairman of the Board
and President of Apple. See "The Company -- Apple Residential Income Trust."
Since 1972, Mr. Knight has held executive and/or ownership positions in several
corporations involved in the management of and investment in real estate, and
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 "Risk Factors -- Prior Performance Difficulties of Certain
Affiliates." Mr. Knight is Chairman of the Board of Trustees of Southern
Virginia College in Buena Vista, Virginia. Mr. Knight is also a member of the
advisory board to the Graduate School of Real Estate and Urban Land Development
at Virginia Commonwealth University.
DEBRA A. JONES. Ms. Jones is the Chief Operating Officer of the Company. From
June 1991 through August 1996, Ms. Jones was employed by Cornerstone Realty
Group, Inc. Through Cornerstone Realty Group, Inc., Cornerstone Management
Group, Inc. and Cornerstone Advisors, Inc., which had contracts to provide
management and administration services to the Company, Ms. Jones provided the
same general types of services as she now provides as the Company's Chief
Operating Officer. Ms. Jones has held executive positions in real estate
companies organized by Mr. Knight 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.
STANLEY J. OLANDER, Jr. Mr. Olander is Chief Financial Officer and Secretary
of the Company. From June 1991 through August 1996, Mr. Olander was employed by
Cornerstone Realty Group, Inc. Through Cornerstone Realty Group, Inc.,
Cornerstone Management Group, Inc. and Cornerstone Advisors, Inc., which had
contracts to provide management and administration services to the Company, Mr.
Olander provided the same general types of services as he now provides as the
Company's Chief Financial Officer. Mr. Olander has held various executive
positions in real estate companies organized by Mr. Knight since 1981. Mr.
Olander is a licensed real estate agent in the Commonwealth of Virginia and a
member of the Richmond Board of Realtors. Mr. Olander serves as Secretary of
Apple, but his time commitment to such position is expected to be immaterial.
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, which brokers shopping centers
and apartment communities, since 1980.
LESLIE A. GRANDIS. Mr. Grandis has been a partner in the law firm of McGuire,
Woods, Battle & Boothe, L.L.P. in Richmond, Virginia since 1974. Mr. Grandis
concentrates his practice in the areas of corporate finance and securities law.
He is a director of Markel Corporation and CSX Trade Receivables Corporation.
39
<PAGE>
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. beginning in 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. Ms. Kyle is also a director of Apple.
HARRY S. TAUBENFELD. Mr. Taubenfeld 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. Taubenfeld specializes in real estate and commercial law. Mr. Taubenfeld is
a Trustee of the Village of Cedarhurst and a past President of the Nassau County
Village Officials.
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 are real estate and
commercial law. Mr. Zuckerbrod also serves as a judge in the Village of
Cedarhurst.
OFFICER COMPENSATION
GENERAL. The Company did not pay salaries to its officers for the period
before September 1, 1996. During such prior period, the Company operated as an
"externally-advised" and "externally-managed" REIT. Effective October 1, 1996
the Company has converted to "self-administered" and "self-managed" status. See
"Certain Transactions." In connection with this change, the Company entered into
employment agreements with Messrs. Knight and Olander and Ms. Jones, each of
whom had previously served as the principal executive officers of the advisory
and management companies.
40
<PAGE>
The following table sets forth the compensation awarded to the Company's
Chief Executive Officer, Chief Operating Officer and Chief Financial Officer
during the fiscal year ending December 31, 1996 (collectively the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------------------- --------------------------
RESTRICTED
OTHER ANNUAL SHARE SECURITIES
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS UNDERLYING
POSITION ($)(1) ($)(2) (3) ($)(4) OPTIONS (#)
- -------------------------- ------------ --------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Glade M. Knight
Chairman and Chief
Executive Officer........ 70,000 (5) -- -- -- 80,440
Debra A. Jones
Chief Operating Officer.. 40,000 (6) -- -- -- 44,310
Stanley J. Olander, Jr.
Chief Financial Officer.. 40,000 (6) -- -- -- 44,310
</TABLE>
- ----------
(1) Amounts given are for the period September 1, 1996 through December 31,
1996.
(2) Bonuses may be awarded in 1997 and in future years in the discretion of the
board of directors.
(3) The Company provides each of the Named Executive Officers with use of a
Company automobile, and pays premiums for term life, disability and health
insurance for the Named Executive Officers. The value of such items was
less than the lesser of either $50,000 or 10% of the total salary and bonus
of the Named Executive Officer in 1996.
(4) At December 31, 1996, Mr. Knight held 5,000 restricted Common Shares issued
under the Incentive Plan (as defined herein) and each of Ms. Jones and Mr.
Olander held 2,500 restricted Common Shares issued under the Incentive
Plan. All of these restricted Common Shares were issued on July 1, 1995 and
vest in equal 1/5 portions on July 1 of each year from 1995 through 1999,
inclusive. If the holder of such restricted Common Shares ceases to be
either an officer or employee of the Company for any reason other than
death or permanent disability, the unvested restricted Common Shares will
revert to the Company. Distributions are payable on all of these restricted
Common Shares, both vested and unvested. Prior to this Offering, there has
been no public market for the Common Shares. Thus, the value of the
restricted Common Shares awarded under the Incentive Plan at the end of
1996 is indeterminate. Assuming the Shares had a value of $11.75 per Share
(the midpoint of the price range set forth on the cover page of the
Prospectus), the value of Mr. Knight's 5,000 restricted Common Shares would
be $58,750, and the value of the 2,500 restricted Common Shares owned by
each of Ms. Jones and Mr. Olander would be $29,375.
(5) Annualized salary of $210,000.
(6) Annualized salary of $120,000.
The following table sets forth the information with respect to the
exercisability of the Common Share options held by the Named Executive Officers
during the year ended December 31, 1996.
AGGREGATED OPTION EXERCISES IN 1996
AND 1996 YEAR-END OPTIONS VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING
ACQUIRED VALUE UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED
NAME ON EXERCISE REALIZED YEAR-END OPTIONS AT YEAR END $
- ----------------------- --------------- ---------- ----------------------------- -------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE(1) UNEXERCISABLE(1)
------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Glade M. Knight........ -- -- 54,264 26,176 -- --
Debra A. Jones......... -- -- 29,586 14,724 -- --
Stanley J. Olander,
Jr..................... -- -- 29,586 14,724 -- --
</TABLE>
- ----------
(1) The exercise price of each exercisable option referred to in the table is
$11.00 per Common Share. The exercise price of one half of the
unexercisable options referred to in the table will equal the fair market
value of the Common Shares on September 8, 1997, and the exercise price of
the other one-half of the unexercisable options referred to in the table
will equal the fair market value of the Common Shares on September 9, 1997.
Prior to this Offering, there has been no public market for the Common
Shares. Thus, the value of the options at the end of 1996 is indeterminate.
Assuming the Shares had a value of $11.75 per Share, the value of Mr.
Knight's exercisable and unexercisable options would be $40,698 and
$19,632, respectively, and the value of each of Ms. Jones' and Mr.
Olander's exercisable and unexercisable options would be $22,190 and
$11,043, respectively.
41
<PAGE>
EMPLOYMENT AGREEMENTS. Each of Glade M. Knight, Stanley J. Olander, Jr. and
Debra A. Jones has, effective September 1, 1996, entered into an employment
agreement with the Company. Mr. Knight's employment agreement has a term of one
year, but may be extended by the Company for up to four additional one-year
terms. The employment agreements with Ms. Jones and Mr. Olander have five year
terms ending on August 31, 2001. Mr. Olander and Ms. Jones are obligated to
devote all of their business time to the Company. Mr. Knight is not similarly
restricted, although he has agreed to devote as much of his attention and
energies to the business of the Company as is reasonably required in the
judgment of him and the board of directors.
STOCK INCENTIVE PLANS
The Company has adopted two stock incentive plans (the "Stock Incentive
Plans"). The aggregate number of Common Shares underlying issuable options under
the two stock incentive plans is 1,771,017 Common Shares plus 6.2% of the number
of Common Shares sold in this Offering and additional offerings through July 7,
1999.
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. Mr. Knight, Ms. Jones and Mr. Olander are
participants in the Incentive Plan. Such incentive awards may be in the form of
stock options or restricted stock. The exercise price of the options will be not
less than 100% of the fair market value of the Common Shares as of the date of
grant of the option. Under the Incentive Plan, the number of Common Shares
underlying issuable options is 1,237,470 Common Shares plus 4.4% of the number
of Common Shares sold in this Offering and any additional offerings of Common
Shares through July 7, 1999. If an option is canceled, terminates or lapses
unexercised, any unissued Common Shares allocable to such option are available
for future incentive awards.
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 in a
way that aligns the identification of such employees' interests with those of
the shareholders.
As of December 31, 1996, the Company had outstanding under the Incentive Plan
options to purchase an aggregate of 271,500 Common Shares to 18 officers and
employees and an aggregate of 10,000 restricted Common Shares to three officers.
The exercise price of each option outstanding under the Incentive Plan is $11.00
per Common Share, except that the exercise price of options to purchase 40,900
Common Shares will be the fair market value of the Common Shares on September 8,
1997, and the exercise price of options to purchase an additional 40,900 Common
Shares will be the fair market value of the Common Shares on September 8, 1998.
As of the date of this Prospectus, no options under the Incentive Plan have been
exercised.
Directors' Plan. The Company has also adopted a stock option plan for
directors of the Company who are not employees of the Company (the "Directors'
Plan"). Under the Directors' Plan, the number of Common Shares underlying
issuable options is 533,547 Common Shares plus 1.8% of the number of Common
Shares sold in this Offering and any additional offerings of Common Shares
through July 7, 1999.
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 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. Five 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 is administered by the board. Grants of stock options to
eligible directors under the Plan are automatic. The exercise price for each
option granted under the Directors' Plan is 100% of the fair market value on the
date of grant; no consideration is paid to the Company for the granting of the
option.
As of December 31, 1996, the Company had outstanding under the Directors'
Plan options to purchase an aggregate of 99,756 Common Shares at $11 per Common
Share and 3,773 Common Shares at $10 per Common Share. As of the date of this
Prospectus, no options under the Directors' Plan have been exercised.
42
<PAGE>
CERTAIN TRANSACTIONS
CONVERSION TO SELF-ADMINISTRATION
Before October 1, 1996, the Company operated as an "externally-advised" and
"externally-managed" REIT. Cornerstone Advisors, Inc. served as the advisor to
the Company, Cornerstone Management Group, Inc. served as the manager of the
Properties, and property acquisition services were provided to the Company by
Cornerstone Realty Group, Inc. Glade M. Knight, Chairman and Chief Executive
Officer of the Company, owned all of the stock of Cornerstone Advisors, Inc.,
Cornerstone Management Group, Inc. and Cornerstone Realty Group, Inc.
(collectively, the "External Companies"). By agreement among Mr. Knight, Stanley
J. Olander, Jr. (Chief Financial Officer of the Company) and Debra A. Jones
(Chief Operating Officer of the Company), Mr. Knight held part of the beneficial
ownership of the External Companies for the account and interest of each of Mr.
Olander and Ms. Jones.
Before October 1, 1996, the Company entered into a separate management
contract with Cornerstone Management Group, Inc. with respect to each Property
acquired. Under the terms of these agreements, the Company was obligated to pay
Cornerstone Management Group, Inc. a management fee equal to 5% of gross rental
income from the related Property plus certain expenses. Under the terms of the
advisory agreement with Cornerstone Advisors, Inc., the Company was obligated to
pay to Cornerstone Advisors, Inc. an annual advisory fee of up to 0.25% of the
Company's assets based on certain performance criteria. Under the terms of the
acquisition agreement with Cornerstone Realty Group, Inc., the Company was
obligated to pay Cornerstone Realty Group, Inc. a brokerage commission of 2% of
the gross purchase price of each Property acquired.
As of September 1, 1996, the Company agreed with the External Companies on a
series of related transactions, the effect of which was to convert the Company
into a "self-administered" and "self-managed" REIT effective October 1, 1996.
The transactions were unanimously approved by the board of directors, which
relied in part upon a "fairness opinion" issued by Arthur Andersen LLP. The
conversion was approved by the board of directors because it was determined to
be in the best interests of the Company and the shareholders for property
acquisition, property management and Company administration to be performed by
the Company's own officers and employees, rather than through contracts with the
External Companies.
To effect the conversion, the Company agreed to issue 1,400,000 Common Shares
to Cornerstone Management Group, Inc. in exchange for the assignment by such
company of all of its rights and interests in, to and under its management
agreements with the Company. On October 1, 1996, the Company issued 700,000
Common Shares, and the balance of such Common Shares will be issued on September
30, 1997. No distributions are payable with respect to the 700,000 unissued
Common Shares until they are issued. However, there are no conditions to the
issuance of the deferred Common Shares other than the passage of time.
In addition, the Company paid to Cornerstone Realty Group, Inc. and
Cornerstone Advisors, Inc. an aggregate of $1,325,000 in exchange for the
assignment by them of all of their rights and interests in the property
acquisition agreement and advisory agreement with the Company. Also on such
date, the Company paid to Cornerstone Realty Group, Inc. $100,000 and paid to
Glade M. Knight $350,000 for the personal property and building, respectively,
located at 306 East Main Street, Richmond, Virginia, which previously had served
as the principal executive office of the External Companies. This space now
serves as the principal executive office of the Company. Finally, the Company
paid approximately $138,000 to certain lenders, representing the balance owed by
Cornerstone Realty Group, Inc. on certain automobile loans, in exchange for the
conveyance of seven automobiles by it to the Company.
Mr. Knight owned all of the shares of each of the External Companies. Mr.
Knight, however, held a portion of the shares in such companies for the benefit
of Ms. Jones and Mr. Olander. Mr. Knight transferred 109,091 Common Shares and
$100,000 cash to each of these officers from the proceeds of the transactions
described above.
Immediately following the assignment by each of the External Companies of its
rights and interests in its respective agreement with the Company, the Company
terminated each such agreement. Furthermore, as of September 1, 1996, the
Company entered into employment agreements with Mr. Knight, Mr. Olander and Ms.
Jones. See "Management -- Compensation of Officers -- Employment Agreements."
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Although all of the foregoing transactions involving the Company were
unanimously approved by the Company's board of directors, the transactions were
not the result of arm's-length negotiations. Although the Company did obtain the
fairness opinion described above, it did not obtain independent evaluations or
appraisals of the rights and assets acquired by the Company. See "Risk Factors
- -- Purchase of Former Advisor's and Former Manager's Rights not at
Arm's-Length."
APPLE RESIDENTIAL INCOME TRUST
PURCHASE OF COMMON SHARES OF APPLE
The Company has a continuing right to own up to 9.8% of the common shares of
Apple. The Company has committed to purchase at or before the closing of the
Offering sufficient common shares of Apple so that it will own approximately
9.5% of the total common shares of Apple outstanding as of March 1, 1997.
Thereafter, the Company intends, if the board of directors of the Company
determines it is in the best interest of the Company and its shareholders, to
purchase additional common shares of Apple as of the end of each calendar
quarter so as to maintain its ownership of approximately 9.5% of the outstanding
common shares of Apple.
POSSIBLE ACQUISITION OF APPLE
The Company has a right of first refusal to purchase the properties and
business of Apple. In addition, by the end of 1997, the Company will evaluate
the acquisition of Apple and, if the board of directors of the Company
determines it is in the best interests of the Company and its shareholders,
offer to acquire Apple or its assets. While any decision to combine the Company
and Apple can be made only by the respective boards of directors, and depending
on the structure of the transaction, the respective shareholders, of the two
companies, it is the current intent of Mr. Knight and the board of directors of
the Company to seek to acquire Apple if the board of directors determines such
an acquisition is in the best interests of the Company. See "Risk Factors --
Conflict of Interest in Continuation or Enforcement of Advisory Agreement and
Property Management Agreements."
ACQUISITION, DISPOSITION, ADVISORY AND PROPERTY MANAGEMENT SERVICES
Summary. On or before the closing of the Offering, the Company will acquire
from Mr. Knight all of the assets of ARG in exchange for $350,000 in cash and
Common Shares valued at $1,650,000. The number of Common Shares issued will be
based upon the Offering Price, net of underwriting discounts and commissions.
The sole material asset of ARG is its Property Acquisition/Disposition Agreement
with Apple and the Company will succeed by assignment to the rights, powers,
benefits, duties and obligations of ARG under the Property
Acquisition/Disposition Agreement. See "Risk Factors -- Acquisition of Assets of
Apple Realty Group, Inc. Not at Arm's-Length."
ARA and ARMG provide advisory and property management services, respectively,
to Apple under an Advisory Agreement and a series of Property Management
Agreements. Pursuant to subcontract agreements, each of ARA and ARMG has
delegated its duties and obligations and assigned its rights, powers and
benefits under the agreements with Apple to the Company, and the Company has
agreed to perform all such services for Apple in exchange for all fees and
expense reimbursements payable under the agreements between Apple and ARA and
ARMG.
Acquisition and Disposition Services. Under the Property
Acquisition/Disposition Agreement, the Company will be entitled to a real estate
commission equal to 2% of the gross purchase prices of Apple's properties (net
of acquisition debt), payable by Apple in connection with each property
acquisition on or after March 1, 1997. The Company will also be entitled to a
real estate commission equal to 2% of the gross sales prices of Apple's
properties, payable by Apple in connection with each property sale if, but only
if, any such property is sold and the sales price exceeds the sum of (1) Apple's
cost basis in the property plus (2) 10% of such cost basis. The Company will not
be entitled to any disposition fee in connection with a sale of a property by
Apple to the Company or any affiliate of Mr. Knight but the
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Company will, in such case, be entitled to payment by Apple of its costs
incurred upon such disposition. The Property Acquisition/Disposition Agreement
has an initial term of five years ending October 31, 2001, and will renew
automatically for successive terms of five years unless either party to the
agreement elects not to renew.
Advisory Services. Pursuant to the subcontract between ARA and the Company
pertaining to the Advisory Agreement between ARA and Apple, the Company will
seek to obtain, investigate, evaluate and recommend property investment
opportunities for Apple, serve as property investment advisor and consultant in
connection with investment policy decisions made by the directors of Apple, and
subject to the direction of the directors of Apple, supervise the day-to-day
operations of Apple. The current Advisory Agreement has a one-year term ending
October 31, 1997, and is renewable annually by the directors of Apple. See "Risk
Factors -- Conflict of Interest in Continuation or Enforcement of Advisory
Agreement and Property Management Agreements." The Advisory Agreement provides
that it may be terminated at any time by a majority of the independent directors
of Apple upon 60 days written notice, and upon shorter or no notice for cause,
as defined in the agreement.
Pursuant to the subcontract pertaining to the Advisory Agreement, the Company
will be entitled to an annual asset management fee (the "Asset Management Fee").
The Asset Management Fee is payable quarterly in arrears. The amount of the
Asset Management Fee is a percentage of the gross offering proceeds that have
been received from time to time by Apple from the sale of its common shares
("Total Contributions"). The applicable percentage used to calculate the Asset
Management Fee is based on the ratio of Apple's funds from operations to Total
Contributions (such ratio, the "Return Ratio") for the preceding calendar
quarter. The per annum Asset Management Fee is 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%. At February 28, 1997,
Apple's Total Contributions were approximately $39.6 million. Apple began
operations in January 1997, and therefore has not completed a full quarter of
operations. The amount of the Asset Management Fee during any subsequent term of
the Advisory Agreement may vary from the amount payable in the previous term.
In accordance with certain state regulatory requirements applicable to Apple,
Apple's Bylaws generally prohibit Apple's operating, general and administrative
expenses, excluding depreciation and similar non-cash items and expenses of
raising capital, interest, taxes and costs related to asset acquisition,
operation and disposition ("Operating Expenses") from exceeding in any year the
greater of (a) 2% of the monthly average of the aggregate book value of Apple's
assets invested in real estate, before deducting depreciation or (b) 25% of
Apple's revenues for any period, less expenses other than depreciation or
similar non-cash items for such year. Unless the independent directors of Apple
conclude that a higher level of expenses is justified based upon unusual and
nonrecurring factors which they deem sufficient, the advisor must reimburse
Apple for the amount of any such excess. Under the subcontract related to the
Advisory Agreement, such reimbursement will be an obligation of the Company.
Apple's Bylaws further prohibit its total organization and offering expenses
(including selling commissions) from exceeding 15% of the Total Contributions,
and its total organization and offering expenses, exclusive of selling
commissions, from exceeding 3% of Total Contributions. Furthermore, the total of
all acquisition fees and acquisition expenses paid by Apple in connection with
the purchase of a property by Apple must be reasonable and must in no event
exceed an amount equal to 6% of the contract price for the property, unless a
majority of Apple's directors (including a majority of the independent
directors) not otherwise interested in the transaction approves the transaction
as being commercially competitive, fair and reasonable to Apple. Any
organizational and offering expenses or acquisition fees and acquisition
expenses incurred by Apple in excess of the permitted limits are payable by the
Company immediately upon the demand of Apple.
Property Management Services. It is expected that Apple will enter into a
Property Management Agreement with ARMG with respect to each of Apple's
residential properties at the time Apple acquires each such property. As of
February 28, 1997, Apple and ARMG had entered into Property Management
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Agreements for four properties totaling 1,140 apartment units. The duties,
obligations, rights, powers and benefits under existing and future Property
Management Agreements have been delegated and assigned to the Company pursuant
to a subcontract agreement.
For its services, the Company will receive a monthly Property Management Fee
equal to 5% of the monthly gross revenues of the Apple properties. The Company
will also be responsible for the accounting and financial reporting
responsibilities for each of the properties. The Company will be reimbursed for
expenses, including salaries and related overhead expenses, associated with such
accounting and financial reporting responsibilities. It is expected that 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.
COMPANY OWNERSHIP OF PREFERRED SHARES
The Company also owns 100% of the nonvoting preferred shares of ARA and ARMG.
As holder of such preferred shares, the Company owns 95% of the economic
benefits of such companies. Mr. Knight owns all of the common shares of such
companies and is entitled to 5% of the economic benefits of these companies.
Because all of the revenues of ARA and ARMG are expected to be paid to the
Company under the subcontract agreements described above, it is not expected
that ARA or ARMG will pay any dividends to its shareholders. However, because
the Company, as a REIT, is limited in the amount of fee income it can receive
(see "Federal Income Tax Considerations -- Requirements for Qualification as a
REIT"), it has the right, by notice to ARA or ARMG, to terminate its subcontract
relationship with either or both of such companies at any time. To the extent
such subcontract relationship is terminated, fees payable by Apple will be paid
to ARA or ARMG, as the case may be, and net amounts remaining from such
payments, after the payment of expenses of ARA or ARMG, including tax
liabilities of such corporations, will be available for distribution to the
shareholders of ARA or ARMG. As noted, the Company would be entitled to 95% of
any such distributions.
The Company's anticipated ownership of the common shares in Apple and
agreements to provide acquisition, advisory and property management services to
Apple are intended to enable the Company to benefit from Mr. Knight's efforts
with respect to Apple and realize benefits from investment in another market
area.
OTHER RELATIONSHIPS
Leslie A. Grandis, a director of the Company, is also a partner in McGuire,
Woods, Battle & Boothe, L.L.P., which serves as counsel to the Company. See
"Certain Legal Matters." Martin Zuckerbrod and Harry S. Taubenfeld, directors of
the Company, have in the past and will in the future provide real estate legal
services to the Company.
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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
discussion 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 intends 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 at least the four succeeding taxable 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 will receive at
the closing of the Offering 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 has qualified, since its
formation in 1993, currently qualifies, and will continue to qualify as a REIT
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 as a REIT will depend on its continuing to meet various requirements
concerning, among other things, the ownership of its Common 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 additional taxes, including but not limited to (i)
a 100% tax on certain income from any "prohibited transactions" (i.e., sales or
other dispositions of property (other than foreclosure property and 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, (v) an alternative minimum tax on any undistributed items of tax
preference, and (vi) a tax at the highest corporate rate (as provided in
Treasury Regulations that have not yet been promulgated) on the "built-in-gain"
(i.e., the excess of the fair market value at the time of acquisition by the
Company over the adjusted basis at such time) associated with a Property
acquired by the Company from a C corporation (i.e., a corporation generally
subject to full corporate-level tax) in a
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transaction in which the basis of the Property in the Company's hands is
determined by reference to the basis of the asset (or any other asset) in the
hands of the C corporation and the Company recognizes gain on the disposition of
such Property during the 10-year period beginning on the date on which such
Property was acquired by the Company. The results described above with respect
to the recognition of "built-in-gain" assume that the Company would make an
election pursuant to IRS Notice 88-19 if it were to make any such acquisition.
REQUIREMENTS FOR QUALIFICATION AS A REIT
In order to qualify as a REIT, the Company must satisfy a variety of tests
relating to its organization, Common 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
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.
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company's taxable year is the calendar year.
As a Virginia corporation, the Company satisfies the first and fourth
requirements. The Company also is 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 owning,
directly or indirectly, more than 9.8% (by value) of the outstanding Common
Shares and provide restrictions regarding the transfer of Common Shares.
Treasury Regulations require the Company to maintain records of the actual
ownership of its Common Shares. In accordance with those regulations, each year
the Company must demand from certain record shareholders written statements
which disclose information concerning the actual ownership of the Common Shares.
Any record shareholder who does not provide the Company with required
information concerning actual ownership of the Common 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 is 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 distributions 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 is not a prohibited transaction
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)
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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.
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 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, directly or
constructively owns 10% or more of such tenant (a "Related Party Tenant"). The
Company currently does not receive rent from a Related Party Tenant and does not
anticipate receiving any rents from Related Party Tenants in the future. 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 currently does not receive and
does not anticipate receiving any rent attributable to personal property leased
in connection with a lease of real property that is or would 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 who is adequately compensated and from
whom the REIT derives no income. However, a REIT 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. The Company does not and does not expect in the future to perform any
services for its tenants other than services customary in the geographic market
and to the type and class of its properties.
The Company will provide certain advisory and property management services to
Apple pursuant to subcontracts between the Company and ARA and ARMG. In
addition, the Company will provide property acquisition and disposition services
to Apple under a direct agreement between the Company and Apple in exchange for
certain brokerage fees. Fees received by the Company for any such services will
be nonqualifying income for purposes of the 75% and 95% gross income tests. Any
dividends received by the Company with respect to its stock in ARA and ARMG will
be qualifying income for purposes of the 95% gross income test, but not the 75%
gross income test. In addition, each of the companies pays federal, state and
local income taxes on its taxable income. Any such taxes reduce amounts
available for distribution by such companies which in turn, reduces amounts
available for distribution to the Company's shareholders.
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 is held for sale to customers and that the sale of any Property will not
be in the ordinary course of business of 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,
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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."
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.
The Company owns 100% of the nonvoting shares and none of the voting
securities of each of ARG, ARA and ARMG. As noted above, for the Company to
qualify as a REIT the value of the shares of each such company held by the
Company may not exceed 5% of the Company's total assets. The Company believes
that the value of its shares of each such company held by the Company does not
exceed 5% of the total value of the Company's assets. If the Service were to
successfully challenge this determination, however, the Company likely would
fail to qualify as a REIT.
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 date 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 capital gains or ordinary
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.
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 alternative 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 four-year period 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.
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FEDERAL INCOME TAXATION OF U.S. 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 U.S. Shareholders as
ordinary income for federal income tax purposes. A "U.S. Shareholder" means a
holder of Common Shares that (for United States federal income tax purposes) is
(i) a citizen or resident of the United States, (ii) a corporation, partnership
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, or (iii) an estate or trust, the income
of which is subject to United States federal income taxation regardless of its
source (except, with respect to the tax year of any trust that begins after
December 31, 1996, a trust whose administration is subject to the primary
supervision of a United States court and which has one or more United States
fiduciaries who have authority to control all substantial decisions of the
trust). 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 U.S. Shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Common Shares. U.S. 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
Common Shares. Any loss upon a sale or exchange of Shares by a U.S. Shareholder
who held such Common 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 Common Shares of the Company may be disallowed if other
Common 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 and 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.
INVESTMENT BY TAX-EXEMPT ENTITIES
Tax-exempt entities, including qualified employee pension and profit sharing
trusts, Keogh Plan 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 Common 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.
Qualified pension 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) at least 5% of the
REIT's gross income is derived from an unrelated trade or business (determined
as if the REIT were a qualified pension trust). A REIT would be predominantly
held
51
<PAGE>
by qualified trusts 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. 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.
NON-U.S. 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 Common 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 Common 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 (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. Proposed
Treasury Regulations would modify the manner in which the Company complies with
the withholding regulations. 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 Common
Shares but rather will reduce the adjusted basis of such Common Shares. To the
extent that such distributions exceed the adjusted basis of a Non-U.S.
Shareholder's Common 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 Common 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. The Small Business Job
Protection Act of 1996 requires the Company to withhold 10% of any distribution
in excess of the Company's current and accumulated earnings and profits.
Consequently, to the extent that the Company does not withhold at a rate of 30%
on the entire amount of any distribution, any portion of any distribution not
subject to such withholding will be subject to withholding at a rate of 10%.
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
52
<PAGE>
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 35% 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 Common 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 is currently anticipated that the Company
will be a "domestically controlled REIT" and, therefore, the sale of the Common
Shares will not be subject to taxation under FIPPTA. However, no assurance can
be given that the Company will be a "domestically controlled REIT." Gain not
subject to FIRPTA will be taxable to a Non-U.S. Shareholder if (i) investment in
the Common 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 Common 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 Common 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 Common 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 U.S. 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 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. In addition, the Company may be required
to withhold a portion of capital gain distributions to any Shareholders who fail
to certify their nonforeign status to the Company. The Service issued proposed
regulations in April 1996 regarding the backup withholding rules as applied to
Non-U.S. Shareholders. The proposed regulations would alter the current system
of backup withholding compliance. See "- Non-U.S. Shareholders."
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.
53
<PAGE>
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 Common 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 Company will use its best efforts to qualify
its assets for exemption from the Plan Asset rules.
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; (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.
Shares may not be purchased with Plan Assets by an Employee Trust or IRA with
respect to which the Board of Directors 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.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters") have severally agreed to purchase
from the Company the following respective numbers of Shares at the initial
public offering price less the underwriting discounts and commissions set forth
on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- -------------------------------------- -----------
<S> <C>
Alex, Brown & Sons Incorporated .................
Branch, Cabell & Co. .............................
Friedman, Billings, Ramsey & Co., Inc. ...........
Interstate/Johnson Lane Corporation .............
------------
Total........................................... 4,500,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all Shares offered hereby if any such Shares are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Shares to the public at the initial public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $.__ per Share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $.__ per
Share to certain other dealers. After the Offering, the offering price and the
other selling terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 675,000
additional Shares at the public offering price less the underwriting discounts
and commissions set forth on the cover page of this Prospectus. To the extent
that the Underwriters exercise such option, each of the Underwriters will have a
firm commitment to purchase approximately the same percentage thereof that the
number of Shares to be purchased by it shown in the above table bears to
675,000, and the Company will be obligated, pursuant to the option, to sell such
Shares to the Underwriters. The Underwriters may exercise such option only to
cover over-allotments made in connection with the sale of Shares offered hereby.
If purchased, the Underwriters will offer such additional Shares on the same
terms as those on which the 675,000 Shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Company and each of its executive officers and directors have agreed not
to offer, sell, contract to sell or otherwise issue or dispose of any Common
Shares or options to purchase Common Shares (except for issuances by the Company
pursuant to the Company's Stock Incentive Plans and Dividend Reinvestment and
Share Purchase Plan and any issuances of Common Shares in connection with an
acquisition of any properties) for a period of 12 months after the date of this
Prospectus without the prior written consent of Alex. Brown & Sons Incorporated,
which consent will not be unreasonably withheld.
The Underwriters have advised the Company that they do not intend to confirm
sales to any account over which they exercise discretionary authority.
Prior to the Offering, there has been no public trading market for the Common
Shares. Consequently, the initial public offering price has been determined by
negotiation between the Company and the Underwriters. Among the factors
considered in such negotiations were prevailing market conditions, the results
of operations of the Company in recent periods, the previous best-efforts public
offering prices of the Common Shares, dividend yields and price-earnings ratios
of publicly traded REITs that the Company and the Underwriters believe to be
comparable to the Company, estimates of business potential and earnings
prospects of the Company, the current state of the real estate market in the
Company's primary markets, and the economy as a whole.
55
<PAGE>
The Company has applied to list the Common Shares on the NYSE under the
proposed symbol "TCR." The Company expects that all of the Common Shares,
including the Shares, will be listed immediately after the pricing of the
Offering, and that the Common Shares, including the Shares, will begin trading
at the same time.
Alex. Brown & Sons Incorporated will be paid an aggregate amount equal to
1.00% of the gross Offering proceeds for certain structuring and advisory
services in connection with the transactions described herein.
Until the distribution of the Common Shares is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase Common Shares. As an exception to these rules,
the Underwriters are permitted to engage in certain transactions that stabilize
the price of the Common Shares. Such transactions may consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Shares.
If the Underwriters create a short position in the Common Shares in
connection with the Offering (i.e., if they sell more Common Shares than are set
forth on the cover page of this Prospectus), the Underwriters may reduce that
short position by purchasing Common Shares in the open market. The Underwriters
also may elect to reduce any short position by exercising all or part of the
over-allotment option described herein.
The Underwriters also may impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase Common Shares in the open
market to reduce the Underwriters' short position or to stabilize the price of
the Common Shares, they may reclaim the amount of the selling concession from
the selling group members who sold those shares as part of the Offering.
In general, purchase of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the Offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Shares. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
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.
EXPERTS
The financial statements of Cornerstone Realty Income Trust, Inc. at December
31, 1996 and 1995, and for each of the three years in the period ended December
31, 1996, appearing in this Prospectus and 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 financial statements of Cornerstone Realty Income Trust, Inc. at December
31, 1995 and 1994 and for the two years ended December 31, 1995, appearing in
Cornerstone Realty Income Trust, Inc.'s Annual Report (Form 10-K) for the year
ended December 31, 1995, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. Such financial statements are incorporated herein by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
56
<PAGE>
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 have been incorporated by
reference herein and in the Registration Statement in reliance upon the reports
of KPMG Peat Marwick LLP, independent auditors, also incorporated herein by
reference, and upon the authority of said firm as experts in accounting and
auditing.
Certain Statements of Income and Direct Operating Expenses of Properties,
incorporated by reference herein, have been incorporated herein in reliance on
the reports of L.P. Martin & Company, P.C., and Dixon, Odom & Co., L.L.P.,
independent certified public accountants, also incorporated by reference herein,
and upon the authority of said firms as experts in accounting and auditing.
CERTAIN LEGAL MATTERS
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 for the Company by
McGuire, Woods, Battle & Boothe, L.L.P., Richmond, Virginia. McGuire, Woods,
Battle & Boothe, L.L.P. also acts as counsel to Mr. Knight and certain of his
affiliates. Leslie A. Grandis, a partner in McGuire, Woods, Battle & Boothe,
L.L.P., is a director of the Company. As of the date of this Prospectus, Mr.
Grandis owns 654 Common Shares and holds options to purchase 11,762 Common
Shares. See "Management." Certain legal matters will be passed upon for the
Underwriters by Hunton & Williams, Richmond, Virginia.
AVAILABLE INFORMATION
The Company, 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, and at the following regional offices of the
Commission: Seven World Trade Center, Suite 1300, New York, New York, 10048; and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. 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 files reports, proxy statements and other
information with the Commission electronically. The Commission maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Web site is: http://www.sec.gov.
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 Reports on Form 10-Q for the quarters ended March 31, 1996, June 30,
1996 and September 30, 1996, the Company's Current Reports on Form 8-K dated
January 31, 1996 (including Amendment No. 1 thereto on Form 8-K/A),
57
<PAGE>
April 30, 1996 (including Amendment No. 1 thereto on Form 8-K/A), June 26, 1996
(including Amendment No. 1 thereto on Form 8-K/A), and September 26, 1996
(including Amendment No. 1 thereto on Form 8-K/A), 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 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.
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).
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Auditors................................................................. F-1
Balance Sheets as of December 31, 1995 and December 31, 1996................................... F-3
Statements of Operations for Years Ended December 31, 1994, December 31, 1995 and December
31, 1996..................................................................................... F-4
Statements of Shareholders' Equity for Years Ended December 31, 1994, December 31, 1995 and
December 31, 1996............................................................................ F-5
Statements of Cash Flows for Years Ended December 31, 1994, December 31, 1995 and December
31, 1996....................................................................................... F-6
Notes to Financial Statements.................................................................. F-7
Unaudited Pro Forma Balance Sheet as of December 31, 1996...................................... F-15
Unaudited Pro Forma Statement of Operations for Year Ended December 31, 1996 .................. F-16
Notes to Unaudited Pro Forma Statement of Operations for Year Ended December 31, 1996 ......... F-19
</TABLE>
F-1
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
INDEPENDENT AUDITORS' REPORT
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, 1996 and 1995, and the related statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1996 the company
changed its method of accounting for impairment of long-lived assets and
long-lived assets held for disposition.
Ernst & Young LLP
Richmond, Virginia
January 24, 1997
F-2
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1995 1996
---- ----
<S> <C> <C>
ASSETS
Investment in rental property
Land........................................................... $ 19,852,544 $ 46,980,280
Building....................................................... 96,862,036 250,705,667
Property improvements.......................................... 10,627,687 26,640,085
Furniture and fixtures......................................... 2,354,180 5,389,821
-------------- --------------
129,696,447 329,715,853
Less accumulated depreciation.................................. (4,254,974) (12,323,037)
-------------- --------------
125,441,473 317,392,816
Cash and cash equivalents....................................... 7,073,147 3,182,651
Prepaid expenses................................................ 167,152 557,544
Other assets.................................................... 499,260 1,737,563
-------------- --------------
7,739,559 5,477,758
-------------- --------------
Total Assets.................................................... $133,181,032 $322,870,574
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Notes payable.................................................. $ 8,300,000 $ 55,403,000
Accrued payable-related party.................................. -- 7,297,093
Accounts payable............................................... 555,691 2,087,673
Accrued expenses............................................... 1,257,231 1,366,853
Rents received in advance...................................... 129,648 491,928
Tenant security deposits....................................... 784,042 1,654,322
-------------- --------------
11,026,612 68,300,869
Shareholders' Equity
Common stock, no par value, authorized 50,000,000 shares;
issued and outstanding 12,754,331 shares (in 1995) and
28,141,509 shares (in 1996) ................................... 123,771,504 276,269,539
Deferred compensation........................................... (77,000) (55,000)
Distributions greater than net income........................... (1,540,084) (21,644,834)
-------------- --------------
122,154,420 254,569,705
-------------- --------------
Total Liabilities and Shareholders' Equity...................... $133,181,032 $322,870,574
============== ==============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
------------- ------------- --------------
<S> <C> <C> <C>
REVENUE
Rental income................................ $8,177,576 $16,300,821 $40,352,955
EXPENSES
Utilities.................................... 973,598 1,773,648 3,870,541
Repairs and maintenance...................... 971,376 2,042,819 4,203,180
Taxes and insurance.......................... 644,239 1,201,812 3,275,422
Property management fees..................... 455,650 896,521 1,243,215
Property management ......................... 94,455 181,166 741,257
Advertising.................................. 189,111 378,089 1,126,295
General and administrative................... 717,049 609,969 1,495,528
Amortization and other depreciation.......... 30,628 30,564 47,133
Depreciation of real estate.................. 1,210,818 2,788,818 8,068,063
Other operating expenses..................... 566,228 1,020,242 2,638,183
Other........................................ 48,607 81,910 151,537
Management contract termination.............. -- -- 16,526,012
------------- ------------- --------------
Total expenses................................ 5,901,759 11,005,558 43,386,366
------------- ------------- --------------
Income (loss) before interest income
(expense).................................... 2,275,817 5,295,263 (3,033,411)
Interest income............................... 110,486 226,555 287,344
Interest expense.............................. -- (292,103) (1,423,782)
------------- ------------- --------------
Net income (loss)............................. $2,386,303 $ 5,229,715 $(4,169,849)
============= ============= ==============
Net income (loss) per share................... $ 0.60 $ 0.64 $ (0.21)
============= ============= ==============
Cash distributions per share.................. $ .89 $ .96 $ .99
============= ============= ==============
Weighted average number of shares
outstanding.................................. 4,000,558 8,176,803 20,210,432
============= ============= ==============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ 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, 1993......................... 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 declared and paid to shareholders
($.8855 per share).................................. -- -- -- (2,977,136) (2,977,136)
Shares issued through reinvestment of distributions . 128,665 1,273,784 -- -- 1,273,784
------------ -------------- -------------- --------------- ---------------
Balance at December 31, 1994......................... 5,458,648 51,890,477 -- (453,614) 51,436,863
Net proceeds from the sale of shares................. 6,930,567 68,255,383 -- -- 68,255,383
Net income........................................... -- -- -- 5,229,715 5,229,715
Cash distributions declared and paid to shareholders
($.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 reinvestment of distributions . 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................. 13,816,973 136,183,048 -- -- 136,183,048
Net loss............................................. -- -- -- (4,169,849) (4,169,849)
Cash distributions declared and paid to shareholders
($.9930 per share).................................. -- -- -- (15,934,901) (15,934,901)
Shares issued in connection with management contract
termination ......................................... 700,000 7,700,000 -- -- 7,700,000
Amortization of deferred compensation................ -- -- 22,000 -- 22,000
Shares issued through reinvestment of distributions . 870,205 8,614,987 -- -- 8,614,987
------------ -------------- -------------- --------------- ---------------
Balance at December 31, 1996......................... 28,141,509 $276,269,539 $ (55,000) $(21,644,834) $254,569,705
============ ============== ============== =============== ===============
</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,
----------------------------------------------
1994 1995 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
FROM OPERATING ACTIVITIES
Net income (loss)..................................... $ 2,386,303 $ 5,229,715 $ (4,169,849)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization......................... 1,241,446 2,819,382 8,115,196
Amortization of deferred compensation................. -- 33,000 22,000
Advisor fee........................................... 440,000 -- --
Management contract termination....................... -- -- 14,997,093
Changes in operating assets and liabilities:
Prepaid expenses..................................... (39,377) (63,594) (390,392)
Other assets......................................... (23,206) (305,072) (1,285,436)
Accounts payable..................................... 42,025 342,293 1,531,982
Accrued expenses..................................... (387,720) 1,026,414 109,622
Rents received in advance............................ (55,156) 63,511 362,280
Tenant security deposits............................. 113,771 473,307 870,280
--------------- -------------- ---------------
Net cash provided by operating activities............. 3,718,086 9,618,956 20,162,776
FROM INVESTING ACTIVITIES
Acquisitions of rental property, net of debt assumed.. (22,494,000) (68,482,525) (175,471,367)
Capital improvements.................................. (6,063,568) (7,106,564) (19,048,039)
--------------- -------------- ---------------
Net cash used in investing activities................. (28,557,568) (75,589,089) (194,519,406)
FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings................... 5,000,000 38,300,000 135,653,144
Repayments of short-term borrowings................... -- (35,000,000) (94,050,144)
Net proceeds from issuance of shares.................. 23,496,784 71,771,027 144,798,035
Cash distributions paid to shareholders............... (2,977,136) (6,316,185) (15,934,901)
--------------- -------------- ---------------
Net cash provided by financing activities............. 25,519,648 68,754,842 170,466,134
Increase (decrease) in cash and cash equivalents...... 680,166 2,784,709 (3,890,496)
Cash and cash equivalents, beginning of year .......... 3,608,272 4,288,438 7,073,147
--------------- -------------- ---------------
Cash and cash equivalents, end of year................. $ 4,288,438 $ 7,073,147 $ 3,182,651
=============== ============== ===============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Cornerstone Realty Income Trust, Inc. (the "Company"), a Virginia
corporation, is an owner-operator of residential apartment communities in the
mid-Atlantic and southeastern regions of the United States.
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
approximate their carrying value.
INVESTMENT IN RENTAL PROPERTY
The Company adopted FASB Statement 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. The Company records impairment losses on rental property used
in the 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. Impairment losses are measured as the difference between
the asset's fair value and its carrying value. There was no effect on the
Company's financial statements in 1996 as a result of the adoption.
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, Inc., a related party, for purchases prior to October
1, 1996 (See Note 6).
Repairs and maintenance costs are expensed as incurred while significant
improvements, renovations 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 operating 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 has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options. As discussed in Note 5, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("FASB 123"), requires use of option
valuation models that were developed for use in valuing employee stock options.
Under APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
ADVERTISING COSTS
Costs incurred for the production and distribution of advertising are
expensed as incurred.
F-7
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC. -
Notes to Financial Statements (Continued)
INCOME PER SHARE
Net income per share is computed based upon the weighted average number of
shares outstanding during the year. Potentially dilutive securities are not
included since their inclusion would not materially dilute net income per share.
FEDERAL INCOME TAXES
The Company is operated as, and has elected to be taxed as, a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). Generally, a REIT 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.
For income tax purposes, distributions paid to shareholders consist of
ordinary income and return of capital or a combination thereof. Distributions
per share were 88.55, 95.75, and 99.30 cents in the years ended December 31,
1994, 1995 and 1996, respectively. In 1994, of the total distribution, 79% was
taxable as ordinary income and 21% was a non-taxable return of capital. In 1995,
of the total distribution, 83% was taxable as ordinary income and 17% was a
non-taxable return of capital. In 1996, 86% was taxable as ordinary income and
14% was a non-taxable return of capital.
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, 1996.
<TABLE>
<CAPTION>
INITIAL
ACQUISITION CARRYING ACCUMULATED DATE
DESCRIPTION COST COST(1) DEPRECIATION ACQUIRED
- ---------------------- ------------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
The Hollows........... $ 4,200,000 $ 5,438,995 $577,553 June 1993
Polo Club............. 4,300,000 6,664,656 982,336 June 1993
Mayflower Seaside .... 7,634,144 9,346,121 817,276 October 1993
County Green.......... 3,800,000 5,132,182 542,906 December 1993
Stone Ridge........... 3,325,000 5,460,698 637,308 December 1993
Wimbledon Chase....... 3,300,000 5,268,408 531,217 February 1994
Harbour Club.......... 5,250,000 5,860,766 468,719 May 1994
Chase Mooring......... 3,594,000 4,973,568 401,020 August 1994
The Trestles.......... 10,350,000 11,234,689 720,874 December 1994
Wind Lake............. 8,760,000 9,588,220 542,372 April 1995
Magnolia Run.......... 5,500,000 6,555,252 360,380 June 1995
Breckinridge.......... 5,600,000 6,465,850 283,408 June 1995
Bay Watch Pointe...... 3,372,525 4,728,003 215,196 July 1995
Hanover Landing....... 5,725,000 7,008,174 297,335 August 1995
Mill Creek............ 8,550,000 9,136,406 372,584 September 1995
Glen Eagles........... 7,300,000 7,829,058 332,935 October 1995
Sailboat Bay.......... 9,100,000 12,612,632 410,372 November 1995
Tradewinds............ 10,200,000 10,744,903 425,641 November 1995
Osprey Landing........ 4,375,000 6,002,617 221,985 November 1995
The Meadows........... 6,200,000 6,921,730 245,086 January 1996
F-8
<PAGE>
<CAPTION>
CORNERSTONE REALTY INCOME TRUST, INC. -
Notes to Financial Statements (Continued)
INITIAL
ACQUISITION CARRYING ACCUMULATED DATE
DESCRIPTION COST COST(1) DEPRECIATION ACQUIRED
- ---------------------- ------------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
West Eagle Greens .... $ 4,020,000 $ 5,326,476 $ 139,525 March 1996
Ashley Park........... 12,205,000 12,745,351 362,659 March 1996
Arbor Trace........... 5,000,000 5,641,816 134,044 March 1996
Bridgetown Bay........ 5,025,000 5,482,705 132,870 April 1996
Trophy Chase.......... 3,710,000 5,058,276 107,038 April 1996
Beacon Hill........... 13,579,203 14,140,526 268,969 May 1996
Meadow Creek.......... 11,100,000 11,710,655 255,529 May 1996
Summerwalk............ 5,660,000 6,448,175 114,247 May 1996
The Landing........... 8,345,000 9,145,124 191,297 May 1996
Trolley Square East . 6,000,000 6,452,907 147,530 June 1996
Savannah West......... 9,843,620 10,958,218 183,735 July 1996
Paces Glen............ 7,425,000 7,711,013 99,625 July 1996
Signature Place....... 5,462,948 5,908,018 81,704 August 1996
Hampton Glen.......... 11,599,931 11,983,485 159,883 August 1996
Heatherwood........... 10,205,457 10,321,457 94,473 September 1996
Highland Hills(2) .... 12,100,000 12,697,339 146,089 September 1996
Parkside at Woodlake . 14,663,886 14,692,805 152,478 September 1996
Greenbrier............ 11,099,525 11,216,833 92,571 October 1996
Deerfield............. 10,675,000 10,755,978 62,656 November 1996
Trolley Square
West(2)............... 4,242,575 4,345,768 9,612 December 1996
------------------- -------------- -------------- ----------------
$292,397,814 $329,715,853 $12,323,037
=================== ============== ==============
</TABLE>
(1) Includes real estate commissions, closing costs, and improvements
capitalized since the date of acquisition.
(2) The results of operations of the Trolley Square West and Highland Hills
Apartments (for which audited financial statements were not available
at the time of purchase) and the Westchase and Arbors at Windsor Lake
Apartments (which were purchased in January, 1997, as described below)
are not reflected in the pro forma information in Note 8.
The following is a reconciliation of the carrying amount of real estate
owned:
1994 1995 1996
---- ---- ----
Balance at January 1........... $25,549,790 $ 54,107,358 $129,696,447
Real estate purchased.......... 22,494,000 68,482,525 180,971,367
Improvements................... 6,063,568 7,106,564 19,048,039
----------- ------------ ------------
Balance at December 31......... $54,107,358 $129,696,447 $329,715,853
=========== ============ ============
The following is a reconciliation of accumulated depreciation:
1994 1995 1996
---- ---- ----
Balance at January 1 .......... $ 255,338 $1,466,156 $ 4,254,974
Depreciation expense .......... 1,210,818 2,788,818 8,068,063
----------- ------------ ------------
Balance at December 31......... $1,466,156 $4,254,974 $12,323,037
=========== ============ ============
On January 13, 1997, effective January 1, 1997, the Company acquired The
Arbors at Windsor Lake, a 228-unit apartment community located in Columbia,
South Carolina for $10,875,000. On January 15, 1997, the Company acquired
Westchase, a 352-unit apartment community located in Charleston, South Carolina
for $11,000,000. The operations of these two properties are not reflected in the
financial statements of the Company for the year ended December 31, 1996.
F-9
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC. -
Notes to Financial Statements (Continued)
NOTE 3. NOTES PAYABLE
In March 1996, the Company renewed its agreement with a commercial bank and
increased its unsecured revolving line of credit to $50 million. The line of
credit expires in March 1997, but is renewable annually by mutual agreement
between the company and bank. On January 1, 1997, the Company increased the line
of credit to $85 million. This agreement allows the Company to finance a portion
of the purchase price of property acquisitions. Borrowings under the current
agreement are evidenced by an unsecured promissory note and bear interest at
one-month LIBOR plus 160 basis points. At December 31, 1996, borrowings under
the agreement were $49,903,000. The weighted average interest rate incurred
under the line of credit was 7.8% in 1995 and 7.2% in 1996.
On June 25, 1996, in connection with the acquisition of rental property, an
unsecured note was executed by the Company in the amount of $5,500,000. The note
bears an effective interest rate of 6.65% per annum. Annual interest payments
are due on January 1, 1997, 1998, and 1999 and the principal balance is due in
June 1999 if not prepaid. The note is prepayable at any time, without penalty.
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 note was executed for the remaining amount of
$2,300,000. The balance of the note was paid in full in January 1996 through the
sale of additional shares.
The fair market value of the borrowings approximate the recorded amounts. No
interest was capitalized in 1994, 1995 or 1996. Interest paid was $0, $227,478
and $1,075,360, for 1994, 1995, and 1996, respectively.
NOTE 4. COMMON STOCK
The Company raised capital through a series of continuous offerings of shares
during 1994, 1995 and 1996 (the "Continuous Offerings"). The Company received
gross proceeds of $26,657,818, $80,142,516 and $161,558,958, from the sale of
2,423,438 (at $11.00 per share), 7,285,683 (at $11.00 per share) and 14,687,178
(at $11.00 per share) shares, including shares sold through the reinvestment of
distributions, for the years ended December 31, 1994 1995 and 1996,
respectively. The managing sales agent for the Continuous Offerings received
selling commissions and a marketing expense allowance equal to 7.5% and 2.5%,
respectively, of the gross proceeds of shares sold. During 1994, 1995 and 1996,
such managing sales agent earned $2,663,032 $8,014,252 and $16,159,634,
respectively. The net proceeds of the Continuous Offerings, after deducting
selling commissions and other offering expenses, were $23,496,786 in 1994,
$71,771,027 in 1995 and $144,798,035 in 1996 .
The Company provides a plan which allows shareholders to reinvest
distributions in the purchase of additional shares of the Company. Of the total
proceeds raised from common shares during the years ended December 31, 1994,
1995 and 1996, $1,415,328 , $3,904,325 and $9,572,255 respectively, were
provided through the reinvestment of distributions.
NOTE 5. STOCK INCENTIVE PLANS
Under the Company's 1992 Incentive Option Plan, as amended, a maximum of
1,237,470 options could be granted, at the discretion of the Company's board of
directors to certain officers and key employees of the Company. Also, under the
Company's Directors Plan, as amended, a maximum of 533,547 options could be
granted to the directors of the Company.
In 1996, the Company granted 41,289 options to purchase shares under the
Directors Plan and 37,000 options under the Incentive Plan.
F-10
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC. -
Notes to Financial Statements (Continued)
Both of the plans generally provide, among other things, that options be
granted at exercise prices not lower than the market value of the shares on the
date of grant. Under the Incentive Plan, options become exercisable at the date
of grant. Generally the optionee has up to 10 years from the date on which the
options first become exercisable during which to exercise the options. Activity
in the Company's share option plans during the three years ended December 31,
1996 is summarized in the following table:
<TABLE>
<CAPTION>
1994 1995 1996
-------------------------- -------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ---------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year .. 5,243 $10.28 250,954 $10.98 292,962 $10.99
Granted.......................... 245,711 11.00 42,008 11.00 78,289 11.00
Exercised........................ -- -- -- -- -- --
Forfeited........................ -- -- -- -- -- --
--------- ---------------- --------- ---------------- --------- ----------------
Outstanding, end of year......... 250,954 $10.98 292,962 $10.99 371,251 $10.99
========= ================ ========= ================ ========= ================
Exercisable at end of year ...... 250,954 $10.98 292,962 $10.99 371,251 $10.99
========= ================ ========= ================ ========= ================
Weighted average fair value of
options granted during the year. N/A $ .60 $ .69
</TABLE>
Pro forma information regarding net income and earnings per share is required
by FASB 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method described in that statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1995 and 1996, respectively: risk-free interest rates of 6.4%
and 6.9%; a dividend yield of 7.0% for 1995 and 1996; volatility factors of the
expected market price of the Company's common shares of .122 for 1995 and 1996;
and a weighted average expected life of the option of 10 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of FASB 123 pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. As the
options are immediately exercisable, the full impact of the pro forma is
disclosed below.
1995 1996
---- ----
Pro forma FASB 123 net income (loss) ....... $5,204,510 $(4,223,868)
As reported net income (loss)............... 5,229,715 (4,169,849)
Pro forma FASB 123 earnings per share
(loss)..................................... .64 (.21)
As reported earnings per share.............. .64 (.21)
NOTE 6. RELATED-PARTY TRANSACTIONS
Prior to October 1, 1996, the Company operated as an "externally advised" and
"externally managed" REIT. Cornerstone Advisors, Inc. (the "Advisor") served as
the advisor, Cornerstone Management Group, Inc. (the "Management Company")
served as the property manager, and acquisition services were provided by
Cornerstone Realty Group, Inc. Glade M. Knight, Chairman and Chief Executive
Officer of the Company, held all of the stock of the Advisor, the Management
Company and Cornerstone Realty Group, Inc. (collectively, the "External
Companies"). By agreement, Mr. Knight held part of the stock of the External
Companies for the account and interest of Stanley J. Olander, Jr., Chief
Financial Officer of the company, and Debra A. Jones, Chief Operating Officer of
the Company.
F-11
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC. -
Notes to Financial Statements (Continued)
As of October 1, 1996, the Company entered into a series of related-party
transactions with the External Companies, the effect of which was to convert the
company into a "self-administered" and "self-managed" REIT. The transactions
were unanimously approved by the independent members of the board of directors.
To effect the transaction, the Company agreed to issue 1,400,000 shares to
the Management Company in exchange for the assignment of all of its rights and
interest in, to and under its management agreements with the Company. On October
1, 1996, the Company issued 700,000 shares. The balance of the shares will be
issued on September 30, 1997, and are disclosed on the December 31, 1996 balance
sheet as "accrued payable-related party" in the amount of $7,162,791 plus
accrued, imputed interest of $134,302. The combined $14,997,093 is treated as a
non-cash item on the statement of cash flows. No distributions are payable with
respect to the shares to be issued in 1997 until they are issued. The
consideration for the transaction $15,400,000 based upon the agreed-upon fair
market value of $11 per share of the Company shares before reductions for
imputed interest on shares to be issued in 1997. In addition, on October 1, 1996
the Company paid to Cornerstone Realty Group, Inc. and the Advisor. $1,325,000
in exchange for the assignment by them of all of their rights and interests in,
to and under, their property acquisition agreement and advisory agreement with
the Company. Immediately following the assignment by each of the External
Companies of its rights and interest in, to and under its respective agreements
with the Company, the Company terminated each such agreement. The consideration
for all of the above transactions, plus related transaction costs, was accounted
for as a termination of the management administration contracts.
Also on October 1, 1996, the Company paid to Cornerstone Realty Group, Inc.
$100,000 and paid to Glade Knight $350,000 for the personal property and
building, respectively, located at 306 E. Main Street, Richmond, Virginia, which
serves as the principal executive office of the Company. The Company also paid
approximately $138,000 to certain lenders, representing the balance owed by
Cornerstone Realty Group, Inc. on certain automobile loans, in exchange for the
conveyance by Cornerstone Realty Group, Inc. to the Company of such automobiles.
Prior to the October 1, 1996 transaction, as properties were acquired, the
Company entered into agreements to manage the Properties with the Management
Company. The Management Company earned a management fee equal to 5% of rental
income and was entitled to be reimbursed for certain expenses. The staffs of the
individual properties owned by the Company were employees of the Management
Company through December 31, 1995, and the Company reimbursed the Management
Company for actual salary expenses. Effective January 1, 1996, these employees
were directly employed by the Company.
Prior to October 1, 1996, the Company 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.
Prior to the October 1, 1996 transaction, the Advisor was the advisor to the
Company and provided its day-to-day management. The Advisor earned 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.
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.
F-12
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC. -
Notes to Financial Statements (Continued)
The following table is a summary of payments made by the Company during the
years ended December 31, 1994, 1995 and 1996 per the terms of the various
contracts with the External Companies:
1994 1995 1996
------------- ------------ ------------
Cornerstone Management Group, Inc. $1,445,816 $2,686,204 $1,243,215
Cornerstone Realty Group, Inc. ... 349,980 1,302,550 1,957,624
Cornerstone Advisors, Inc......... -- 219,930 295,759
Cornerstone Realty Advisors, Inc.. 440,000 -- --
Apple Residential Income Trust was organized by Mr. Knight late in 1996 for
the purpose of acquiring apartment communities in Texas. It commenced operations
in January 1997. The Company owns all of the preferred stock in the companies
that provide advisory and property management services to Apple, and expects to
receive economic benefits from the investment. In addition, the Company has a
right to purchase up to 9.8% of the common shares of Apple outstanding from time
to time and has a right of first refusal to acquire the assets and business of
Apple.
NOTE 7. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly results of operations for the years
ended December 31, 1995 and 1996:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------- -----------------
<S> <C> <C> <C> <C>
1995
Rental income....................... $2,745,012 $3,410,692 $ 4,383,403 $ 5,761,714
Income before interest
income/(expense)................... 915,752 1,027,628 1,473,164 1,878,719
Net income ......................... 902,832 1,034,183 1,527,978 1,764,722
Net income per share ............... .16 .15 .17 .16
Distributions per share............. .23 .24 .2425 .245
1996
Rental income....................... $6,552,688 $8,666,887 $11,495,302 $ 13,638,078
Income (loss) before interest
income/(expense).................... 2,142,429 2,931,010 3,471,329 (11,578,179)
Net income (loss)................... 2,171,887 2,749,676 3,306,208 (12,397,620)(a)
Net income (loss) per share......... .16 .16 .14 (.67)
Distributions per share............. .2475 .248 .2485 .249
</TABLE>
- ----------
(a) Includes $16,526,012 of management contract termination expense resulting
from the Company's conversion to "self-administered" and "self-managed"
status. See Note 6.
F-13
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC. -
Notes to Financial Statements (Continued)
NOTE 8. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma information for the years ended December
31, 1995 and 1996 is presented as if (a) 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 (b) the Company had used proceeds from the
Continuous Offerings to acquire the properties, for properties acquired before
the completion of the the Continuous Offerings. Properties acquired after the
completion of the Continuous Offerings were assumed to be acquired using the
Company's line of credit. The pro forma information does not purport to
represent what the Company's results of operations would 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.
UNAUDITED PRO FORMA TOTALS
---------------------------
1995 1996
------------- -------------
Rental income........................ $47,259,007 $51,430,900
Net income (loss).................... 13,043,237 (2,975,417)
Net income (loss) per share.......... .55 (.12)
The pro forma information reflects adjustments for the actual rental income
and rental expenses of all of the 1995 and 19 of the 1996 property acquisitions
for the respective periods in 1995 and 1996 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 in
effect until the contracts were terminated; (2) interest expense has been
reflected based on market rates at the time of acquisition available to the
Company for applicable properties; and (3) depreciation has been adjusted based
on the Company's basis in the properties.
F-14
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
UNAUDITED PRO FORMA BALANCE SHEET
DECEMBER 31, 1996
BASIS OF PRESENTATION
The Unaudited Pro Forma Balance Sheet gives effect to the Offering having
occurred on December 31, 1996. In the opinion of management, all adjustments
necessary to reflect the effects of the Offering have been made.
The Unaudited Pro Forma Balance Sheet is presented for comparative purposes
only and is not necessarily indicative of what the actual financial position of
the Company would have been at December 31, 1996, nor does it purport to
represent the future financial position of the Company. This Unaudited Pro Forma
Balance Sheet should be read in conjunction with, and is qualified in its
entirety by, the respective historical financial statements and notes thereto of
the Company included in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA TOTAL
HISTORICAL ADJUSTMENTS PRO FORMA
-------------- ----------------- ---------------
<S> <C> <C> <C>
ASSETS
Investment in rental property
Land..................................... $ 46,980,280 $ 46,980,280
Building................................. 250,705,667 250,705,667
Property improvements.................... 26,640,085 26,640,085
Furniture................................ 5,389,821 5,389,821
-------------- ---------------
329,715,853 329,715,853
Less accumulated depreciation............ (12,323,037) (12,323,037)
-------------- ---------------
317,392,816 317,392,816
Cash and cash equivalents................. 3,182,651 3,182,651
Prepaid expenses.......................... 557,544 557,544
Other assets.............................. 1,737,563 1,737,563
-------------- ---------------
5,477,758 5,477,758
-------------- ---------------
Total assets.............................. $322,870,574 $322,870,574
============== ===============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Liabilities
Notes payable............................ $ 55,403,000 $(48,375,000)(A) $ 7,028,000
Accrued payable-related party............ 7,297,093 7,297,093
Accounts payable......................... 2,087,673 2,087,673
Accrued expenses......................... 1,366,853 1,366,853
Rents received in advance................ 491,928 491,928
Tenant security deposits................. 1,654,322 1,654,322
-------------- ----------------- ---------------
68,300,869 (48,375,000) 19,925,869
Shareholders'equity
Common stock............................. 276,269,539 48,375,000 (B) 324,644,539
Deferred compensation.................... (55,000) (55,000)
Distributions in excess of net income.... (21,644,834) (21,644,834)
-------------- ----------------- ---------------
254,569,705 48,375,000 302,944,705
-------------- ----------------- ---------------
Total liabilities and shareholders'
equity.................................. $322,870,574 $ -- $322,870,574
============== ================= ===============
</TABLE>
- ----------
(A) Reflects use of net proceeds from the sale of 4,500,000 Shares to repay
notes payable.
(B) Reflects net proceeds from sale of 4,500,000 Shares from this Offering at
an assumed price of $11.75 per Share less related underwriting discounts
and Offering costs estimated at $4,500,000.
F-15
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
BASIS OF PRESENTATION
The Unaudited Pro Forma Statement of Operations for the year ended December
31, 1996 is presented as if 19 of the 21 Property acquisitions during 1996 and
the Offering had occurred on January 1, 1996. The results of operations of the
Westchase and Arbors at Windsor Lake Apartments (which were purchased in
January, 1997) and the Trolley Square West and Highland Hills Apartments (for
which audited financial statements were not available at the time of purchase)
are not reflected in the pro forma statements of operations. The Unaudited Pro
Forma Statement of Operations assumes the Company qualifying as a REIT,
distributing at least 95% of its taxable income, and, therefore, incurred no
federal income tax liability for the period presented. In the opinion of
management, all adjustments necessary to reflect the effects of these
transactions have been made.
The Unaudited Pro Forma Statement of Operations is presented for comparative
purposes only and is not necessarily indicative of what the actual results of
the Company would have been for the year ended December 31, 1996 if the
acquisitions and Offering had occurred at the beginning of the period presented,
nor does it purport to be indicative of the results of operations in future
periods. The Unaudited Pro Forma Statement of Operations should be read in
conjunction with, and is qualified in its entirety by, the respective historical
financial statements and notes thereto of the Company included in this
Prospectus.
F-16
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1996
<TABLE>
<CAPTION>
THE WEST EAGLE ARBOR BRIDGETOWN TROPHY
MEADOWS GREENS ASHLEY PARK TRACE BAY CHASE
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
---------- ----------- ----------- ----------------------- ----------- -----------
Date of Acquisition 1/31/96 3/1/96 3/1/96 3/1/96 4/1/96 4/1/96
------------ ----------- ------------ ------------ ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from rental
properties..................... $40,352,955 $90,006 $127,302 $284,403 $138,795 $186,114 $217,183
Rental expenses:
Utilities ................... 3,870,541 7,903 7,327 16,769 14,849 9,440 21,899
Repairs and maintenance ..... 4,203,180 14,553 22,819 39,027 19,702 25,542 39,180
Taxes and insurance ......... 3,275,422 5,273 9,776 27,496 10,819 14,262 13,830
Property management fee...... 1,243,215 -- -- -- -- -- --
Property management ......... 741,257 -- -- -- -- -- --
Advertising ................. 1,126,295 1,484 3,066 3,213 3,215 5,455 5,819
General and administrative .. 1,495,528 -- -- -- -- -- --
Amortization and other
depreciation................ 47,133 -- -- -- -- -- --
Depreciation of rental
property.................... 8,068,063 -- -- -- -- -- --
Other operating expenses..... 2,638,183 4,452 9,198 18,542 9,645 16,367 17,458
Other ....................... 151,537 -- -- -- -- -- --
Management contract
termination expense ........ 16,526,012 -- -- -- -- -- --
----------- ------------ ------------ ----------- -------------- ------------ ------------
43,386,366 33,665 52,186 105,047 58,230 71,066 98,186
------------ ----------- ------------ ------------ ----------- -------------- ------------
Income (loss) before interest
income
(expense)..................... (3,033,411) 56,341 75,116 179,356 80,565 115,048 118,997
Interest income ............... 287,344 -- -- -- -- -- --
Interest expense............... (1,423,782) -- -- -- -- -- --
------------ ----------- ------------ ------------ ----------- -------------- ------------
Net income (loss) ............. $(4,169,849) $56,341 $ 75,116 $179,356 $ 80,565 $115,048 $118,997
============ =========== ============ ============ =========== ============== ============
Net income (loss) per share .. $ (0.21)
============
Weighted average number of
shares outstanding............ 20,210,432
============
<CAPTION>
BEACON HILL SUMMERWALK THE LANDING MEADOW CREEK
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
----------- ----------- ----------- -----------
Date of Acquisition 5/1/96 5/1/96 5/1/96 5/31/96
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenues from rental $684,622 $297,115 $418,247 $671,043
properties.....................
Rental expenses: 48,373 23,038 30,473 32,330
Utilities ................... 68,173 59,973 68,918 90,083
Repairs and maintenance ..... 58,443 15,663 38,620 50,931
Taxes and insurance ......... -- -- -- --
Property management fee...... -- -- -- --
Property management ......... 12,974 7,559 10,041 12,198
Advertising ................. -- -- -- --
General and administrative ..
Amortization and other -- -- -- --
depreciation................
Depreciation of rental -- -- -- --
property.................... 38,922 22,676 30,122 36,593
Other operating expenses..... -- -- -- --
Other .......................
Management contract -- -- -- --
termination expense ........ ------------ ------------ ------------ -----------
226,885 128,909 178,174 222,135
------------ ------------ ------------ ------------
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1996 (continued)
<CAPTION>
BEACON HILL SUMMERWALK THE LANDING MEADOW CREEK
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Income (loss) before interest
income 457,737 168,206 240,073 448,908
(expense)..................... -- -- -- --
Interest income ............... -- -- -- --
Interest expense............... ------------ ------------ ------------ ------------
$457,737 $168,206 $240,073 $448,908
Net income (loss) ............. ============ ============ ============ ============
Net income (loss) per share ..
Weighted average number of
shares outstanding............
</TABLE>
See accompanying notes
F-17
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1996 (CONTINUED)
<TABLE>
<CAPTION>
TROLLEY SAVANNAH SIGNATURE HAMPTON PARKSIDE
SQUARE EAST WEST PACES GLEN PLACE GLEN HEATHERWOOD AT WOODLAKE
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
DATE OF ACQUISITION ------------ ------------ ----------- ------------ ----------- ------------ -----------
6/26/96 7/1/96 7/19/96 8/1/96 8/1/96 9/1/96 9/30/96
- ----------------------------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from rental
properties................. $345,237 $1,038,285 $628,639 $509,713 $970,246 $1,077,164 $653,152
Rental expenses:
Utilities ................. 62,247 102,411 39,060 25,951 56,883 45,391 34,669
Repairs and maintenance ... 97,819 221,613 92,090 122,995 130,430 155,415 94,280
Taxes and insurance ....... 41,086 49,192 46,834 47,162 62,436 81,204 66,873
Property management fee ... -- -- -- -- -- -- --
Property management ....... -- -- -- -- -- -- --
Advertising ............... 10,293 23,992 14,827 9,500 24,998 21,877 64,687
General and administrative -- -- -- -- -- -- --
Amortization and other
depreciation.............. -- -- -- -- -- -- --
Depreciation of rental
property.................. -- -- -- -- -- -- --
Other operating expenses... 30,878 71,976 44,481 28,499 74,993 65,629 194,059
Other ..................... -- 151,537
Management contract
termination expense ...... -- -- -- -- -- -- --
------------ ------------ --------------- ------------ ----------- ------------ -----------
242,323 469,184 237,292 234,107 349,740 369,516 454,568
Income (loss) before
interest income
(expense)................... 102,914 569,101 391,347 275,606 620,506 707,648 198,584
Interest income ............. -- -- -- -- -- -- --
Interest expense............. -- -- -- -- -- -- --
------------ ------------ ------------ ------------ ----------- ------------ ----------
Net income (loss)............ $102,914 $ 569,101 $391,347 $275,606 $620,506 $ 707,648 $198,584
============ ============ =========== ============ =========== ============ ==========
Net income (loss) per share
Weighted average number of
shares outstanding..........
<CAPTION>
GREENBRIER DEERFIELD
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS 1996
------------ ----------- PRO FORMA TOTAL
10/1/96 11/20/96 ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues from rental $1,250,682 $1,489,997 $ -- $51,430,900
properties.................
Rental expenses: 70,957 62,040 -- 4,582,551
Utilities ................. 205,550 190,567 -- 5,961,909
Repairs and maintenance ... 98,321 155,082 -- 4,168,725
Taxes and insurance ....... -- -- 580,575 (A) 1,823,790
Property management fee ... -- -- -- ,741,257
Property management ....... 24,988 25,476 -- 1,411,957
Advertising ............... -- -- 175,767 (B) 1,671,295
General and administrative
Amortization and other -- -- -- 47,133
depreciation..............
Depreciation of rental -- -- 2,410,042 (C) 10,478,105
property.................. 74,964 76,430 3,504,067
Other operating expenses...
Other .....................
Management contract -- -- -- 16,526,012
termination expense ...... ----------- ------------ ------------ -----------
474,780 509,595 3,166,384 51,068,338
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1996 (CONTINUED)
GREENBRIER DEERFIELD
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS 1996
------------ ----------- PRO FORMA TOTAL
10/1/96 11/20/96 ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Income (loss) before
interest income 775,902 980,402 (3,166,384) 362,562
(expense)................... -- -- -- 287,344
Interest income ............. -- -- 890,411 (D) (533,371)
Interest expense.............----------- -------------- ------------ ------------
$ 775,902 $ 980,402 $(2,275,973) $ 116,535
Net income (loss)............========== ============== ============ ============
Net income (loss) per share $ 0.00
============
Weighted average number of 28,626,979
shares outstanding.......... ============
</TABLE>
See accompanying notes
F-18
<PAGE>
CORNERSTONE REALTY INCOME TRUST, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
The Unaudited Pro Forma Statement of Operations includes the effects of 19 of
the Company's 21 Property acquisitions during 1996 and reflects actual rental
income and rental expenses of these Properties for the respective periods in
1996 prior to acquisition by the Company.
Properties acquired in 1996 during the period in which the Company was
selling its shares were assumed to be purchased with proceeds of that offering.
Properties acquired after that offering, which were purchased using the
Unsecured Line of Credit, were assumed to be purchased with the proceeds of the
Offering.
Shares issued to purchase Properties during the earlier offering period are
based on a net proceed amount of $9.69 per share and represent the net proceeds
received by the Company. Weighted average number of shares outstanding has been
adjusted to reflect the number of shares used to purchase the Properties during
the periods not owned by the Company.
Shares issued to purchase the Properties with the proceeds of the Offering
are based on assumed net proceeds of $10.75 per share (expected Offering price
per Share of $11.75 less $1.00 of expected offering related costs). Shares
outstanding have been adjusted for a full year to reflect issuance of shares in
the Offering and related pay down of debt under the Company's line of credit
(see D below).
(A) Represents the property management fee of 5% of rental income and the
processing costs equal to $2.50 per apartment unit per month charged by the
external management company for period of time not owned by the Company
until the time the management contract was terminated (see Note 6 to the
financial statements).
(B) Represents the advisory of fee of .25% of accumulated capital contributions
for the period of time not owned by the Company until the time the advisor
contract was terminated (see Note 6 to the financial statements).
(C) Represents the depreciation expense of the 19 Properties acquired based on
the purchase price of the Properties for the period of time not owned by
the Company. The weighted average life of the Property depreciated was 27.5
years.
(D) Represents the reduction of interest expense associated with the pay-down
of debt from the proceeds of the Offering. A weighted average interest rate
of 7.2% was used to make this adjustment and represents the 1996 weighted
interest rate under the Unsecured Line of Credit.
F-19
<PAGE>
======================================= ======================================
No person has been authorized in
connection with the offering made
hereby to give any information or to
make any representations not contained
in this Prospectus and, if given or
made, such information or
representations must not be relied
upon as having been authorized by the 4,500,000 SHARES
Company or any Underwriter. This
Prospectus does not constitute an
offer to sell or a solicitation of any
offer to buy any of the securities
offered hereby to any person or by
anyone in any jurisdiction in which it
is unlawful to make such offer or
solicitation. Neither the delivery of
this Prospectus nor any sale made
hereunder shall, under any
circumstances, create any implication
that the information contained herein
is correct as of any date subsequent
to the date hereof. CORNERSTONE REALTY
INCOME TRUST, INC.
----------------
COMMON SHARES
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................. 3
Risk Factors ....................... 9
The Company.........................18
Properties..........................23
Use of Proceeds.....................30 ----------
Distribution Policy ................30 PROSPECTUS
Capitalization .....................32 ----------
Selected Pro Forma and His-
torical Information................33
Management's Discussion and
Analysis of Financial Condition
and Results of Operations .........34 .
Management .........................39
Certain Transactions ...............43
Federal Income Tax Considerations ..47 ALEX. BROWN & SONS
ERISA Considerations ...............54 INCORPORATED
Underwriting .......................55
Reports to Shareholders ............56 BRANCH, CABELL & CO.
Experts ............................56
Certain Legal Matters ..............57 FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Available Information ..............57
Incorporation of Certain Infor-
mation by Reference ...............57 INTERSTATE/JOHNSON LANE
Index to Financial Statements......F-1 CORPORATION
_______ , 1997
======================================== ======================================
<PAGE>
II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are estimates of the expenses to be incurred in connection with
the issuance and distribution of the securities to be registered:
SEC registration fee............................... 19,603
NASD filing fee.................................... 6,969
Printing and engraving fees........................ 260,000
Legal fees and expenses ........................... 300,000
Accounting fees and expenses....................... 150,000
Transfer agent and registrar....................... 10,000
Miscellaneous...................................... 52,178
TOTAL.............................................. $798,750
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has obtained, and pays the cost of, directors' and officers'
liability insurance coverage in the amount of $5 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.
The Virginia Stock Corporation Act (the "Virginia Act") permits, and the
Registrant's Articles of Incorporation require, indemnification of the
Registrant's directors and officers in a variety of circumstances, which may
include liabilities under the Securities Act of 1933. Under Section 13.1-697 of
the Virginia Act, a Virginia corporation generally is authorized to indemnify
its directors in civil or criminal actions if they acted in good faith and
believed their conduct to be in the best interests of the corporation and, in
the case of criminal actions, had no reasonable cause to believe that the
conduct was unlawful. The Registrant's Articles of Incorporation require
indemnification of officers and directors with respect to any action if the
directors (other than the indemnified party) determine in good faith that the
indemnified party's course of conduct was undertaken in good faith within what
the indemnified party reasonably believed to be the scope of his authority and
for a purpose he reasonably believed to be in the best interests of the
Registrant or its shareholders, except in the case of misconduct, bad faith,
negligence, reckless disregard of duties or violation of the criminal law. In
addition, the Registrant may carry insurance on behalf of directors, officers,
employees or agents that may cover liabilities under the Securities Act of 1933.
The Registrant's Articles of Incorporation, as permitted by the Virginia Act,
eliminate the damages that may be assessed against a director or officer of the
Registrant in a shareholder or derivative proceeding. This limit on liability
will not apply in the event of willful misconduct or a knowing violation of the
criminal law or of federal or state securities laws. Reference also is made to
the indemnification provisions set forth in the Underwriting Agreement filed as
Exhibit 1 hereto.
II-1
<PAGE>
-
II. INFORMATION NOT REQUIRED IN PROSPECTUS
(Continued)
ITEM 16. EXHIBITS.
The following exhibits are filed herewith, except as stated.
<TABLE>
<CAPTION>
<S> <C>
1.1 Underwriting Agreement.
4.1 Amended and Restated Articles of Incorporation of Cornerstone Realty
Income Trust, Inc., as amended. Incorporated by reference to Exhibit
3.1 included in the Registrant's Report on Form 10-Q for the Quarter
ended June 30, 1995; File No. 0-23954.
4.2 Bylaws of Cornerstone Realty Income Trust, Inc. (Amended through April
26, 1995. Incorporated by reference to Exhibit 3.2 included in the
Registrant's Report on Form 10-Q for the Quarter ended June 30, 1995;
File No. 0-23954.
5 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to the legality of the securities being registered.
8 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to certain tax matters.
10.1 Advisory Agreement between Apple Residential Income Trust, Inc. and Apple Residential Advisors, Inc. Incorporated
herein by reference to Exhibit 10.1 of Amendment No. 2 to Form S-11 of Apple Residential Income Trust, Inc. (File
No. 333-10635) filed on November 14, 1996.
10.2 Form of Property Management Agreement between Apple Residential Income Trust, Inc. and Apple Residential
Management Group, Inc. Incorporated herein by reference to Exhibit 10.2 of Form S-11 of Apple Residential Income
Trust, Inc. (File No. 333-10635) filed on August 22, 1996.
10.3 Form of Property Acquisition/Disposition Agreement between Apple Residential Income Trust, Inc. and Apple Realty
Group, Inc. Incorporated herein by reference to Exhibit 10.3 of Amendment No. 2 to Form S-11 of Apple Residential
Income Trust, Inc. (File No. 333-10635) filed on November 14, 1996.
10.4 Form of Advisory Agreement Subcontract among Apple Residential Income Trust, Inc., Apple Residential Advisors,
Inc. and the Registrant.
10.5 Property Management Agreement Subcontract among Apple Residential Income Trust, Inc., Apple Residential
Management Group, Inc. and the Registrant.
10.6 Form of Agreement and Bill of Transfer and Assignment among Apple Residential Income Trust, Inc., Apple Realty
Group, Inc. and the Registrant.
10.7 Right of First Refusal Agreement between Apple Residential Income Trust, Inc. and Cornerstone Realty Income
Trust, Inc. Incorporated herein by reference to Exhibit 10.7 of Amendment No. 2 to Form S-11 of Apple Residential
Income Trust, Inc. (File No. 333-0635) filed on November 14, 1996.
10.8 Common Share Purchase Option Agreement between Apple Residential Income Trust, Inc. and Cornerstone Realty Income
Trust, Inc.
23.1 Consent of McGuire, Woods, Battle & Boothe, L.L.P. (included in Exhibits 5 and 8).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of L.P. Martin & Company, P.C.
23.5 Consent of Dixon, Odom & Co., L.L.P.
23.6 Consent of Arthur Andersen LLP.
23.7 Consent of M/PF Research, Inc.
24.1 Power of Attorney of Glade M. Knight.
24.2 Power of Attorney of Stanley J. Olander, Jr.
24.3 Power of Attorney of Martin Zuckerbrod.
24.4 Power of Attorney of Harry S. Taubenfeld.
24.5 Power of Attorney of Penelope W. Kyle.
24.6 Power of Attorney of Glenn W. Bunting.
</TABLE>
II-2
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 15, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, and will be governed by the final adjudication of such
issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Richmond, Commonwealth of Virginia, on March 20,
1997.
Cornerstone Realty Income Trust,
By: /s/ Stanley J. Olander, Jr., Vice President
----------------------------------------------
Stanley J. Olander, Jr., Vice President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- -------------------------------- ----------------------- ------------------
/s/* Glade M. Knight Director and President March 20, 1997
- --------------------------------
Glade M. Knight
/s/* Stanley J. Olander Director, Vice President March 20, 1997
- -------------------------------- Secretary
Stanley J. Olander
/s/* Martin Zuckerbrod Director March 20, 1997
- --------------------------------
Martin Zuckerbrod
/s/* Harry S. Taubenfeld Director March 20, 1997
- --------------------------------
Harry S. Taubenfeld
/s/ Leslie A. Grandis Director March 20, 1997
- --------------------------------
Leslie A. Grandis
/s/* Glenn W. Bunting Director March 20, 1997
- --------------------------------
Glenn W. Bunting
/s/* Penelope W. Kyle Director March 20, 1997
- --------------------------------
Penelope W. Kyle
*By: /s/ Stanley J. Olander, Jr.
- --------------------------------
Stanley J. Olander, Jr.
Attorney-in-Fact for
the above-named persons
II-4
<PAGE>
EXHIBIT INDEX
(EXCEPT AS STATED, THE FOLLOWING EXHIBITS ARE FILED HEREWITH)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------
<S> <C>
1.1 Underwriting Agreement.
4.1 Amended and Restated Articles of Incorporation of Cornerstone Realty Income Trust, Inc., as
amended. Incorporated by reference to Exhibit 3.1 included in the Registrant's Report on Form 10-Q
for the Quarter ended June 30, 1995; File No. 0-23954.
4.2 Bylaws of Cornerstone Realty Income Trust, Inc. (Amended through April 26, 1995. Incorporated by
reference to Exhibit 3.2 included in the Registrant's Report on Form 10-Q for the Quarter ended
June 30, 1995; File No. 0-23954.
5 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to the legality of the securities being
registered.
8 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to certain tax matters.
10.1 Advisory Agreement between Apple Residential Income Trust, Inc. and Apple Residential Advisors,
Inc. Incorporated herein by reference to Exhibit 10.1 of Amendment No. 2 to Form S-11 of Apple
Residential Income Trust, Inc. (File No. 333-10635) filed on November 14, 1996.
10.2 Form of Property Management Agreement between Apple Residential Income Trust, Inc. and Apple
Residential Management Group, Inc. Incorporated herein by reference to Exhibit 10.2 of Form S-11 of
Apple Residential Income Trust, Inc. (File No. 333-10635) filed on August 22, 1996.
10.3 Property Acquisition/Disposition Agreement between Apple Residential Income Trust, Inc. and Apple
Realty Group, Inc. Incorporated herein by reference to Exhibit 10.3 of Amendment No. 2 to Form S-11
of Apple Residential Income Trust, Inc. (File No. 333-10635) filed on November 14, 1996.
10.4 Form of Advisory Agreement Subcontract among Apple Residential Income Trust, Inc., Apple
Residential Advisors, Inc. and the Registrant.
10.5 Form of Property Management Agreement Subcontract among Apple Residential Income Trust, Inc., Apple
Residential Management Group, Inc. and the Registrant.
10.6 Form of Agreement and Bill of Transfer and Assignment among Apple Residential Income Trust, Inc.,
Apple Realty Group, Inc. and the Registrant.
10.7 Right of First Refusal Agreement between Apple Residential Income Trust, Inc. and Cornerstone
Realty Income Trust, Inc. Incorporated herein by reference to Exhibit 10.7 of Amendment No. 2 to
Form S-11 of Apple Residential Income Trust, Inc. (File No. 333-0635) filed on November 14, 1996.
10.8 Common Share Purchase Option Agreement between Apple Residential Income Trust, Inc. and Cornerstone
Realty Income Trust, Inc.
23.1 Consent of McGuire, Woods, Battle & Boothe, L.L.P. (included in Exhibits 5 and 8).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of KPMG Peat Marwick LLP
23.4 Consent of L.P. Martin & Co, P.C.
23.5 Consent of Dixon, Odom & Co., L.L.P.
23.6 Consent of Arthur Andersen LLP.
23.7 Consent of M/PF Research, Inc.
24.1 Power of Attorney of Glade M. Knight.
24.2 Power of Attorney of Stanley J. Olander.
24.3 Power of Attorney of Martin Zuckerbrod.
24.4 Power of Attorney of Harry S. Taubenfeld.
24.5 Power of Attorney of Penelope W. Kyle.
24.6 Power of Attorney of Glenn W. Bunting.
</TABLE>
_______________ Shares
Cornerstone Realty Income Trust, Inc.
Common Shares
(No Par Value)
UNDERWRITING AGREEMENT
_______________, 1997
Alex. Brown & Sons Incorporated
Freidman, Billings, Ramsey & Co., Inc.
Interstate/Johnson Lane Corporation
Branch Cabell & Company, Inc.
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
Cornerstone Realty Income Trust, Inc., a Virginia corporation (the
"Company"), subject to the terms and conditions stated herein, proposes to sell
to the several underwriters (the "Underwriters") named in Appendix I hereto an
aggregate of __________ shares of the Company's Common Shares, no par value (the
"Firm Shares"). The respective amounts of the Firm Shares to be so purchased by
the several Underwriters are set forth opposite their names in Appendix I
hereto. The Company also proposes to sell at the Underwriters' option an
aggregate of up to __________ additional shares of the Company's Common Shares
(the "Optional Shares") as set forth below.
You have advised the Company (a) that you are authorized to enter into
this Agreement and (b) that the several Underwriters are acting severally and
not jointly, to purchase the number of Firm Shares set forth opposite their
respective names in Appendix I, plus their pro rata portion of the Optional
Shares if you elect to exercise the over-allotment option in whole or in part
for the accounts of the several Underwriters. The Firm Shares and the Optional
Shares (to the extent the aforementioned option is exercised) are herein
collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
<PAGE>
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
The Company represents and warrants to, and agrees with, the
Underwriters that:
(a) A registration statement on Form S-3 (File No. 333-______)
with respect to the Shares has been carefully prepared by the Company
in conformity with the requirements of the Securities Act of 1933, as
amended (the "Act"), and the Rules and Regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder and has been filed with the Commission. The
Company has complied with the conditions for the use of Form S-3.
Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the
Rules and Regulations) contained therein and the exhibits, financial
statements and schedules, as finally amended and revised, have
heretofore been delivered by the Company to you. Such registration
statement, together with any registration statement filed by the
Company pursuant to Rule 462 (b) of the Act, herein referred to as the
"Registration Statement," which shall be deemed to include all
information omitted therefrom in reliance upon Rule 430A and contained
in the Prospectus referred to below, has become effective under the Act
and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. "Prospectus" means (a) the form
of prospectus first filed with the Commission pursuant to Rule 424(b)
or (b) the last preliminary prospectus included in the Registration
Statement filed prior to the time it becomes effective or filed
pursuant to Rule 424(a) under the Act that is delivered by the Company
to the Underwriters for delivery to purchasers of the Shares, together
with the term sheet or abbreviated term sheet filed with the Commission
pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus
included in the Registration Statement prior to the time it becomes
effective is herein referred to as a "Preliminary Prospectus." Any
reference herein to the Registration Statement, any Preliminary
Prospectus or to the Prospectus shall be deemed to refer to and include
any documents incorporated by reference therein, and, in the case of
any reference herein to any Prospectus, also shall be deemed to include
any documents incorporated by reference therein, and any supplements or
amendments thereto, filed with the Commission after the date of filing
of the Prospectus under Rules 424(b) or 430A, and prior to the
termination of the offering of the Shares by the Underwriters.
2
<PAGE>
(b) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the
Commonwealth of Virginia, with corporate power and authority to own its
properties and conduct its business as described in the Registration
Statement. Each of the subsidiaries of the Company as listed in
Schedule II hereto (collectively, the "Subsidiaries") has been duly
organized and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, with corporate
power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. The Subsidiaries
are the only subsidiaries, direct or indirect, of the Company. The
Company and each of the Subsidiaries are duly qualified to transact
business in all jurisdictions in which the conduct of their business
requires such qualification except where the failure to be so qualified
would have a material adverse effect on the financial position, results
of operations or business of the Company and its subsidiaries taken as
a whole ("Material Adverse Effect"). The outstanding shares of capital
stock of each of the Subsidiaries have been duly authorized and validly
issued, are fully paid and non-assessable and, all Preferred Shares of
the Subsidiaries are owned by the Company and all Common Shares of the
Subsidiaries are owned by the Company and Glade M. Knight, free and
clear of all liens, encumbrances and equities and claims; and except as
described in the Registration Statement, no options, warrants or other
rights to purchase, agreements or other obligations to issue or other
rights to convert any obligations into shares of capital stock or
ownership interests in the Subsidiaries are outstanding. The Company's
Preferred Shares of the Subsidiaries represents ___% of the equity
interests in each Subsidiary and except as required by law have no
voting rights.
(c) The Company is organized in conformity with the
requirements for qualification as a real estate investment trust under
the Internal Revenue Code of 1986, as amended (the "Code"), and the
Company's method of operation will enable it to meet the requirements
for taxation as a real estate investment trust under the Code.
(d) The outstanding Common Shares of the Company have been
duly authorized and validly issued and are fully paid and
non-assessable; the Shares to be issued and sold by the Company have
been duly authorized and when issued and paid for as contemplated
herein will be validly issued, fully paid and non-assessable; and no
preemptive rights of stockholders exist with respect to any of the
Shares or the issue and sale thereof. Neither the filing of the
3
<PAGE>
Registration Statement nor the offering or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than
those which have been waived or satisfied, for or relating to the
registration of any Common Shares.
(e) The information set forth under the caption
"Capitalization" in the Prospectus is true and correct. All of the
Shares conform to the description thereof contained in the Registration
Statement. The form of certificates for the Shares conforms to the
corporate law of the jurisdiction of the Company's incorporation.
(f) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering
of the Shares nor instituted proceedings for that purpose. The
Registration Statement contains, and the Prospectus and any amendments
or supplements thereto will contain, all statements which are required
to be stated therein by, and will conform to, the requirements of the
Act and the Rules and Regulations. The documents incorporated by
reference in the Prospectus, at the time filed with the Commission
conformed, in all material respects, to the requirements of the
Securities Exchange Act of 1934 or the Act, as applicable, and the
Rules and Regulations. The Registration Statement and any amendment
thereto do not contain, and will not contain, any untrue statement of a
material fact and do not omit, and will not omit, to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading. The Prospectus and any amendments and
supplements thereto do not contain, and will not contain, any untrue
statement of material fact; and do not omit, and will not omit, to
state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that the
Company makes no representations or warranties as to information
contained in or omitted from the Registration Statement or the
Prospectus, or any such amendment or supplement, in reliance upon, and
in conformity with, written information furnished to the Company by or
on behalf of any Underwriter through the Representatives, specifically
for use in the preparation thereof.
(g) The consolidated financial statements of the Company,
together with related notes and schedules as set forth or incorporated
by reference in the Registration Statement, present fairly the
financial position and the results of operations and cash flows of the
Company at the indicated dates and for the indicated periods. Such
4
<PAGE>
financial statements and related schedules have been prepared in
accordance with generally accepted accounting principles, consistently
applied throughout the periods involved, except as disclosed therein,
and all adjustments necessary for a fair presentation of results for
such periods have been made. The summary financial and statistical data
included or incorporated by reference in the Registration Statement
presents fairly the information shown therein and such data has been
compiled on a basis consistent with the financial statements presented
therein and the books and records of the Company. The pro forma
financial statements and other pro forma financial information included
in the Registration Statement and the Prospectus present fairly the
information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements, have been properly compiled on the pro forma bases
described therein, and, in the opinion of the Company, the assumptions
used in the preparation thereof are reasonable and the adjustments used
therein are appropriate to give effect to the transactions or
circumstances referred to therein.
(h) Ernst & Young LLP, KPMG Peat Marwick LLP, L.P. Martin &
Company, P.C. and Dixon, Odom & Co., L.L.P., who have certified certain
of the financial statements filed with the Commission as part of, or
incorporated by reference in, the Registration Statement, are
independent public accountants with respect to the Company as required
by the Act and the Rules and Regulations.
(i) There is no proceeding, action, suit, claim, inquiry or
investigation pending or, to the knowledge of the Company, threatened
against the Company or any of the Subsidiaries before any court or
administrative agency or otherwise which if determined adversely to the
Company or any of its Subsidiaries would result in a Material Adverse
Effect or to prevent the consummation of the transactions contemplated
hereby, except as set forth in the Registration Statement.
(j) The Company will have, at the Closing Date, as hereinafter
defined, good and marketable title in fee simple to all of the
properties described in the Prospectus (the "Properties") free and
clear of all liens, encumbrances, claims, security interests,
restrictions and defects except such as (i) are described in the
Prospectus or (ii) would not have a Material Adverse Effect. All liens,
encumbrances, claims, security interests, restrictions and defects
affecting the Properties which are required to be
5
<PAGE>
disclosed in the Prospectus are disclosed therein. The Company does not
own or lease any material real property, except as described in the
Prospectus. No person has an option or right of first refusal to
purchase all or part of any property or any interest therein. Each of
theProperties complies with all applicable codes, laws and regulations
(including, without limitation, building and zoning codes, laws and
regulations and laws relating to access to the properties), except if
and to the extent disclosed in the Prospectus and except for such
failures to comply that would not individually or in the aggregate have
a Material Adverse Effect. The Company has no knowledge of any pending
or threatened condemnation proceedings, zoning change, or other
proceeding or action that will in any manner affect the size of, use
of, improvements on, construction on or access to any of its property,
except such proceedings or actions that would not have a Material
Adverse Effect.
The Company has obtained an owner's title insurance policy or
commitment from a title insurance company to issue such a policy on
each of its Properties with coverage in an amount at least equal to the
cost of acquisition of such property, including the principal amount of
any indebtedness assumed with respect to the property.
(k) The Company and the Subsidiaries have filed all Federal,
State, local and foreign income tax returns which have been required to
be filed and have paid all taxes indicated by said returns and all
assessments received by them or any of them to the extent that such
taxes have become due. All material tax liabilities have been
adequately provided for in the financial statements of the Company.
(l) Since the respective dates as of which information is
given in the Registration Statement, as it may be amended or
supplemented, there has not been any material adverse change or any
development involving a prospective material adverse change in or
affecting the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise), or prospects of
the Company and its Subsidiaries taken as a whole, whether or not
occurring in the ordinary course of business.
(m) Neither the Company nor any of the Subsidiaries is or with
the giving of notice or lapse of time or both, will be, in violation of
or in default under its Articles of Incorporation or By-Laws or under
any agreement, lease, contract, indenture or other instrument or
obligation to
6
<PAGE>
which it is a party or by which it, or any of its properties, is bound
and which violation or default is of material significance in respect
of the business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and the
Subsidiaries taken as a whole. The execution and delivery of this
Agreement and the consummation of the transactions herein contemplated
and the fulfillment of the terms hereof will not conflict with or
result in a breach of any of the terms or provisions of, or constitute
a default under, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company or any Subsidiary is a
party, or of the Articles of Incorporation or By-laws of the Company or
any order, rule or regulation applicable to the Company or any
Subsidiary of any court or of any regulatory body or administrative
agency or other governmental body having jurisdiction and which
conflict, breach or default would have a Material Affect.
(n) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body necessary in connection with the execution and
delivery by the Company of this Agreement and the consummation of the
transactions herein contemplated (except such additional steps as may
be required by the Commission, the National Association of Securities
Dealers, Inc. (the "NASD") or as may be necessary to qualify the Shares
for public offering by the Underwriters under state securities or Blue
Sky laws) has been obtained or made and is in full force and effect.
(o) The Company and each of the Subsidiaries holds all
material licenses, certificates and permits from governmental
authorities which are necessary to the conduct of their businesses; and
neither the Company nor any of the Subsidiaries has infringed any
patents, patent rights, trade names, trademarks or copyrights, which
infringement is material to the business of the Company and the
Subsidiaries taken as a whole. The Company knows of no material
infringement by others of patents, patent rights, trade names,
trademarks or copyrights owned by or licensed to the Company.
(p) Neither the Company, nor to the Company's best knowledge,
any of its officers, directors or other affiliates has taken or may
take, directly or indirectly, any action designed to cause or result
in, or which has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price
7
<PAGE>
of the Common Shares to facilitate the sale or resale of the Shares.
(q) Neither the Company nor any Subsidiary is an "investment
company" within the meaning of such term under the Investment Company
Act of 1940 and the rules and regulations of the Commission thereunder.
(r) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(s) The Company and each of its Subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks that the
Company believes is adequate for the conduct of their respective
businesses and the value of their respective properties and as is
customary for companies engaged in similar industries. Except as
otherwise disclosed in the Prospectus, neither the Company, nor, to its
knowledge, any former owner of any of the Properties has authorized or
conducted or has knowledge of the generation, transportation, storage,
presence, use, treatment, disposal, release, or other handling of any
hazardous substance, hazardous waste, hazardous material, hazardous
constituent, toxic substance, pollutant, contaminant, asbestos, radon,
polychlorinated biphenyls ("PCBs"), petroleum product or waste
(including crude oil or any fraction thereof), natural gas, liquefied
gas, synthetic gas or other material defined, regulated, controlled or
potentially subject to any remediation requirement under any
environmental law (collectively, "Hazardous Materials"), on, in, under
or affecting the Properties except in material compliance with
applicable laws; to the knowledge of the Company, the Properties and
the Company's operations with respect to the Properties are in
substantial compliance with all federal, state and local laws,
ordinances, rules, regulations and other governmental requirements
relating to pollution, control of chemicals, management of waste,
discharges of materials into the environment, health, safety, natural
resources, and the environment (collectively, "Environmental
8
<PAGE>
Laws"), and the Company has been, and is, in substantial compliance
with all licenses, permits, registrations and government authorizations
necessary to operate under all applicable Environmental Laws. Except as
otherwise disclosed in the Prospectus, neither the Company nor to the
knowledge of the Company, any former owner of any of the Properties has
received any written or oral notice from any governmental entity or any
other person and there is no pending or threatened claim, litigation or
anyadministrative agency proceeding that: alleges a violation of any
Environmental Laws by the Company; alleges that the Company is a liable
party or a potentially responsible party under the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. ss.
9601, et seq., or any state superfund law; has resulted in or could
result in the attachment of an environmental lien on any of the
Properties; or alleges that the Company is liable for any contamination
of the environment, contamination of the Properties, damage to natural
resources, property damage, or personal injury based on their
activities or the activities of their predecessors or third parties
(whether at the Real Property or elsewhere) involving Hazardous
Materials, whether arising under the Environmental Laws, common law
principles, or other legal standards.
None of the entities which prepared appraisals of the
Company's properties, nor the entities which prepared Phase I
environmental assessment reports with respect to such properties, was
employed for such purpose on a contingent basis or has any substantial
interest in the Company, and none of their directors, officers or
employees is connected with the Company as a promoter, selling agent,
voting trustee, officer, director or employee.
(t) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"); no "reportable event"
(as defined in ERISA) has occurred with respect to any "pension plan"
(as defined in ERISA) for which the Company would have any liability;
the Company has not incurred and does not expect to incur liability
under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the
Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each
"pension plan" for which the Company would have any liability that is
intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has
9
<PAGE>
occurred, whether by action or by failure to act, which would cause the
loss of such qualification. To the best of the Company's knowledge, no
general labor problem exists or is imminent with the employees of the
Company.
(u) The Company has not incurred any liability for a fee,
commission or other compensation on account of the employment of a
broker or finder in connection with the transactions contemplated by
this Agreement other than as contemplated hereby.
(v) The Company has been granted a continuing right to
purchase Apple's common shares directly from Apple so long as the
Company's aggregate common shares of Apple do not exceed 9.8% of the
current number of issued and outstanding common shares of Apple.
(w) To the knowledge of the executive officers of the Company,
other than the Subsidiaries, except as disclosed in the Prospectus, no
corporation, partnership, limited liability company or any other entity
of which the Company or any of such officers owns a material interest
is providing any services to Apple.
Any certificate signed by any officer of the Company on behalf
of the Company and delivered to you or to counsel for the Underwriters
in connection with the consummation of the offering shall be deemed a
representation and warranty by such entity to each Underwriter as to
the matters covered thereby.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
----------------------------------------------
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, and subject to the terms and
conditions herein set forth, the Company agrees to sell to the
Underwriters and each Underwriter agrees, severally and not jointly, to
purchase, at a price of $_____ per share, the number of Firm Shares set
forth opposite the name of each Underwriter in Appendix I hereof,
subject to adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be
made in New York Clearing House funds by wire transfer to the order of
the Company against delivery of certificates therefor to the
Underwriters for the several accounts of the Underwriters. Such payment
and delivery are to be made at the offices of Alex. Brown & Sons
Incorporated, 1 South Street, Baltimore, Maryland, at 10:00 a.m.,
Baltimore time, (i) on the third business day after
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the date of this Agreement if this Agreement is executed and delivered
on or before 4:00 p.m., Eastern Standard time, (ii) on the fourth
business day after the date of this Agreement if this Agreement is
executed and delivered on or after 4:01 p.m. Eastern Standard time or
(iii) at such other time and date not later than five business days
thereafter as you and the Company shall agree upon, such time and date
being herein referred to as the "Closing Date." (As used herein,
"business day" means a day on which the New York Stock Exchange is open
for trading and on which banks in New York are open for business and
are not permitted by law or executive order to be closed.) The
certificates for the Firm Shares will be delivered in such
denominations and in such registrations as the Underwriters request in
writing not later than the second full business day prior to the
Closing Date, and will be made available for inspection by the
Underwriters at least one business day prior to the Closing Date.
(c) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions
herein set forth, the Company hereby grants an option to the several
Underwriters to purchase the Optional Shares at the price per share as
set forth in the first paragraph of this Section 2. The option granted
hereby may be exercised in whole or in part by giving written notice
(i) at any time before the Closing Date and (ii) only once thereafter
within 30 days after the date of this Agreement, by you, to the Company
setting forth the number of Optional Shares as to which the several
Underwriters are exercising the option, the names and denominations in
which the Optional Shares are to be registered and the time and date at
which such certificates are to be delivered. The time and date at which
certificates for Optional Shares are to be delivered shall be
determined by the Underwriters but shall not be earlier than three nor
later than 10 full business days after the exercise of such option, nor
in any event prior to the Closing Date (such time and date being herein
referred to as the "Option Closing Date"). If the date of exercise of
the option is three or more days before the Closing Date, the notice of
exercise shall set the Closing Date as the Option Closing Date. The
number of Optional Shares to be purchased by each Underwriter shall be
in the same proportion to the total number of Optional Shares being
purchased as the number of Firm Shares being purchased by such
Underwriter bears to the total number of Firm Shares, adjusted by you
in such manner as to avoid fractional shares. The option with respect
to the Optional Shares granted hereunder may be exercised only to cover
over-allotments in the sale of the Firm Shares by the
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Underwriters. The Underwriters may cancel such option at any time prior
to its expiration by giving written notice of such cancellation to the
Company. To the extent, if any, that the option is exercised, payment
for the Optional Shares shall be made on the Option Closing Date in New
York Clearing House funds by wire transfer to the order of the Company
against delivery of certificates therefor at the offices of Alex. Brown
& Sons Incorporated, 1 South Street, Baltimore, Maryland.
3. OFFERING BY THE UNDERWRITERS.
----------------------------
It is understood that the several Underwriters are to make a
public offering of the Firm Shares as soon as they deem it advisable to
do so. The Firm Shares are to be initially offered to the public at the
initial public offering price set forth in the Prospectus. The
Underwriters may from time to time thereafter change the public
offering price and other selling terms. To the extent, if at all, that
any Optional Shares are purchased pursuant to Section 2 hereof, the
Underwriters will offer them to the public on the foregoing terms.
It is further understood that you will act as the Underwriters
in the offering and sale of the Shares in accordance with an Agreement
Among Underwriters entered into by you and the several other
Underwriters.
4. COVENANTS OF THE COMPANY.
------------------------
The Company covenants and agrees with the several Underwriters
that:
(a) The Company will (i) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule
430A of the Rules and Regulations is followed, to prepare and timely
file with the Commission under Rule 424(b) of the Rules and Regulations
a Prospectus in a form approved by the Underwriters containing
information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Rules and
Regulations, (ii) not file any amendment to the Registration Statement
or supplement to the Prospectus or any document incorporated by
reference therein of which the Underwriters shall not previously have
been advised and furnished with a copy or to which the Underwriters
shall have reasonably objected in writing or which is not in compliance
with the Rules and Regulations and (iii) file on a timely basis all
reports and any definitive proxy or information statements required to
be filed by the Company
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with the Commission subsequent to the date of the Prospectus and prior
to the termination of the offering of the Shares by the Underwriters.
(b) The Company will advise the Underwriters promptly (i) when
the Registration Statement or any post-effective amendment thereto
shall have become effective, (ii) of receipt of any comments from the
Commission, (iii) of any request of the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any
additional information, and (iv) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to
prevent the issuance of any such stop order preventing or suspending
the use of the Prospectus and to obtain as soon as possible the lifting
thereof, if issued.
(c) The Company will cooperate with the Underwriters in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Underwriters may reasonably have designated
in writing and will make such applications, file such documents, and
furnish such information as may be reasonably required for that
purpose, provided the Company shall not be required to qualify as a
foreign corporation, to file a general consent to service of process or
to subject itself to taxation in any jurisdiction where it is not now
so qualified, required to file such a consent or so subject to
taxation. The Company will, from time to time, prepare and file such
statements, reports, and other documents, as are or may be required to
continue such qualifications in effect for so long a period as the
Underwriters may reasonably request for distribution of the Shares.
(d) The Company will deliver to, or upon the order of, the
Underwriters, from time to time, as many copies of any Preliminary
Prospectus as the Underwriters may reasonably request. The Company will
deliver to, or upon the order of, the Underwriters during the period
when delivery of a Prospectus is required under the Act, as many copies
of the Prospectus in final form, or as thereafter amended or
supplemented, as the Underwriters may reasonably request. The Company
will deliver to the Underwriters at or before the Closing Date, four
signed copies of the Registration Statement and all amendments thereto
including all exhibits filed therewith, and will deliver to the
Underwriters such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that
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may reasonably be requested), including documents incorporated by
reference therein, and of all amendments thereto, as the Underwriters
may reasonably request.
(e) The Company will comply in all material respects with the
Act and the Rules and Regulations, and the Securities Exchange Act of
1934 (the "Exchange Act"), and the rules and regulations of the
Commission thereunder, so as to permit the completion of the
distribution of the Shares as contemplated in this Agreement and the
Prospectus. If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur
as a result of which, in the judgment of the Company or in the
reasonable written opinion of the Underwriters, it becomes necessary to
amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances existing at the time the
Prospectus is delivered to a purchaser, not misleading, or, if it is
necessary at any time to amend or supplement the Prospectus to comply
with any law, the Company promptly will either (i) prepare and file
with the Commission an appropriate amendment to the Registration
Statement or supplement to the Prospectus or (ii) prepare and file with
the Commission an appropriate filing under the Securities Exchange Act
of 1934 which shall be incorporated by reference in the Prospectus so
that the Prospectus as so amended or supplemented will not, in the
light of the circumstances when it is so delivered, be misleading, or
so that the Prospectus will comply with the law.
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not
later than 15 months after the effective date of the Registration
Statement, an earnings statement (which need not be audited) in
reasonable detail, covering a period of at least 12 consecutive months
beginning after the effective date of the Registration Statement, which
earning statement shall satisfy the requirements of Section 11(a) of
the Act and Rule 158 of the Rules and Regulations and will advise you
in writing when such statement has been so made available.
(g) The Company will, for a period of five years from the
Closing Date, deliver to the Underwriters copies of annual reports and
copies of all other documents, reports and information furnished by the
Company to its stockholders or filed with any securities exchange
pursuant to the requirements of such exchange or with the Commission
pursuant to the Act or the Securities Exchange Act of 1934, as amended.
The Company will deliver to the Underwriters
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similar reports with respect to significant subsidiaries, as that term
is defined in the Rules and Regulations, which are not consolidated in
the Company's financial statements.
(h) No offering, sale, short sale or other disposition of any
Common Shares of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Shares or derivative
of Common Shares (or agreement for such), except for issuances by the
Company pursuant to the Company's Stock Incentive Plan, Directors' Plan
and Dividend Reinvestment Plan and Stock Purchase and the issuance by
the Company of Common Shares not registered under the Act and not to be
registered under the Act until the first anniversary of the date of
this Agreement that have been issued as consideration for the Company's
acquisition of additional properties, will be made for a period of 12
months after the date of this Agreement, directly or indirectly, by the
Company otherwise than hereunder or with the prior written consent of
Alex. Brown & Sons Incorporated, which consent shall not unreasonably
be withheld.
(i) The Company has caused each officer and director of the
Company to furnish to you, on or prior to the date of this agreement, a
letter or letters, in form and substance satisfactory to the
Underwriters, pursuant to which each such person shall agree not to
offer, sell, sell short or otherwise dispose of any Common Shares of
the Company or other capital stock of the Company, or any other
securities convertible, exchangeable or exercisable for Common Shares
or derivative of Common Shares owned by such person or request the
registration for the offer or sale of any of the foregoing (or as to
which such person has the right to direct the disposition of) for a
period of 12 months after the date of this Agreement, directly or
indirectly, except with the prior written consent of Alex. Brown & Sons
Incorporated ("Lockup Agreements").
(j) The Company will use its best efforts to list, subject to
notice of issuance, the Shares on the New York Stock Exchange.
(k) The Company shall apply the net proceeds of its
sale of the Shares as set forth in the Prospectus.
(l) The Company will use its best efforts to meet the
requirements to qualify as a real estate investment trust under the
Code.
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(m) The Company shall not invest, or otherwise use, the
proceeds received by the Company from its sale of the Shares in such a
manner as would require the Company or any of the Subsidiaries to
register as an investment company under the Investment Company Act of
1940, as amended (the "1940 Act").
(n) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a
registrar for the Common Shares.
(o) The Company will not take, directly or indirectly, any
action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation
of the price of any securities of the same class or convertible into or
exchangeable for Common Shares.
(p) The Company on or before the Closing Date, shall purchase
the number of common shares of Apple equal to approximately 9.5% of the
issued and outstanding common shares of Apple as of the date of the
initial filing of the Registration Statement and (ii) at each of the
Company's quarterly meetings of its Board of Directors, the Board shall
consider an additional purchase of Apple common shares and the Company
shall purchase the number of Apple common shares necessary to increase
the Company's aggregate holdings of Apple common shares to
approximately 9.5% of the issued and outstanding Apple common shares as
of the date of such Board meeting unless the Board determines that such
purchase is not in the best interest of the Company. Notwithstanding
any other provisions of this paragraph, no purchase of Apple common
shares by the Company shall be required (a) if a majority of the
Company's Board of Directors, including a majority of the Company's
Independent Directors (as defined in the Company's Bylaws) resolves
that the purchase of common shares of Apple is not in the best interest
of the Company.
(q) Between October 1, 1997 and December 31, 1997, the Company
shall (i) call a special meeting of the Board of Directors for the
purpose of the Board considering, or (ii) at any other meeting of the
Board of Directors (provided proper notice of the subject has been
given), cause the Board of Directors to consider, the merits of the
Company proposing to purchase or acquire Apple or its assets.
5. COSTS AND EXPENSES.
------------------
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The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement,
including, without limiting the generality of the foregoing, the
following: accounting fees of the Company; the fees and disbursements
of counsel for the Company; the cost of printing and delivering to, or
as requested by, the Underwriters copies of the Registration Statement,
Preliminary Prospectuses, the Prospectus, this Agreement, the
Underwriters' Selling Memorandum, the Underwriters' Invitation Letter,
the Listing Application, the Blue Sky Survey and any supplements or
amendments thereto; the filing fees of the Commission; the filing fees
incident to securing any required review by the National Association of
Securities Dealers, Inc. (the "NASD") of the terms of the sale of the
Shares; the Listing Fee of the New York Stock Exchange; and the
expenses, including the reasonable fees and disbursements of counsel
for theUnderwriters, incurred in connection with the qualification of
the Shares under State securities or Blue Sky laws. The Company shall
not, however, be required to pay for any of the Underwriters' expenses
(other than those related to reviews under NASD regulation and
qualifications under State securities or Blue Sky laws) except that, if
this Agreement shall not be consummated because the conditions in
Section 6 hereof are not satisfied, or because this Agreement is
terminated by the Representatives pursuant to Section 11 hereof, or by
reason of any failure, refusal or inability on the part of the Company
to perform any undertaking or satisfy any condition of this Agreement
or to comply with any of the terms hereof on its part to be performed,
unless such failure to satisfy said condition or to comply with said
terms be due to the default or omission of any Underwriter, then the
Company shall reimburse the several Underwriters for reasonable
out-of-pocket expenses, including reasonable fees and disbursements of
counsel, reasonably incurred in connection with investigating,
marketing and proposing to market the Shares or in contemplation of
performing their obligations hereunder; but the Company shall not in
any event be liable to any of the several Underwriters for damages on
account of loss of anticipated profits from the sale by them of the
Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
---------------------------------------------
The several obligations of the Underwriters to purchase the
Firm Shares on the Closing Date and the Optional Shares, if any, on the
Option Closing Date are subject to the accuracy in all material
respects, as of the Closing Date or the Option Closing Date, as the
case may be, of the representations and warranties of the Company
contained
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<PAGE>
herein, and to the performance by the Company in all material respects
of its covenants and obligations hereunder and to the following
additional conditions:
(a) The Registration Statement and all post-effective
amendments thereto shall have become effective and any and all filings
required by Rule 424 and Rule 430A of the Rules and Regulations shall
have been made, and any request of the Commission for additional
information (to be included in the Registration Statement or otherwise)
shall have been disclosed to the Underwriters and complied with to
their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to
time, shall have been issued and no proceedings for that purpose shall
have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission and no injunction, restraining order, or
order of any nature by a Federal or state court of competent
jurisdiction shall have been issued as of the Closing Date which would
prevent the issuance of the Shares.
(b) The Underwriters shall have received on the Closing Date
or the Option Closing Date, as the case may be, the opinion of McGuire,
Woods, Battle & Boothe, L.L.P., counsel for the Company, dated the
Closing Date or the Option Closing Date, as the case may be, addressed
to the Underwriters to the effect that:
(i) The Company has been duly organized and is
validly existing as a corporation in good standing under the
laws of the Commonwealth of Virginia, with corporate power and
authority to own, lease and operate its properties and conduct
its business as described in the Registration Statement; each
of the Subsidiaries has been duly organized and is validly
existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, with corporate power
and authority to own or lease its properties and conduct its
business as described in the Registration Statement; the
Company and each of the Subsidiaries are duly qualified to
transact business in all jurisdictions in which the conduct of
their business requires such qualification, or in which the
failure to qualify would have a materially adverse effect upon
the business of the Company and the Subsidiaries taken as a
whole; and the outstanding shares of capital stock of each of
the Subsidiaries have been duly authorized and validly issued
and are fully paid and non-assessable and are owned of record
by the Company or Glade M. Knight; the preferred shares of
each Subsidiary held by
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the Company represents ___% of the equity interests in each
Company and, except as required by law, are not entitled to
vote on matters before the shareholders of the Subsidiaries
and, to of such counsel's knowledge, the outstanding shares of
capital stock of each of the Subsidiaries is owned free and
clear of all liens, encumbrances and equities and claims, and
no options, warrants or other rights to purchase, agreements
or other obligations to issue or other rights to convert any
obligations into any shares of capital stock or of ownership
interests in the Subsidiaries are outstanding.
(ii) The Company has authorized capital stock as set forth
under the caption "Capitalization" in the Prospectus; the
Company's outstanding Common Shares have been duly authorized
and validly issued and are fully paid and non-assessable; the
Shares conform to the description thereof contained in the
Prospectus;the certificates for the Shares, assuming they are
in the form filed with the Commission, are in due and proper
form; the Common Shares, including the Optional Shares, if
any, to be sold by the Company pursuant to this Agreement have
been duly authorized and will be validly issued, fully paid
and non-assessable when issued and paid for as contemplated by
this Agreement; and no preemptive rights of shareholders exist
with respect to any of the Shares or the issue or sale
thereof.
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel, there are no
outstanding securities of the Company convertible or
exchangeable into or evidencing the right to purchase or
subscribe for any shares of the Company and there are no
outstanding or authorized options, warrants or rights of any
character obligating the Company to issue any shares or any
securities convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares; and except as
described in the Prospectus, to the knowledge of such counsel,
no holder of any securities of the Company or any other person
has the right, contractual or otherwise, which has not been
satisfied or effectively waived, to cause the Company to sell
or otherwise issue to them, or to permit them to underwrite
the sale of, any of the Shares or the right to have any Common
Shares or other securities of the Company included in the
Registration Statement or the right, as a result of the filing
of the Registration
19
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Statement, to require registration under the Act of Common
Shares or other securities of the Company.
(iv) The Registration Statement has become effective
under the Act and, to the knowledge of such counsel, no stop
order proceedings with respect thereto have been instituted or
are pending or threatened under the Act.
(v) The Registration Statement, the Prospectus and
each amendment or supplement thereto and document incorporated
by reference therein comply as to form in all material
respects with the requirements of the Act or the Securities
Exchange Act of 1934, as applicable, and the applicable rules
and regulations thereunder (except that such counsel need
express no opinion as to the financial statements, financial
schedules and statistical information, including those
incorporated by reference therein). To the knowledge of such
counsel, the conditions for the Company's use of Form S-3 for
the Offering, set forth in the General Instructions thereto,
have been satisfied.
(vi) The statements under the captions "Certain
Transactions," "Federal Income Tax Considerations," and "ERISA
Consideration," in the Prospectus, insofar as such statements
constitute a summary of documents referred to therein or
matters of law, fairly summarize in all material respects the
information called for with respect to such documents and
matters of law.
(vii) Such counsel does not know of any contracts or
documents required to be filed as exhibits to or incorporated
by reference in the Registration Statement or described in the
Registration Statement or the Prospectus that are not so
filed, incorporated by reference or described as required, and
such contracts and documents as are summarized in the
Registration Statement or the Prospectus are fairly summarized
in all material respects.
(viii) Such counsel knows of no material legal or
governmental proceedings, actions, suits, inquiries or
investigations pending or threatened against the Company, or
any of its properties, or any of the Subsidiaries except as
set forth in the Prospectus.
(ix) The Company has corporate power and authority
to enter into, deliver and perform this Agreement.
20
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(x) The Company's execution and delivery of this
Agreement and the consummation of the transactions herein
contemplated do not and will not conflict with or result in a
breach of any of the terms or provisions of, or constitute a
default under, the Articles of Incorporation or By-laws of the
Company, or any material agreement or instrument known to such
counsel to which the Company or any of the Subsidiaries is a
party or by which the Company or any of the Subsidiaries may
be bound except for conflicts or breaches which would not have
a Material Adverse Effect..
(xi) To the knowledge of such counsel, neither the
Company nor any of its Subsidiaries is in violation of its
respective Articles of Incorporation or By-laws, as the case
may be, and no material default exists and no event has
occurred which, with notice or after the lapse of time to cure
or both, would constitute a material default in the due
performance and observance of any agreement or instrument
known to such counsel. To the knowledge of such counsel,
neither the Company nor any of its Subsidiaries is in
violation of, or in default with respect to, any statute,
rule, regulation, order, judgment or decree, except as may be
properly described in the Prospectus or such as in the
aggregate do not now have and will not in the future have a
material adverse effect on the financial position, results of
operations or business of the Company.
(xii) This Agreement has been duly authorized,
executed and delivered by the Company.
(xiii) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory,
administrative or other governmental body is necessary in
connection with the execution and delivery of this Agreement
and the consummation of the transactions herein contemplated
(other than as may be required by the NASD or as required by
State securities and Blue Sky laws as to which such counsel
need express no opinion) except such as have been obtained or
made.
(xiv) The Company is organized in conformity with the
requirements for qualification as a real estate investment
trust pursuant to Sections 856 through 860 of the Code, and
the Company's proposed method of operation will enable it to
meet the
21
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requirements for qualification and taxation as a real estate
investment trust under the Code.
(xv) The Company is not, and will not be, as a result
of the consummation of the transactions contemplated by this
Agreement and application of the net proceeds therefrom as
described in the Prospectus, required to register as an
investment company under the 1940 Act.
In rendering such opinion, McGuire, Woods, Battle & Boothe,
L.L.P. may rely as to matters governed by the laws of states other than
Virginia or Federal laws on local counsel in such jurisdictions,
provided that in each case McGuire, Woods, Battle & Booth, L.L.P. shall
state that they believe that they and the Underwriters are justified in
relying on such other counsel. In addition to the matters set forth
above, such opinion shall also include a statement to the effect that
nothing has come to the attention of such counsel which leads them to
believe that (i) the Registration Statement, at the time it became
effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act)and as of the
Closing Date or the Option Closing Date, as the case may be, contained
an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and (ii) the Prospectus, or any supplement
thereto, on the date it was filed pursuant to the Rules and Regulations
and as of the Closing Date or the Option Closing Date, as the case may
be, contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements, in the
light of the circumstances under which they are made, not misleading
(except that such counsel need express no view as to financial
statements, schedules and statistical information therein). With
respect to such statement, McGuire, Woods, Battle & Booth, L.L.P. may
state that their belief is based upon the procedures set forth therein,
but is without independent check and verification.
(c) The Underwriters shall have received from Hunton &
Williams, counsel for the Underwriters, an opinion dated the Closing
Date or the Option Closing Date, as the case may be, substantially to
the effect specified in subparagraphs (ii), (iii), (iv) and (x) of
Paragraph (b) of this Section 6, and that the Company is a duly
organized and validly existing corporation under the laws of the
Commonwealth of Virginia. In rendering such opinion, Hunton & Williams
may rely as to all matters governed other than by the laws of the State
of
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Virginia or Federal laws on the opinion of counsel referred to in
Paragraph (b) of this Section 6. In addition to the matters set forth
above, such opinion shall also include a statement to the effect that
nothing has come to the attention of such counsel which leads them to
believe that (i) the Registration Statement, or any amendment thereto,
as of the time it became effective under the Act (but after giving
effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the
Option Closing Date, as the case may be, contained an untrue statement
of a material fact or omitted to state a material fact, necessary in
order to make the statements, in the light of the circumstances under
which they are made, not misleading (except that such counsel need
express no view as to financial statements, schedules and statistical
information therein). With respect to such statement, Hunton & Williams
may state that their belief is based upon the procedures set forth
therein, but is without independent check and verification.
(d) The Underwriters shall have received, on each of the dates
hereof, the Closing Date and the Option Closing Date, as the case may
be, signed letters dated the date hereof, the Closing Date or the
Option Closing Date, as the case may be, in form and substance
satisfactory to you, of Ernst & Young LLP, KPMG Peat Marwick LLP, L.P.
Martin & Company, P.C. and Dixon, Odom & Co., L.L.P., confirming that
they are independent public accountants within the meaning of the Act
and the applicable published Rules and Regulations thereunder and
stating that in their opinion the financial statements and schedules
prepared and examined by them and included in the Registration
Statement comply in form in all material respects with the applicable
accounting requirements of the Act and the related published Rules and
Regulations; and, with regards to the letter from Ernst & Young, LLP,
containing such other statements and information as is ordinarily
included in accountants' "comfort letters" to Underwriters with respect
to the financial statements and certain financial and statistical
information contained in the Registration Statement and Prospectus.
(e) The Underwriters shall have received on the Closing Date
or the Option Closing Date, as the case may be, a certificate or
certificates of the Chief Executive Officer
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and the Chief Financial Officer of the Company to the effect that, as
of the Closing Date or the Option Closing Date, as the case may be:
(i) The Registration Statement has become effective
under the Act and no stop order suspending the effectiveness
of the Registration Statement has been issued, and no
proceedings for such purpose have been taken or are, to his
knowledge, contemplated by the Commission;
(ii) The representations and warranties of the
Company contained in Section 1 hereof are true and correct as
of the Closing Date or the Option Closing Date, as the case
may be;
(iii) All filings required to have been made pursuant
to Rules 424 or 430A under the Act have been made;
(iv) He or she has carefully examined the
Registration Statement and the Prospectus and, in his or her
opinion, as of the effective date of the Registration
Statement, the statements contained in the Registration
Statement were true and correct in all material respects, and
such Registration Statement and Prospectus did not omit to
state a material fact required to be stated therein or
necessary in order to make the statements therein not
misleading, and since the effective date of the Registration
Statement, no event has occurred which should have been set
forth in a supplement to or an amendment of the Prospectus
which has not been so set forth in such supplement or
amendment; and
(v) Since the respective dates as of which
information is given in the Registration Statement and
Prospectus, there has not been any material adverse change or
any development that is reasonably likely to result in a
material adverse change in or affecting the condition,
financial or otherwise, of the Company and its Subsidiaries
taken as a whole or the earnings, business, management,
properties, assets, rights, operations, condition (financial
or otherwise) or prospects of the Company and the Subsidiaries
taken as a whole, whether or not arising in the ordinary
course of business.
(f) The Company shall have furnished to the Underwriters such
further certificates and documents
24
<PAGE>
confirming the representations and warranties, covenants and conditions
contained herein and related matters as the Underwriters may reasonably
have requested.
(g) The Shares have been approved for listing, upon official
notice of issuance, on the New York Stock Exchange.
(h) The Lockup Agreements described in Section 4 are
in full force and effect.
The opinions and certificates mentioned in this Agreement
shall be deemed to be in compliance with the provisions hereof only if
they are in all material respects reasonably satisfactory to the
Underwriters and to Hunton & Williams, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this
Section 6 shall not have been fulfilled when and as required by this
Agreement to be fulfilled, the obligations of the Underwriters
hereunder may be terminated by the Underwriters by notifying the
Company of such termination in writing or by telegram at or prior to
the Closing Date or the Option Closing Date, as the case may be.
In such event, the Company and the Underwriters shall not be
under any obligation to each other (except to the extent provided in
Sections 5 and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
---------------------------------------------
The obligations of the Company to sell and deliver the portion
of the Shares required to be delivered as and when specified in this
Agreement are subject to the conditions that at the Closing Date or the
Option Closing Date, as the case may be, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and
in effect or proceedings therefor initiated or threatened.
8. INDEMNIFICATION.
---------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of the Act, against any losses, claims, damages or
liabilities to which such Underwriter or any such controlling person
may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect
thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained or incorporated
by reference in the
25
<PAGE>
Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto, or (ii) the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will
reimburse each Underwriter and each such controlling person upon demand
for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating or
defending any such loss, claim, damage or liability, action or
proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter
or controlling person is a party to any action or proceeding; provided,
however, that the Company will not be liable in any such case to the
extent that (i) any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement, or
omission or alleged omission made or incorporated by reference in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or
such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by or through the
Underwriters specifically for use in the preparation thereof; (ii) such
statement or omission was contained or made in any Preliminary
Prospectus and corrected in the Prospectus and (a) any such loss,
claim,damage or liability suffered or incurred by any Underwriter (or
any person who controls any Underwriter) resulting from an action,
claim or suit by any person who purchased Shares which are the subject
thereof from such Underwriter in the offering of the shares and (b)
such Underwriter failed to deliver or provide a copy of the Prospectus
to such person at or prior to the confirmation of the sale of such
Shares in any case where such delivery is required by the Act. This
indemnity agreement will be in addition to any liability which the
Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify
and hold harmless the Company, each of its directors, each of its
officers who have signed the Registration Statement and each person, if
any, who controls the Company within the meaning of the Act, against
any losses, claims, damages or liabilities to which the Company or any
such director, officer, or controlling person may become subject under
the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of
or are based upon (i) any untrue statement or alleged untrue statement
of any material fact contained or incorporated by reference in the
Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto, or (ii)
26
<PAGE>
the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which
they were made; and will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer, or
controlling person in connection with investigating or defending any
such loss, claim, damage, liability, action or proceeding; provided,
however, that each Underwriter will be liable in each case to the
extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or
such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by or through the
Underwriters specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such
Underwriter may otherwise have.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to this Section 8, such person
(the "indemnified party") shall promptly notify the person against whom
such indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a) or (b) shall be available
to any party who shall fail to give notice as provided in this Section
8(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was materially
prejudiced by the failure to give such notice, but the failure to give
such notice shall not relieve the indemnifying party or parties from
any liability which it or they may have to the indemnified party for
contribution or otherwise than on account of the provisions of Section
8(a) or (b). In case any such proceeding shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel selected by the indemnifying party and reasonably
satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In
any such proceeding, any indemnified party shall have the right to
retain its own counsel at its own expense. Notwithstanding the
foregoing, the indemnifying party shall pay as incurred the fees and
expenses of the counsel retained by the indemnified party in
27
<PAGE>
the event (i) the indemnifying party and the indemnified party shall
have mutually agreed to the retention of such counsel, (ii) the named
parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and
representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between
them or (iii) the indemnifying party shall have failed to assume the
defense and employ counsel reasonably acceptable to the indemnified
party within a reasonable period of time after notice of commencement
of the action. It is understood that the indemnifying party shall not,
in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more
than one separate firm for all such indemnified parties. The
indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent but if settled with
such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or judgment.
In addition, the indemnifying party will not, without the prior written
consent of the indemnified party, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action or
proceeding of which indemnification may be sought hereunder (whether or
not any indemnified party is an actual or potential party to such
claim, action or proceeding) unless such settlement, compromise or
consent includes an unconditional release of each indemnified party
from all liability arising out of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party
under Section 8(a) or (b) above in respect of any losses, claims,
damages or liabilities (or actions or proceedings in respect thereof)
referred to therein, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of
such losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however,
the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give
notice required under Section 8(c) above, then each indemnifying party
shall contribute to such amount paid or payable by such indemnified
party in such proportion as is appropriate to
28
<PAGE>
reflect not only such relative benefits but also the relative fault of
the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, (or actions or proceedings in
respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other shall be deemed to be in the
same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information supplied by the Company on the one hand or
the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the Underwriters agree that it would not be
just and equitable if contributions pursuant to this Section 8(d) were
determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations
referred toabove in this Section 8(d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
above in this Section 8(d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations in
this Section 8(d) to contribute are several in proportion to their
respective underwriting obligations and not joint.
(e) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or
contribution under this Section 8 shall
29
<PAGE>
be paid by the indemnifying party to the indemnified party as such
losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and
the representations and warranties of the Company set forth in this
Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter, the Company, its
directors or officers or any persons controlling the Company, (ii)
acceptance of any Shares and payment therefor hereunder, and (iii) any
termination of this Agreement. A successor to any Underwriter, or to
the Company, its directors or officers, or any person controlling the
Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
9. DEFAULT BY UNDERWRITERS.
-----------------------
If on the Closing Date or the Option Closing Date, as the case
may be, any Underwriter shall fail to purchase and pay for the portion
of the Shares which such Underwriter has agreed to purchase and pay for
on such date (otherwise than by reason of any default on the part of
the Company), you shall use your reasonable efforts to procure within
36 hours thereafter one or more of the other Underwriters, or any
others, to purchase from the Company such amounts as may be agreed upon
and upon the terms set forth herein, the Firm Shares or Optional
Shares, as the case may be, which thedefaulting Underwriter or
Underwriters failed to purchase. If during such 36 hours you shall not
have procured such other Underwriters, or any others, to purchase the
Firm Shares or Optional Shares, as the case may be, agreed to be
purchased by the defaulting Underwriter or Underwriters, then (a) if
the aggregate number of shares with respect to which such default shall
occur does not exceed 10% of the Firm Shares or Optional Shares, as the
case may be, covered hereby, the other Underwriters shall be obligated,
severally, in proportion to the respective numbers of Firm Shares or
Optional Shares, as the case may be, which they are obligated to
purchase hereunder, to purchase the Firm Shares or Optional Shares, as
the case may be, which such defaulting Underwriter or Underwriters
failed to purchase, or (b) if the aggregate number of shares of Firm
Shares or Optional Shares, as the case may be, with respect to which
such default shall occur exceeds 10% of the Firm Shares or Optional
Shares, as the case may be, covered hereby, the Company or you will
have the right, by written notice given within the next 36-hour period
to the parties to this Agreement, to terminate this Agreement without
liability on
30
<PAGE>
the part of the non-defaulting Underwriters or of the Company except to
the extent provided in Section 8 hereof. In the event of a default by
any Underwriter or Underwriters, as set forth in this Section 9, the
Closing Date or Option Closing Date, as the case may be, may be
postponed for such period, not exceeding seven days, as you may
determine in order that the required changes in the Registration
Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any
person substituted for a defaulting Underwriter. Any action taken under
this Section 9 shall not relieve any defaulting Underwriter from
liability in respect of any default of such Underwriter under this
Agreement.
10. NOTICES.
-------
All communications hereunder shall be in writing and, except
as otherwise provided herein, will be mailed, delivered or telegraphed
and confirmed as follows:
If to the Underwriters:
Alex. Brown & Sons Incorporated
1 South Street
Baltimore, Maryland 21202-3220
Attention: William G. Byrnes
with a copy to:
Alex. Brown & Sons Incorporated
1 South Street
Baltimore, Maryland 21202-3220
Attention: General Counsel
If to the Company:
Cornerstone Realty Income Trust, Inc.
306 East Main Street
Richmond, Virginia 23219
Attention: Glade M. Knight
with a copy to:
McGuire, Woods, Battle & Booth, L.L.P.
One James Center
901 East Cary Street
Richmond, Virginia 23219
Attention: Leslie A. Grandis, Esq.
31
<PAGE>
11. TERMINATION.
-----------
This Agreement may be terminated by you by notice to the
Company as follows:
(a) at any time prior to the earlier of (i) the time the
Shares are released by you for sale by notice to the Underwriters, or
(ii) 11:30 a.m. on the first business day following the date of this
Agreement;
(b) at any time prior to the Closing Date if any of the
following has occurred: (i) since the respective dates as of which
information is given in the Registration Statement and the Prospectus,
any material adverse change or any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, of the Company and its Subsidiaries taken as a whole or the
earnings, business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and its
Subsidiaries taken as a whole, whether or not arising in the ordinary
course of business, (ii) any outbreak or escalation of hostilities or
declaration of war or national emergency or other national or
international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, escalation, declaration,
emergency, calamity, crisis or change on the financial markets of the
United States would, in your reasonable judgment, make it impracticable
to market the Shares or to enforce contracts for the sale of the
Shares, or (iii) suspension of trading in securities generally on the
New York Stock Exchange or American Stock Exchange or limitation on
prices (other than limitations on hours or numbers of days of trading)
for securities on either such Exchange, (iv) the enactment,
publication, decree or other promulgation of any statute, regulation,
rule or order of any court or other governmental authority which in
your reasonable opinion materially and adversely affects or that is
reasonably likely to materially and adversely affect the business or
operations of the Company, (v) declaration of a banking moratorium by
United States or New York State authorities, (vi) the suspension of
trading of the Common Shares by the Commission on the New York Stock
Exchange or (vii) the taking of any action by any governmental body or
agency in respect of its monetary or fiscal affairs which in your
reasonable opinion has a material adverse effect on the securities
markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
32
<PAGE>
12. SUCCESSORS.
----------
This Agreement has been and is made solely for the benefit of
the Underwriters and the Company and their respective successors,
executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other
person will have any right or obligation hereunder. No purchaser of any
of the Shares from any Underwriter shall be deemed a successor or
assign merely because of such purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
------------------------------------
The Company and the Underwriters acknowledge and agree that
the only information furnished or to be furnished by any Underwriter to
the Company for inclusion in any Prospectus or the Registration
Statement consists of the information set forth in the last paragraph
on the front cover page (insofar as such information relates to the
Underwriters), legends required by Item 502(d) of Regulation S-K under
the Act and the information under the caption "Underwriting" in the
Prospectus.
14. MISCELLANEOUS.
-------------
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any
investigation made by
or on behalf of any Underwriter or controlling person thereof, or by or
on behalf of the Company or its directors or officers and (c) delivery
of and payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Maryland.
33
<PAGE>
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
CORNERSTONE REALTY INCOME TRUST, INC.
By:
------------------------------
Its:
------------------------------
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
ALEX. BROWN & SONS INCORPORATED
FREIDMAN, BILLINGS, RAMSEY & CO., INC.
INTERSTATE/JOHNSON LANE CORPORATION
BRANCH CABELL & COMPANY, INC.
By: ALEX. BROWN & SONS INCORPORATED
By: __________________________
Its: __________________________
34
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Number of Firm Shares
Underwriter to be Purchased
----------- ---------------
Alex. Brown & Sons Incorporated
Freidman, Billings, Ramsey & Co., Inc.
Interstate/Johnson Lane Corporation
Branch Cabell & Company, Inc.
----------
Total ----------
35
<PAGE>
SCHEDULE II
SCHEDULE OF SUBSIDIARIES
1. Apple Residential Advisors, Inc.
2. Apple Residential Management Group, Inc.
3. Apple Realty Group, Inc.
36
EXHIBIT 5
DATE
Board of Directors
Cornerstone Realty Income Trust, Inc.
306 East Main Street
Richmond, Virginia 23219
Dear Sirs:
We have acted as counsel to Cornerstone Realty Income Trust, Inc. (the
"Company"), a Virginia corporation, in connection with the preparation of the
registration statement on Form S-3 to which this opinion is an exhibit (the
"Registration Statement"), which is being filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act"), for the
registration under the Act of 5,175,000 Common Shares of the Company. Terms not
otherwise defined herein shall have the meanings assigned to them in the
Registration Statement.
We have reviewed originals or copies of (i) the Amended and Restated Articles
of Incorporation (as amended), Bylaws and other corporate documents of the
Company, (ii) certain resolutions of the Board of Directors of the Company, and
(iii) the Registration Statement and the prospectus included therein (the
"Prospectus"). In addition, we have reviewed such other documents and have made
such legal and factual inquiries as we have deemed necessary or advisable for
purposes of rendering the opinions set forth below.
Based upon and subject to the foregoing we are of the opinion that:
1. The Company is duly organized and validly existing under the laws of the
Commonwealth of Virginia; and
2. The Common Shares registered under the Registration Statement have been
duly authorized and, when issued and paid for as described in the Registration
Statement, will be validly issued, fully paid and nonassessable.
We hereby consent to the reference to our firm under the captions "Legal
Matters," "Federal Income Tax Considerations" and "Risk Factors -- Federal
Income Tax Risks" in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement. In giving this consent, we
do not admit that we are in the category of persons whose consent is required by
Section 7 of the Act, or the rules and regulations promulgated thereunder by the
Securities and Exchange Commission.
Very truly yours,
EXHIBIT 8
DATE
Board of Directors
Cornerstone Realty Income Trust, Inc.
306 East Main Street
Richmond, VA 23219
Dear Sirs:
We have acted as counsel to Cornerstone Realty Income Trust, Inc. (the
"Company"), a Virginia corporation, in connection with the preparation of the
registration statement on Form S-3 to which this opinion is attached as an
exhibit (the "Registration Statement"). The Company is filing the Registration
Statement with the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "Act"), to register under the Act 5,175,000 Common
Shares of the Company. Terms not otherwise defined herein shall have the
meanings assigned to them in the Registration Statement.
The Company has elected to be treated as a real estate investment trust
("REIT") for federal income tax purposes commencing with its taxable year ended
December 31, 1993. The Company's initial and continuing qualification as a REIT
depends upon the satisfaction of various requirements under the Internal Revenue
Code of 1986, as amended (the "Code"). The satisfaction of those requirements
generally is within the control of the Company's Board of Directors and
officers, who have been engaged to conduct the affairs of the Company under the
supervision of the Board of Directors. This opinion is based upon various
assumptions and is conditioned upon certain representations as to factual
matters made by the Company through a certificate of an officer of the Company
(the "Officer's Certificate"), a copy of which is attached hereto.
After reasonable inquiry of the officers of the Company, we are not aware of
any facts or circumstances contrary to or inconsistent with the foregoing
representations and assumptions. To the extent the representations set forth in
the Officer's Certificate are with respect to matters set forth in the Code or
Treasury Regulations, we have reviewed with the individual making such
representations the relevant provisions of the Code, the applicable Treasury
Regulations and published administrative interpretations thereof.
We have reviewed originals or copies of (i) the Amended and Restated Articles
of Incorporation (as amended), Bylaws and other corporate documents of the
Company, (ii) certain resolutions of the Board of Directors of the Company, and
(iii) the Registration Statement and the prospectus included therein (the
"Prospectus"). In addition, we have reviewed such other documents and have made
such legal and factual inquiries as we have deemed necessary or advisable for
purposes of rendering the opinions set forth below. We have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to authentic original documents of all documents
submitted to us as copies, and the accuracy and completeness of all records made
available to us.
We are opining herein only as to the federal income tax laws of the United
States and we express no opinion with respect to the applicability thereto, or
the effect thereon, of other federal laws, the laws of any other jurisdiction or
as to any matters of municipal law or the laws of any other local agencies
within any state.
Based on the foregoing documents, representations, and assumptions being, and
continuing to be, accurate, and subject to the qualifications hereinafter set
forth, we are of the opinion that:
1. The Company qualified as a REIT for its taxable years ended December 31,
1993 through December 31, 1996, and, as of the date hereof, its proposed method
of operation would enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code;
2. Provided that a shareholder which is an Exempt Organization (i) does not
incur any "acquisition indebtedness" as defined in Section 514(c) of the Code in
connection with its acquisition of Shares and (ii) does not hold the Shares as
stock in trade, inventory, or property held
<PAGE>
primarily for sale to customers in the ordinary course of business, dividends
paid by the Company to such shareholder will not constitute unrelated business
taxable income under Section 512 of the Code even if the Company owns
"debt-financed property" as that term is defined in Section 514(b) of the Code;
and
3. The statements and legal conclusions contained in the Registration
Statement under the captions "Risk Factors--Federal Income Tax Risks" and
"Federal Income Tax Considerations" describe the material federal income tax
aspects of the offering made by the Registration Statement applicable to the
Company and the shareholders, are correct in all material respects, and the
discussion thereunder does not omit any material provision with respect to the
matters covered.
No opinion is expressed as to any matter not discussed herein.
Any variation or difference in the facts from those set forth in the
Officer's Certificate or the other representations and assumptions described
above may affect the conclusions stated herein. With respect to our opinion
contained in paragraph 1 above, you should note that the continued qualification
and taxation of the Company as a REIT under the Code will depend upon the
Company's ability, through its actual operations, to meet the qualification
tests imposed by Section 856(c)(2), (3), (4) and (5) of the Code. The Company's
ability to satisfy such tests may be affected by, inter alia, the Company's
actual annual operating results, distribution levels, diversity of stock
ownership, and changes in the Company's current method of operation. No
prediction as to those actual operating results is implied by our opinion.
The foregoing opinions are based solely on the provisions of the Code, the
Treasury Regulations promulgated thereunder and the judicial and administrative
rulings, pronouncements and decisions all as they exist as of this date and all
of which are subject to change, which change may be retroactively applied, or
possible differing interpretations that may affect the conclusions stated
herein. To the extent this opinion relies upon recent tax legislation, and
recently promulgated Treasury Regulations, no assurance can be given as to the
interpretations of such recent legislation that will be reflected in applicable
Internal Revenue Service rulings and future Treasury Regulations, which could be
applied retroactively. Any changes to the foregoing authorities might result in
modifications to our opinions contained herein. Further, this opinion does not
purport to deal with certain types of investors subject to special treatment
under the federal income tax laws.
We hereby consent to the reference to our firm under the captions "Federal
Income Tax Considerations," "Risk Factors -- Federal Income Tax Risks" and
"Certain Legal Matters" in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement. In giving this consent, we
do not admit that we are in the category of persons whose consent is required by
Section 7 of the Act or the rules and regulations promulgated thereunder by the
Securities and Exchange Commission.
Very truly yours,
<PAGE>
CORNERSTONE LETTERHEAD
, 1997
McGuire, Woods, Battle & Boothe, L.L.P.
One James Center
901 East Cary Street
Richmond, VA 23219
Ladies & Gentlemen:
Cornerstone Realty Income Trust, Inc. (the "Company"), a Virginia
corporation, in connection with the preparation of the registration statement on
Form S-3 (the "Registration Statement"), has requested your opinion with respect
to certain federal income tax consequences to the Company of its election to be
treated as a "real estate investment trust" ("REIT") under the Internal Revenue
Code of 1986, as amended (the "Code"). We are aware that your opinion may be
rendered or delivered to others having an interest in the subject matter
thereof. In connection with your opinion, we have enclosed a certification by
Stanley J. Olander, Jr., who is the Chief Financial Officer of the Company with
respect to the operation of the Company. We understand that you will rely on
this certification in rendering your opinion that the Company has conducted its
operations in a manner so as to qualify for taxation as a REIT under the Code.
Sincerely yours,
<PAGE>
CORNERSTONE LETTERHEAD
DATE
REIT CERTIFICATION
My name is Stanley J. Olander, Jr. I am the Chief Financial Officer of
Cornerstone Realty Income Trust, Inc. (the "Company"). In connection with this
certification, (i) I have had access to relevant information regarding each of
the factual matters set forth below; (ii) to the extent that I have consulted
with other employees of the Company regarding the factual matters set forth
below, such persons have agreed in all respects with the representations made
below; and (iii) I am familiar with the requirements for qualification as a real
estate investment trust ("REIT") under applicable provisions of the Internal
Revenue Code of 1986, as amended (the "Code") and have exercised ordinary
business care and prudence to attempt to have the Company satisfy such
requirements.
I understand that McGuire, Woods, Battle & Boothe, L.L.P. will rely on these
representations in rendering its opinion that the Company has conducted its
operations in a manner so as to qualify for taxation as a REIT under the Code. I
hereby certify that the statements below are now, and to the extent that such
statements speak to the future will be, to the best of my knowledge and belief
true, correct and complete.
On behalf of the Company, I hereby make the following representations with
respect to the operation of the Company:
1. The Company has operated, and will continue to operate, in compliance with
Virginia law and its Articles of Incorporation and Bylaws, as the same have
existed from time to time;
2. The Company is managed, and will continue to be managed, by one or more
trustees or directors, and the beneficial ownership in the Company has been, and
will continue to be, evidenced by transferable shares;
3. The Company has not operated, and will not operate, so that it becomes
either (i) a financial institution referred to in Section 582(c)(2) of the Code,
or (ii) an insurance company to which subchapter L of the Code applies;
4. The Company has had, and will continue to take all measures within its
control to ensure that it will continue to have, at least 100 shareholders for
at least 335 days of each full taxable year, or proportionate part of any
shorter taxable year (other than its 1993 taxable year);
5. At no time during the last half of any taxable year after the first
taxable year for which the election was made to be a REIT, has more than 50% in
value of the Company's outstanding common shares been, and the Company will take
all measures within its control to ensure that it will continue not to be,
owned, directly or indirectly, by five or fewer individuals;
6. The Company has used since its election to be a REIT, and will continue to
use, a calendar year for federal income tax purposes;
7. The Company has duly filed an election to be treated as a REIT for
federal income tax purposes effective for its taxable year ended December 31,
1993, and has not taken any action to terminate such election. Since such
election, the Company has not, and will not, elect to be treated as an S
Corporation, a real estate mortgage investment conduit, a regulated investment
company, or any entity other than a REIT for federal income tax purposes;
8. The Company has not revoked its election to be treated as a REIT and has
satisfied, and will continue to satisfy, all relevant filing and other
administrative requirements established by the Internal Revenue Service that
must be met to elect and to maintain REIT status;
9. The Company has filed timely tax returns and has not included any
information in such returns with an intent to evade taxes;
<PAGE>
10. The Company does not have, and will not have, as of the close of any
taxable year, any earnings and profits accumulated in any year during which the
Company was not treated as a REIT under the Code;
11. Since its election to be a REIT, at least 95 percent of the Company's
gross income in any taxable year has been, and the Company will take all
measures within its control to ensure that it will continue to be, derived from
dividends, interest, rents from real property, and other sources described in
section 856(c)(2) of the Code;
12. The projections and analyses prepared by the Company and presented to you
with respect to the Company's expected "non-qualifying income" (as determined
under section 856(c)(2) of the Code), due to the fee income from advisory and
property management subcontracts from (i) Apple Residential Advisor, Inc.
("ARA") and Apple Residential Management Group, Inc. ("ARMG"), respectively, and
(ii) property acquisition and disposition services to Apple Residential Income
Trust, Inc. represent the Company's best estimates of the gross income to be
derived from such sources, and the Company will ensure that the receipt of such
income will not cause a breach of representation (11) above;
13. Since its election to be a REIT, at least 75 percent of the Company's
gross income in any taxable year has been, and the Company will take all
measures within its control to ensure that it will continue to be, derived from
rents from real property, interest on obligations secured by mortgages on real
property or on interests in real property, and other sources described in
section 856(c)(3) of the Code;
14. Since its election to be a REIT, less than 30 percent of the Company's
gross income in any taxable year has been, and the Company will take all
measures within its control to ensure that it will continue to be, derived 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 as
defined in the Code, and (iii) real property (including interests in real
property and interests in mortgages on real property) held for less than four
years other than property compulsorily or involuntarily converted within the
meaning of section 1033 of the Code and property which is foreclosure property
within the definition of section 856(e), as described in section 856(c)(4);
15. At least 75 percent of the Company's assets have been and will continue
to be represented by real estate assets, cash and cash items (including
receivables), and Government securities, as described in section 856 (c)(5) of
the Code;
16. The Company has not owned, and will not own in the future, directly or
indirectly, more than 10 percent of the outstanding voting securities of any one
issuer;
17. The Company has not owned, and will not own, securities in any one issuer
having an aggregate value in excess of five percent of the value of the total
assets of the Company;
18. The Company has not held, and will not hold, any assets for sale to
customers in the ordinary course of its trade or business and has complied, and
will continue to comply, with the terms of the safe-harbor provisions in the
Code prescribing when asset sales by a REIT will not be characterized as
prohibited transactions;
19. Since its election to be a REIT, substantially all of the operating gross
income from the properties of the Company has been, and will continue to be,
rents from interests in real property, including rents attributable to personal
property as described below in representation (20) and including charges for
services customarily furnished or rendered in connection with the rental of real
property, whether or not such charges are separately stated, but excluding for
such purposes rents received from related parties as defined in section
856(d)(2)(B) of the Code;
20. Since its election to be a REIT, (i) less than 15 percent of the rent
received by the Company has been attributable to personal property, (ii) all
personal property has been leased under
<PAGE>
or in connection with a lease of real property, and (iii) no personal property
owned by the Company has significant value in excess of its adjusted basis for
federal tax purposes, and the Company will take all measures within its control
to ensure that such statements will continue to be true;
21. The Company has not entered, and will not enter, into any agreement or
arrangement in connection with the rental of real property under which amounts
payable to the Company will depend in whole or in part upon the income or
profits derived from any tenant (or sub-tenant), except that such amounts may be
based on a fixed percentage or percentages of receipts or sales;
22. The Company has not received, and will not receive, rents from real
property, directly or indirectly (within the meaning of section 856(d)(5) of the
Code), from any person in which the Company owns (i) in the case of a
corporation, 10 percent or more of the total (a) combined voting power of all
classes of stock entitled to vote, or (b) number of shares of all classes of
stock; and (ii) in the case of an entity other than a corporation, an interest
of 10 percent or more in the assets or net profits of such entity;
23. Each year the deduction for dividends paid by the Company (as defined in
section 561 of the Code, but determined without regard to capital gains
dividends, as defined in section 857(b)(3)(C)) equaled or exceeded, and is
expected to continue to equal or exceed, (A) the sum of (i) 95 percent of the
Company's real estate investment trust taxable income (as defined in section
857(b)(2), but without regard to the deduction for dividends paid and excluding
any net capital gain) and (ii) 95 percent of the excess of its net income from
foreclosure property over the tax imposed on such income by section
857(b)(4)(A), minus (B) any excess noncash income (as defined in section
857(e));
24. The Company has complied, and will continue to comply, for each taxable
year with the Treasury regulations prescribed for the purpose of ascertaining
the actual ownership of outstanding common shares of the Company;
25. The Company has been, and anticipates that it will continue to be, a
"domestically controlled REIT," within the meaning of section 897(h) of the
Code;
26. The Company has conducted and will continue to conduct its operations as
described in the Registration Statement (including the Prospectus);
27. In so far as it is able to influence or control such matters, the Company
(i) will operate in its own name and for its own account in connection with any
contractual relationships between it and either ARA or ARMG, (ii) will not
engage either ARA or ARMG to act as an agent of the Company, and (iii) will not
have officers, other than Glade M. Knight, who serve as officers of either ARA
or ARMG;
28. Dividends paid by the Company have been made pro rata, with no preference
to any share as compared with other shares of the same class; and
29. The Company is not aware of any facts or circumstances contrary to or
inconsistent with the foregoing representations or assumptions.
Very truly yours,
Cornerstone Realty Income Trust, Inc.
By:
------------------------------------
Name: Stanley J. Olander, Jr.
Title: Chief Financial Officer
EXHIBIT 10.4
ADVISORY AGREEMENT SUBCONTRACT
This Advisory Agreement Subcontract (the "Agreement") is made as of March 1,
1997 by and among Apple Residential Income Trust, Inc., a Virginia corporation
("Apple"), Apple Residential Advisors, Inc., a Virginia corporation (the
"Advisor"), and Cornerstone Realty Income Trust, Inc., a Virginia corporation
("Cornerstone"), and provides:
RECITALS
A. Apple and the Advisor are parties to an Advisory Agreement dated as of
November 1, 1996 (the "Advisory Agreement"), pursuant to which Apple has
engaged the Advisor to provide certain information, advice, assistance and
facilities related to the business of Apple, as more particularly described
in the Advisory Agreement.
B. The Advisor desires to delegate and assign to Cornerstone, and Cornerstone
desires to accept the delegation and assignment from the Advisor of, all of
the Advisor's duties, obligations, rights, powers and benefits under the
Advisory Agreement attributable to the period beginning on the date of this
Agreement, and Apple is willing to consent to such delegation and
assignment, all as more particularly set forth herein.
NOW THEREFORE, in consideration of the foregoing, of the mutual covenants and
agreements contained herein, and other good and valuable consideration, the
parties agree as follows:
1. The Advisor does hereby delegate and assign to Cornerstone all of the
Advisor's duties, obligations, rights, powers and benefits under the
Advisory Agreement attributable to the period beginning on the date of this
Agreement. Cornerstone accepts such delegation and assignment. The intent
of such delegation and assignment is to impose upon Cornerstone all duties
and obligations of the Advisor under the terms of the Advisory Agreement
attributable to the period beginning on the date of this Agreement, and to
confer upon Cornerstone all of the correlative rights, powers and benefits
(including, without limitation, the right to receive all fees and expense
reimbursements) conferred by or provided for in the Advisory Agreement, and
this Agreement shall be interpreted and construed consistently with such
intent. For so long as this Agreement remains in effect, the term
"Advisor," as used in the Advisory Agreement, shall be deemed to refer to
Cornerstone, unless the context clearly requires otherwise.
2. Apple consents to the delegation and assignment referred to in Section 1.
3. This Agreement may be terminated at any time by Cornerstone by written
notice delivered to the Advisor and Apple in the manner and to the
addresses set forth in the Advisory Agreement.
4. Capitalized terms used and not otherwise defined herein shall have the
meanings set forth in the Advisory Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by their
duly authorized officers as of the date first written above.
APPLE RESIDENTIAL INCOME TRUST, INC.,
a Virginia corporation
By:
-----------------------------------
Title:
-------------------------------
APPLE RESIDENTIAL ADVISORS, INC.,
a Virginia corporation
By:
-----------------------------------
Title:
-------------------------------
CORNERSTONE REALTY INCOME TRUST, INC.,
a Virginia corporation
By:
-----------------------------------
Title:
-------------------------------
EXHIBIT 10.5
PROPERTY MANAGEMENT AGREEMENT SUBCONTRACT
This Property Management Agreement Subcontract (the "Agreement") is made as
of March 1, 1997 by and among Apple Residential Income Trust, Inc., a Virginia
corporation ("Apple"), Apple Residential Management Group, Inc., a Virginia
corporation ("ARMG"), and Cornerstone Realty Income Trust, Inc., a Virginia
corporation ("Cornerstone") and provides:
RECITALS
A. As of the date of this Agreement, Apple and ARMG are parties to four
Property Management Agreements more particularly described on Exhibit A
hereto pursuant to which ARMG has agree to provide certain property
management services to Apple, as more particularly described in such
agreements. It is anticipated that Apple and ARMG will enter into
additional Property Management Agreements (any such agreement, including
each such agreement listed on Exhibit A, a "Property Management
Agreement"), as and when Apple purchases additional apartment communities.
B. ARMG desires to delegate and assign to Cornerstone, and Cornerstone desires
to accept the delegation and assignment from ARMG of, all of ARMG's duties,
obligations, rights, powers and benefits under the Property Management
Agreements attributable to the period beginning on the date of this
Agreement, and Apple is willing to consent to such delegation and
assignment, as more particularly set forth below.
NOW THEREFORE, in consideration of the foregoing, of the mutual covenants and
agreements contained herein, and other good and valuable consideration, the
parties agree as follows:
1. ARMG does hereby delegate and assign to Cornerstone all of ARMG's duties,
obligations, rights, powers and benefits under each Property Management
Agreement (including any such Property Management Agreement entered into
after the date hereof, but subject to the provisions of Section 3 of this
Agreement) attributable to the period beginning on the date of this
Agreement. Cornerstone accepts such delegation and assignment. The intent
of such delegation and assignment is to impose upon Cornerstone all duties
and obligations of ARMG under the terms of the Property Management
Agreements attributable to the period beginning on the date of this
Agreement, and to confer upon Cornerstone all of the correlative rights,
powers and benefits (including, without limitation, the right to receive
all fees and expense reimbursements) conferred by or provided for in the
Property Management Agreements, and this Agreement shall be interpreted and
construed consistently with such intent. For so long as this Agreement
remains in effect, the term "Manager," as used in any Property Management
Agreement as to which the delegation and assignment described herein is
effective shall be deemed to refer to Cornerstone, unless the context
clearly requires otherwise.
2. Apple consents to the delegation and assignment referred to in Section 1.
3. Cornerstone may, by written notice delivered to ARMG and Apple at 306 East
Main Street, Richmond, Virginia 23219, Attention: Glade M. Knight,
terminate either (i) the delegation and assignment described herein as to
one or more individual Property Management Agreements or (ii) this
Agreement in its entirety. In the event that the delegation and assignment
with respect to one or more but fewer than all of the Property Management
Agreements subject to this Agreement shall be terminated, such delegation
and assignment shall be deemed terminated with respect to the affected
Property Management Agreements but this Agreement shall not be otherwise
affected.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by their
duly authorized officers as of the date first written above.
APPLE RESIDENTIAL INCOME TRUST, INC.,
a Virginia corporation
By:
-----------------------------------
Title:
-------------------------------
APPLE RESIDENTIAL MANAGEMENT GROUP
a Virginia corporation
By:
-----------------------------------
Title:
-------------------------------
CORNERSTONE REALTY INCOME TRUST, INC.,
a Virginia corporation
By:
-----------------------------------
Title:
-------------------------------
<PAGE>
EXHIBIT A
LIST OF PROPERTY MANAGEMENT AGREEMENTS
BETWEEN APPLE AND ARMG
AS OF MARCH 1, 1997
1. Property Management Agreement dated as of January 1, 1997 pertaining to
Brookfield Apartments.
2. Property Management Agreement dated as of January 1, 1997 pertaining to
Eagle Crest Apartments
3. Property Management Agreement dated as of January 1, 1997 pertaining to
Tahoe Apartments.
4. Property Management Agreement dated as of January 1, 1997 pertaining to
Mill Crossing Apartments.
EXHIBIT 10.6
AGREEMENT AND
BILL OF TRANSFER AND ASSIGNMENT
This AGREEMENT AND BILL OF TRANSFER AND ASSIGNMENT ("Bill of Transfer") is
made as of the ___ day of ________, 1997, among Apple Realty Group, Inc., a
Virginia corporation (the "Company"), Cornerstone Realty Income Trust, Inc., a
Virginia corporation (the "Acquiror") and Apple Residential Income Trust, Inc.,
a Virginia corporation ("Apple").
RECITALS
A. The Company was engaged to render certain property acquisition and
disposition services to Apple under a Property Acquisition/Disposition
Agreement dated as of November 1, 1997 (the "Brokerage Agreement") in
exchange for payment by Apple of certain fees described therein.
B. The Company has agreed to transfer all of the assets of the Company (the
only material assets being its rights in the Brokerage Agreement) to the
Acquiror for certain cash and common shares of the Acquiror, as set forth
herein.
NOW, THEREFORE, in consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged:
1. Transferred Assets. The Company hereby transfers, conveys, assigns and
delivers to the Acquiror all of the material assets of the Company as
follows: All of the Company's rights and interests in, to and under the
Brokerage Agreement (collectively, the "Transferred Assets"). The Company
hereby represents, and the Acquiror hereby acknowledges, that the
Transferred Assets are free of all liens and other encumbrances and
comprise all of the material assets of the Company. The Company represents
and acknowledges that there are no defaults under the Brokerage Agreement.
Further, the Company and the Acquiror acknowledge that the Company is
entitled to acquisition fees under the Brokerage Agreement earned with
respect to property acquisitions of Apple closed during the period
preceding March 1, 1997, and that the Acquiror shall be entitled to all
fees and compensation under the Brokerage Agreement attributable to the
period on and after such date.
2. Consideration for Transfer. In exchange for the Transferred Assets, the
Acquiror agrees to transfer to the Company on the date of this Bill of
Transfer (i) the Agreed-Upon Number of common shares of the Acquiror (the
"REIT Common Shares") plus (ii) cash in the amount of $350,000. The
Agreed-Upon Number of such common shares shall equal (1) $1,650,000 divided
by (2) the per Share public offering price for the Acquiror's common shares
under its Prospectus dated March 14, 1997 less the underwriting commissions
and discounts referred to therein.
3. Assignability. The right to be issued the REIT Common Shares may be
distributed by the Company to its shareholders, but shall not otherwise be
voluntarily assigned or transferred.
4. Registration Rights. Prior to June 1, 1997, the Acquiror shall enter into
with the Company or any subsequent holder of the REIT Common Shares (any
such person, a "Rights Holder") a registration rights agreement
("Registration Rights Agreement") in form and substance agreeable to the
Acquiror and the Rights Holders, providing, among other things, for the
following with respect to the REIT Common Shares:
(a) In the time periods and with the frequency described in Section
4(b) below, the Acquiror shall file and use its best efforts to cause to
become effective, registration statements under the Securities Act of 1933,
and all necessary qualifications or registrations under the securities laws
covering the resale by the Rights Holders of the REIT Common Shares issued
to the Rights Holders hereunder (each, a "Registration Statement").
(b) A Registration Statement shall be filed within 60 days after the
first anniversary of the issuance of the REIT Common Shares hereunder.
<PAGE>
(c) The Acquiror shall use its best efforts to maintain the
effectiveness of each Registration Statement until the earlier of (i) such
time as all of the REIT Common Shares covered thereby have been sold by the
Rights Holders, and (ii) such time as all of the REIT Common Shares covered
thereby may be resold by the Rights Holders without restriction under the
Securities Act.
(d) During any consecutive three month period, the Rights Holders
shall be prohibited, unless the Acquiror shall otherwise consent thereto in
writing, from selling more than 25% of the outstanding REIT Common Shares,
whether pursuant to a Registration Statement or otherwise, except in an
underwritten public offering in which the managing underwriter is one
reasonably acceptable to the Acquiror.
(e) All expenses of such Registration Statement shall be borne by the
Acquiror, other than (i) any underwriting discounts or commissions or
transfer taxes, and (ii) the fees and expenses of all separate counsel for
the Rights Holders in excess of the reasonable fees and expenses of one
separate counsel retained by the Rights Holders to (A) review the
Registration Statement as requested by the Acquiror, (B) review or prepare
information to be provided at the Acquiror's request, and (C) review
documents and instruments to be executed by the Rights Holders at the
request of the Acquiror.
(f)
(i) The Rights Holders shall refrain from the sale of any REIT
Common Shares for one or more periods of not more than sixty (60) days
following written notice from the Acquiror that the relevant
Registration Statement is not then current, due to the existence of
material non-public information disclosure of which would materially
adversely affect the business interests of the Acquiror, and prior to
the Rights Holders' receipt from the Acquiror of written notice that
such Registration Statement is again current, provided that the Rights
Holders shall not be precluded from effecting sales pursuant to this
clause (i) for more than ninety (90) days during any 360-day period.
(ii)Following written notice from the Acquiror that it has filed
and caused to become effective a registration statement including an
offering of common shares for sale by the Acquiror to the public in an
underwritten public offering, the Rights Holders shall enter into
agreements with the underwriters of such public offering,
substantially in the same form and for the same time period as
agreements entered into by the officers and directors of the Acquiror,
precluding the sale of common shares in the Acquiror by Rights Holders
for a period not to exceed one hundred eighty (180) days following
such notice, provided that the Rights Holders were given the
opportunity to include their REIT Common Shares for sale in such
public offering.
(g) With respect to a Registration Statement, the following procedures
shall apply:
(i) The Acquiror will, prior to filing a Registration Statement
or prospectus or any amendment or supplement thereto, furnish to the
Rights Holders and counsel designated by the Rights Holders, copies of
such registration statement or prospectus as proposed to be filed,
together with exhibits thereto, which documents will be subject to
review by the foregoing, and thereafter furnish to the Rights Holders,
such number of copies of such Registration Statement (including each
preliminary prospectus) and such other documents as the Rights Holders
may reasonably request in order to facilitate the disposition of the
REIT Common Shares covered by the Registration Statement.
(ii) The Acquiror will use its best efforts to register or
qualify the REIT Common Shares under such other securities or blue sky
laws of such jurisdictions in the United States as the Rights Holders
reasonably request; provided, that the Acquiror will not be required
to (A) qualify generally to do business in any jurisdiction where it
would not otherwise be required to qualify, (B) subject itself to
taxation in any such jurisdiction, or (C) consent to general service
of process in any such jurisdiction.
(iii) The Acquiror will immediately notify the Rights Holders at
any time when a prospectus included in a Registration Statement is
required to be delivered under the Securities Act of 1933, of the
occurrence of an event requiring the preparation of a supplement or
amendment to such prospectus so that, as thereafter delivered to the
purchasers of such REIT Common Shares, such
<PAGE>
prospectus will not contain an untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and will
promptly make available to the Rights Holders any such supplement or
amendment.
(iv) The Acquiror will otherwise use its best efforts to comply
with all applicable rules and regulations of the SEC.
(v) The Acquiror shall promptly notify the Rights Holders (A)
when the prospectus or any prospectus supplement has been filed, and,
with respect to the Registration Statement or any post-effective
amendment, when the same has been declared effective, (B) of any
request by the SEC for amendments or supplements to the Registration
Statement or the prospectus or for additional information, (C) of the
issuance by the SEC of any stop order suspending the effectiveness of
the Registration Statement or the initiation of any proceedings for
that purpose, and (D) of the receipt by the Acquiror of any
notification with respect to the suspension of the qualification of
the REIT Common Shares for sale in any jurisdiction or the initiation
or threatening of any proceeding for such purpose.
(vi) The Rights Holders and each officer, director and
controlling person of the Rights Holders shall be indemnified by the
Acquiror for all losses, claims, damages, liabilities and expenses
(including reasonable costs of investigation) caused by any untrue or
alleged untrue statement or any omission or alleged omission in the
then-current prospectus included in a Registration Statement, unless
based upon information (if any) furnished to the Acquiror by the
Rights Holders expressly for use in a Registration Statement in a
writing signed by or on behalf of the Rights Holders.
(h) The Acquiror and each officer, director and controlling person of
the Acquiror shall be indemnified by the Rights Holders for all losses,
claims, damages, liabilities and expenses (including reasonable costs of
investigation) caused by any untrue or alleged untrue statement or any
omission or alleged omission in the then-current prospectus included in a
Registration Statement, if based upon information (if any) furnished to the
Acquiror by the Rights Holders expressly for use in a Registration
Statement in a writing signed by or on behalf of the Rights Holders.
(i) The Rights Holders agree to promptly provide information or
execute and deliver documents reasonably determined by the Acquiror to be
necessary to facilitate the preparation or filing of a Registration
Statement.
5. Apple Consent. Apple consents to the assignment by the Company to the
Acquiror of its rights and interests in, to and under the Brokerage
Agreement. The Acquiror shall assume all of the duties and obligations and
shall be entitled to all of the rights, powers and benefits formerly held
by the Company under the Brokerage Agreement.
6. Benefits of Agreement. Except as set forth in Paragraph 7 below, nothing in
this Agreement, express or implied, is intended or shall be construed to
confer upon any person, firm or corporation other than the parties hereto
any remedy or claim.
7. Successors. The provisions of this Agreement are intended to be binding
upon the Company, its successors and permitted assigns, and are for the
benefit of the Acquiror, its successors and assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement and Bill of
Transfer and Assignment as of the date set forth above.
The Company:
APPLE REALTY GROUP, INC.
By:
----------------------------------
Title:
-------------------------------
<PAGE>
The Acquiror:
CORNERSTONE REALTY INCOME TRUST, INC.
By:
----------------------------------
Title:
-------------------------------
Apple:
APPLE RESIDENTIAL INCOME TRUST, INC.
By:
----------------------------------
Title:
-------------------------------
EXHIBIT 10.8
COMMON SHARE PURCHASE OPTION AGREEMENT
THIS COMMON SHARE PURCHASE OPTION AGREEMENT ("Share Purchase Option
Agreement") is made and entered as of this 10th day of February, 1997, by and
between CORNERSTONE REALTY INCOME TRUST, INC. ("Cornerstone"), a Virginia
corporation, and APPLE RESIDENTIAL TRUST, INC. ("Apple"), a Virginia
corporation.
RECITALS
WHEREAS, Cornerstone has stated an intention to own, and has tendered to
Apple an offer to purchase common shares of Apple ("Common Shares"), on the
terms and conditions set forth herein. Apple is willing to give Cornerstone a
right and option to purchase Common Shares on the terms and conditions and for
the purchase price set forth in this Share Purchase Option Agreement.
NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual promises and
covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties do hereby
agree as follows:
1. Terms of Subscription -- Agreement to Purchase and Sell Common Shares.
(a) Option to Purchase Common Shares. Apple does hereby grant to
Cornerstone a right to purchase at any time during the term of this Share
Purchase Option Agreement and from time to time Common Shares subject to
the aggregate subscription limitation set forth below.
(b) Aggregate Subscription Limit. Cornerstone's aggregate holdings of
Common Shares shall not at any time exceed 9.8% of the total number of
Common Shares then outstanding (the "Aggregate Subscription Limit").
2. Purchase Price. The number of Common Shares received by Cornerstone at
each closing of any purchase of Common Shares hereunder shall be equal to
the gross purchase price paid by Cornerstone at such closing divided by,
the then current public offering price of Common Shares set forth on the
Prospectus dated November 19, 1996, as supplemented and amended from time
to time (the "Prospectus"), less all selling commissions and marketing
expense allowances payable in accordance with the Prospectus, (such net
price per Common Share, the "Purchase Price").
3. Purchase Closings. At each closing of the acquisition of Common Shares
hereunder,
(a) Cornerstone shall pay to Apple, by wire transfer or by certified
or bank cashier's check, an amount determined under section 2 above,
subject to the aggregate amount not exceeding the Aggregate Subscription
Limit; and
(b) Apple shall issue to Cornerstone one or more certificates
representing the whole number of issued and outstanding Common Shares equal
to the quotient of (i) the gross amount paid by Cornerstone to Apple under
Section 2 above divided by (ii) the Purchase Price determined under Section
2 above. Apple shall not be required to issue fractional Common Shares in
connection with any purchase by Cornerstone and, in lieu thereof, Apple
shall refund to Cornerstone the cash amount represented by the fractional
share of Common Shares based upon the Purchase Price. In addition to the
legends required by Apple's Articles of Incorporation, each certificate or
instrument representing the Common Shares shall bear a legend in
substantially the following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW, AND MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND QUALIFICATION
WITHOUT AN OPINION OF COUNSEL FOR THE HOLDER THAT SUCH REGISTRATION AND
QUALIFICATION ARE NOT REQUIRED, WHICH OPINION OF COUNSEL SHALL BE
REASONABLY SATISFACTORY TO APPLE.
<PAGE>
Such legend shall be removed by Apple upon (i) the U.S. Securities and
Exchange Commission ("SEC") declaring effective a Registration Statement
(as defined in Section 7 below) covering such Common Shares or (ii)
delivery to it of an opinion of counsel reasonably satisfactory to Apple
and its counsel that a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), other than a Registration
Statement, is at the time effective with respect to the transfer of the
legended security or that such security can be transferred without such
registration statement being in effect and without the requirements of a
legend on the certificate in the hands of the transferee.
4. Term. Apple's obligations in connection with this Share Purchase
Option Agreement shall terminate upon the termination of the public
offering of Common Shares pursuant to the Registration Statement No.
333-10135 filed with the SEC, as it may be amended from time to time.
5. Representations and Warranties of Cornerstone. Cornerstone hereby
represents and warrants to Apple as follows:
(a) The execution, delivery and performance of this Agreement by
Cornerstone have been duly authorized by all necessary corporate action.
This Agreement constitutes a valid and binding obligation of Cornerstone,
enforceable in accordance with its terms.
(b) Neither the execution, delivery and performance of this Agreement
nor the consummation of the transactions contemplated hereby by Cornerstone
will conflict with or result in a breach or violation of any of the terms
and provisions of, or (with or without the giving of notice or passage of
time or both) constitute a default under, any agreement to which
Cornerstone is a party, the certificate of incorporation or bylaws of
Cornerstone, any indenture, mortgage, deed of trust, loan agreement, note,
lease or other agreement or instrument to which Cornerstone is a party or
to which any of its properties or other assets is subject, or any
applicable statute, judgment, decree, rule or regulation of any court or
governmental agency or body applicable to Cornerstone or its assets, or
result in the creation or imposition of any lien, charge, claim or
encumbrance upon any property or asset of Cornerstone.
(c) No consent, license, permit or filing of or with any governmental
authority or any person is required in connection with Cornerstone'
execution, delivery and performance of this Share Purchase Option Agreement
except as has been obtained by Cornerstone.
(d) No finder, broker, agent, financial advisor or other intermediary
has acted on behalf of Cornerstone in connection with the purchase of the
Common Shares pursuant to this Share Purchase Option Agreement or the
negotiation or consummation hereof.
(e) It is familiar with the business and financial condition of Apple
and is not relying upon any representations made to it by Apple or any of
its officers, directors, employees, partners or agents that are not
contained herein.
(f) It is aware of the risks involved in making an investment in the
Common Shares. It has had an opportunity to ask questions of, and to
receive answers from, Apple, or a person or persons authorized to act on
its behalf, concerning the terms and conditions of any investment in Apple.
Cornerstone confirms that all documents, records and books pertaining to
any investment in Apple that have been requested by it have been made
available or delivered to it prior to the date hereof.
(g) It understands that the Common Shares have not been registered
under the Securities Act, or any state securities acts, and are being
offered and sold to Cornerstone in reliance on an exemption from such
registration requirements. The Common Shares for which Cornerstone hereby
subscribes are being acquired solely for its own account, for investment,
and are not being purchased with a view to, or for resale in connection
with, any distribution, subdivision or fractionalization thereof in
violation of such laws, and Cornerstone has no present intention to enter
into any contract, undertaking, agreement or arrangement with respect to
any such resale.
(h) It is an "accredited investor" as that term is defined in Rule 501
and Regulation D promulgated under the Securities Act.
<PAGE>
The foregoing representations and warranties are true and accurate as
of the date hereof and shall be true and accurate as of the date of each
purchase of Common Shares pursuant to the terms of this Share Purchase
Option Agreement, and shall survive such dates.
6. Representations and Warranties of Apple. Apple hereby represents and
warrants to Cornerstone as follows:
(a) Apple has full legal right, power and authority to enter into this
Share Purchase Option Agreement and the Registration Rights Agreement
referred to in Section 7 hereof, and to consummate the transactions
contemplated herein and therein. This Share Purchase Option Agreement has
been, and the Registration Rights Agreement referred to in Section 7 hereof
will be, duly authorized by all necessary corporate action, and each will
constitute the valid and binding obligation of Apple, enforceable in
accordance with their respective terms.
(b) The Common Shares have been validly authorized and, when issued to
Cornerstone, will be duly and validly issued, fully paid, nonassessable and
free of preemptive or similar rights. Authorized and unissued Common Shares
sufficient to satisfy Apple's obligation to issue such shares to
Cornerstone shall at all times be reserved by Apple.
(c) Assuming the accuracy of the representations of Cornerstone set
forth in Section 5 hereof, (i) the Common Shares will have been issued,
offered and sold to Cornerstone in compliance with all applicable laws
(including, without limitation, federal and state securities laws) and (ii)
each consent, approval, authorization, order, license, certificate, permit,
registration, designation or filing by or with any governmental agency or
body necessary for the valid authorization, issuance, sale and delivery of
any Common Shares to Cornerstone, the execution, delivery and performance
of this Agreement and the Registration Rights Agreement referred to in
Section 7 hereof and the consummation by Apple of the transactions
contemplated hereby and thereby has been made or obtained and is in full
force and effect.
(d) Neither the issuance, sale and delivery to Cornerstone by Apple of
the Common Shares, nor the execution, delivery and performance of this
Agreement and the Registration Rights Agreement referred to in Section 7
hereof, nor the consummation of the transactions contemplated hereby or
thereby by Apple will conflict with or result in a breach or violation of
any of the terms and provisions of, or (with or without the giving of
notice or passage of time or both) constitute a default under, any
agreement to which Apple is a party, the certificate of incorporation,
bylaws of Apple, any indenture, mortgage, deed of trust, loan agreement,
note, lease or other agreement or instrument to which Apple is a party or
to which any of its properties or other assets is subject, or any
applicable statute, judgment, decree, rule or regulation of any court or
governmental agency or body applicable to Apple or its assets, or result in
the creation or imposition of any lien, charge, claim or encumbrance upon
any property or asset of Apple.
(e) No consent, license, permit or filing of or with any governmental
authority or any person is required in connection with Apple's execution,
delivery and performance of this Share Purchase Option Agreement except as
has been obtained by Apple.
(f) No finder, broker, agent, financial advisor or other intermediary
has acted on behalf of Apple in connection with the purchase of the Common
Shares pursuant to this Share Purchase Option Agreement or the negotiation
or consummation hereof.
The foregoing representations and warranties are true and accurate as
of the date hereof, or such other date as of which they are deemed to be
made, and shall be true and accurate as of the date of each purchase of
Common Shares made hereunder, and shall survive such dates.
7. Registration Rights. Prior to June 1, 1997, Apple shall enter into
with Cornerstone a registration rights agreement ("Registration Rights
Agreement") in form and substance agreeable to Cornerstone and Apple,
providing, among other things, for the following with respect to Common
Shares acquired by Cornerstone pursuant to this Share Purchase Option
Agreement:
<PAGE>
(a) In the time periods and with the frequency described in Section
7(b) below, Apple shall file and use its best efforts to cause to become
effective, registration statements under the Securities Act, and all
necessary qualifications or registrations under the securities laws
covering the resale by Cornerstone of Common Shares issued to Cornerstone
hereunder (each, a "Registration Statement").
(b) A Registration Statement shall be filed within 60 days after (i)
the first anniversary of the first purchase of Common Shares of Cornerstone
and (ii) each subsequent anniversary if Cornerstone has acquired Common
Shares which are not covered by a Registration Statement.
(c) Apple shall use its best efforts to maintain the effectiveness of
each Registration Statement until the earlier of (i) such time as all of
the Common Shares covered thereby have been issued to and sold by
Cornerstone and (ii) such time as all of the Common Shares covered thereby
may be resold by Cornerstone without restriction under the Securities Act.
(d) During any consecutive three month period, Cornerstone shall be
prohibited, unless Apple shall otherwise consent thereto in writing, from
selling more than 25% of the outstanding Common Shares, whether pursuant to
a Registration Statement or otherwise, except in an underwritten public
offering in which the managing underwriter is one reasonably acceptable to
Apple.
(e) All expenses of such Registration Statement shall be borne by
Apple, other than (i) any underwriting discounts or commissions or transfer
taxes and (ii) the fees and expenses of all separate counsel for
Cornerstone in excess of the reasonable fees and expenses of one separate
counsel retained by Cornerstone to (A) review the Registration Statement as
requested by Apple, (B) review or prepare information to be provided at
Apple's request and (C) review documents and instruments to be executed by
Cornerstone at the request of Apple.
(f) (i) Cornerstone shall refrain from the sale of any Common Shares
for one or more periods of not more than sixty (60) days following
written notice from Apple that the relevant Registration Statement is
not then current, due to the existence of material non-public
information disclosure of which would materially adversely affect the
business interests of Apple, and prior to Cornerstone' receipt from
Apple of written notice that such Registration Statement is again
current, provided that Cornerstone shall not be precluded from
effecting sales pursuant to this clause (i) for more than ninety (90)
days during any 360-day period.
(ii) Following written notice from Apple that it has filed and
caused to become effective a registration statement including an
offering of Common Shares for sale by Apple to the public in an
underwritten public offering, Cornerstone shall enter into agreements
with the underwriters of such public offering, substantially in the
same form and for the same time period as agreements entered into by
the officers and directors of Apple, precluding the sale of Common
Shares by Cornerstone for a period not to exceed one hundred eighty
(180) days following such notice, provided that Cornerstone was given
the opportunity to include its shares for sale in such public
offering.
(g) With respect to a Registration Statement, the following procedures
shall apply:
(i) Apple will, prior to filing a Registration Statement or
prospectus or any amendment or supplement thereto, furnish to
Cornerstone and counsel designated by Cornerstone, copies of such
registration statement or prospectus as proposed to be filed, together
with exhibits thereto, which documents will be subject to review by
the foregoing, and thereafter furnish to Cornerstone, such number of
copies of such Registration Statement, each amendment and supplement
thereto, the prospectus included in such Registration Statement
(including each preliminary prospectus) and such other documents as
Cornerstone may reasonably request in order to facilitate the
disposition of the Common Shares covered by the Registration
Statement.
(ii) Apple will use its best efforts to register or qualify the
Common Shares under such other securities or blue sky laws of such
jurisdictions in the United States as Cornerstone reasonably requests;
provided, that Apple will not be required to (A) qualify generally to
do business in any jurisdiction where it would not otherwise be
required to qualify, (B) subject itself to taxation in any such
jurisdiction or (C) consent to general service of process in any such
jurisdiction.
<PAGE>
(iii) Apple will immediately notify Cornerstone at any time when
a prospectus included in a Registration Statement is required to be
delivered under the Securities Act, of the occurrence of an event
requiring the preparation of a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such
Common Shares, such prospectus will not contain an untrue statement of
a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading, and will promptly make available to Cornerstone any such
supplement or amendment.
(iv) Apple will otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC.
(v) Apple shall promptly notify Cornerstone (A) when the
prospectus or any prospectus supplement has been filed, and, with
respect to the Registration Statement or any post-effective amendment,
when the same has been declared effective, (B) of any request by the
SEC for amendments or supplements to the Registration Statement or the
prospectus or for additional information, (C) of the issuance by the
SEC of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose, and
(D) of the receipt by Apple of any notification with respect to the
suspension of the qualification of the Common Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for
such purpose.
(vi) Cornerstone and each officer, director and controlling
person of Cornerstone shall be indemnified by Apple for all losses,
claims, damages, liabilities and expenses (including reasonable costs
of investigation) caused by any untrue or alleged untrue statement or
any omission or alleged omission in the then-current prospectus
included in a Registration Statement, unless based upon information
(if any) furnished to Apple by Cornerstone expressly for use in a
Registration Statement in a writing signed by or on behalf of
Cornerstone.
(f) Apple and each officer, director and controlling person of Apple
shall be indemnified by Cornerstone for all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation)
caused by any untrue or alleged untrue statement or any omission or alleged
omission in the then-current prospectus included in a Registration
Statement, if based upon information (if any) furnished to Apple by
Cornerstone expressly for use in a Registration Statement in a writing
signed by or on behalf of Cornerstone.
(g) Cornerstone agrees to promptly provide information or execute and
deliver documents reasonably determined by Apple to be necessary to
facilitate the preparation or filing of a Registration Statement.
8. Miscellaneous.
(a) All notices or other communications given or made hereunder shall
be in writing and shall be delivered in person or mailed by registered or
certified mail, return receipt requested, postage prepaid, or by Federal
Express overnight mail, (A) to Cornerstone at 306 East Main Street,
Richmond, Virginia 23219, Attention: Chief Financial Officer, and (B) to
Apple at 306 East Main Street, Richmond, Virginia 23219, Attention:
President.
(b) NOTWITHSTANDING THE PLACE WHERE THIS AGREEMENT MAY BE EXECUTED BY
ANY OF THE PARTIES HERETO, THE PARTIES EXPRESSLY AGREE THAT ALL OF THE
TERMS AND PROVISIONS HEREOF SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE COMMONWEALTH OF VIRGINIA (WITHOUT REGARD TO
CONFLICTS OF LAW PRINCIPLES), APPLICABLE TO AGREEMENTS MADE AND TO BE
WHOLLY PERFORMED THEREIN.
(c) This Agreement (i) supersedes all other agreements or
understandings, by and between Cornerstone and Apple, and (ii) constitutes
the entire agreement between the parties hereto, in each case with respect
to the subscription by Cornerstone for Common Shares of Apple. This
Agreement
<PAGE>
may be amended only by an instrument in writing executed by all parties.
Cornerstone may assign and transfer its rights and obligations hereunder,
and the Common Shares it acquires, to any direct or indirect subsidiary
thereof.
(d) This Agreement shall inure to the benefit of and be binding upon
the successors and assigns of the parties hereto.
(e) All terms used herein shall be deemed to include the masculine and
the feminine and the singular and the plural as the context requires.
Captions herein are for convenience of reference only and shall not alter
or affect the meaning or construction of the paragraphs hereof to which
they relate.
(f) The parties hereto agree to take all actions, including the
entering into of any documents, agreements or instruments, or amendments
thereof, as may be necessary or appropriate to effectuate the intents and
purposes hereof and consummate and make effective the transactions
contemplated hereby.
(g) This Agreement may be executed in two or more counterparts, any
one of which need not contain the signatures of more than one party, but
all such counterparts taken together will constitute one and the same
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Share Purchase
Option Agreement on and as of the date first above written.
CORNERSTONE REALTY INCOME TRUST, INC.,
a Virginia corporation
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
APPLE RESIDENTIAL INCOME TRUST, INC.,
a Virginia corporation
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 24, 1997, in the Registration Statement
(Form S-3 No. 333-00000) and related Prospectus of Cornerstone Realty Income
Trust, Inc. for the registration of 5,175,000 shares of its common stock.
We also consent to the incorporation by reference therein of our report
dated February 6, 1996 (except Note 9, as to which the date is February 22,
1996) with respect to the financial statements and schedule of Cornerstone
Realty Income Trust, Inc. for the years ended December 31, 1995, and 1994
included in the Annual Report (Form 10-K) for 1995, filed with the Securities
and Exchange Commission.
/s/ Ernst & Young LLP
Richmond, Virginia
March 19, 1997
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Cornerstone Realty Income Trust, Inc.:
We consent to the use of our reports incorporated herein by reference
relating to 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 and to the reference to our firm
under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Richmond, Virginia
March 13, 1997
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We consent to the use of the following reports prepared by us to be
incorporated into a Registration Statement on Form S-3 to be filed with the
Securities and Exchange Commission by Cornerstone Realty Income Trust, Inc., and
to the references to our firm under the heading "Experts" in the Prospectus
included in such Registration Statement:
(1) Our report dated March 9, 1996 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the proposed
future operations of the property The Meadows Apartments for the year ended
December 31, 1995, (2) our report dated April 24, 1996 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Scarlett Oaks
Apartments for the twelve month period ended January 31, 1996, (3) our report
dated June 4, 1996 with respect to the statement of income and direct operating
expenses exclusive of items not comparable to the proposed future operations of
the property Colonial Ridge Apartments for the twelve month period ended
December 31, 1995, (4) our report dated July 18, 1996 with respect to the
statements of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Westfield Club
Apartments for the twelve month periods ended December 31, 1995, 1994 and 1993,
(5) our report dated July 19, 1996 with respect to the statement of income and
direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Beacon Hill Apartments for the twelve month
period ended April 30, 1996, (6) our report dated August 9, 1996 with respect to
the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Meadow Creek
Apartments for the twelve month period ended April 30, 1996, (7) our reports
dated June 21, 1996 with respect to the statements of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Lexington Tower Apartments for the three month period
ended March 31, 1996 and for the year ended December 31, 1995, (8) our report
dated August 14, 1996 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Paces Glen Apartments for the twelve month period
ended June 30, 1996, (9) our report dated August 23, 1996 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Doctors Park
Apartments for the twelve month period ended June 30, 1996, (10) our report
dated October 23, 1996 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Oak Park Apartments for the twelve month period ended
June 30, 1996, (11) our report dated October 17, 1996 with respect to the
statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Hampton Glen
Apartments for the twelve month period ended July 31, 1996, (12) our report
dated October 24, 1996 with respect to the statement of income and direct
operating expenses exclusive of items not comparable to the proposed future
operations of the property Sterling Chase Apartments for the twelve month period
ended August 31, 1996, (13) our report dated December 10, 1996 with respect to
the statement of income and direct operating expenses exclusive of items not
comparable to the proposed future operations of the property Parkside at
Woodlake Apartments for the twelve month period ended September 30, 1996, (14)
our report dated December 20, 1996 with respect to the statement of income and
direct operating expenses exclusive of items not comparable to the proposed
future operations of the property Greenbrier Apartments for the twelve month
period ended September 30, 1996, and (15) our report dated January 3, 1997 with
respect to the statement of income and direct operating expenses exclusive of
items not comparable to the proposed future operations of the property Deerfield
Apartments for the twelve month period ended October 31, 1996.
Richmond, Virginia /s/ L. P. Martin & Company, P.C.
March 12, 1997
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia
We consent to the use of the following reports prepared by us to be
incorporated into a Registration Statement on Form S-3 to be filed with the
Securities and Exchange Commission by Cornerstone Realty Income Trust, Inc., and
to the references to our firm under the heading "Experts" in the Prospectus
included in such Registration Statement:
(1) our report dated May 21, 1996 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the
proposed future operations of the property Longmeadow Apartments for
the year ended December 31, 1995,
(2) our report dated June 20, 1996 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the
proposed future operations of the property Lakewood Apartments for the
year ended December 31, 1995, and
(3) our report dated June 20, 1996 with respect to the statement of income
and direct operating expenses exclusive of items not comparable to the
proposed future operations of the property Willow Creek Apartments for
the year ended December 31, 1995.
High Point, North Carolina /s/ Dixon, Odom & Co., L.L.P.
March 12, 1997
EXHIBIT 23.6
ARTHUR ANDERSEN LLP
1666 K STREET, N.W.
WASHINGTON, D.C. 20006-2873
MARCH 12, 1997
Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia 23219
We consent to the use of our name and the references to our Fairness Opinion
dated August 12, 1996 under the captions "Risk Factors -- Purchase of Former
Advisor's and Former Manager's Rights not at Arm's-Length," and "Certain
Transactions -- Conversion to Self-Administration" in the Prospectus of
Cornerstone Realty Income Trust, Inc. (the "Company") included in the
Registration Statement on Form S-3 to be filed by the Company.
Very truly yours,
/s/ Arthur Andersen LLP
--------------------------
Arthur Andersen LLP
Washington, D.C.
March 12, 1997
Exhibit 23.7
M/PF RESEARCH, INC.
March 14, 1997
Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia 23219
We consent to the use of our name and to the references to our Report under
the caption "Properties" in the Prospectus of Cornerstone Realty Income Trust,
Inc. (the "Company") included in the Registration Statement on Form S-3 to be
filed by the Company.
Very truly yours,
Dallas, Texas /s/ Evan J. Griffiths
March 14, 1997 Director of Research Services
Exhibit 24.1
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Glade M. Knight and Stanley
J. Olander, Jr., each acting singly, his attorney-in-fact, to execute on his
behalf, individually and in each capacity stated below, and to file, any
documents referred to below relating to the registration of up to $100 million
of the common shares of Cornerstone Realty Income Trust, Inc. (the "Company"),
such documents being: a Registration Statement to be filed with the Securities
and Exchange Commission; such statements with, or applications to, the
regulatory authorities of any state in the United States as may be necessary to
permit such shares to be offered and sold in such states; and any and all
amendments to any of the foregoing, with all exhibits and documents required to
be filed in connection therewith. The undersigned further grants unto said
attorneys and each of them full power and authority to perform each and every
act necessary to be done in order to accomplish the foregoing registrations as
fully as he himself might do.
IN WITNESS WHEREOF, the undersigned has signed this power of attorney as of
this 22nd day of January, 1997.
/s/ Glade M. Knight
-------------------------
Glade M. Knight, Director
of the Company
EXHIBIT 24.2
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Glade M. Knight and Stanley
J. Olander, Jr., each acting singly, his attorney-in-fact, to execute on his
behalf, individually and in each capacity stated below, and to file, any
documents referred to below relating to the registration of up to $100 million
of the common shares of Cornerstone Realty Income Trust, Inc. (the "Company"),
such documents being: a Registration Statement to be filed with the Securities
and Exchange Commission; such statements with, or applications to, the
regulatory authorities of any state in the United States as may be necessary to
permit such shares to be offered and sold in such states; and any and all
amendments to any of the foregoing, with all exhibits and documents required to
be filed in connection therewith. The undersigned further grants unto said
attorneys and each of them full power and authority to perform each and every
act necessary to be done in order to accomplish the foregoing registrations as
fully as he himself might do.
IN WITNESS WHEREOF, the undersigned has signed this power of attorney as of
this 22 day of January, 1997.
/s/ Stanley J. Olander
----------------------------
Stanley J. Olander, Director
of the Company
EXHIBIT 24.3
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Glade M. Knight and Stanley
J. Olander, Jr., each acting singly, his attorney-in-fact, to execute on his
behalf, individually and in each capacity stated below, and to file, any
documents referred to below relating to the registration of up to $100 million
of the common shares of Cornerstone Realty Income Trust, Inc. (the "Company"),
such documents being: a Registration Statement to be filed with the Securities
and Exchange Commission; such statements with, or applications to, the
regulatory authorities of any state in the United States as may be necessary to
permit such shares to be offered and sold in such states; and any and all
amendments to any of the foregoing, with all exhibits and documents required to
be filed in connection therewith. The undersigned further grants unto said
attorneys and each of them full power and authority to perform each and every
act necessary to be done in order to accomplish the foregoing registrations as
fully as he himself might do.
IN WITNESS WHEREOF, the undersigned has signed this power of attorney as of
this 23rd day of January, 1997.
/s/ Martin Zuckerbrod
----------------------------
Martin Zuckerbrod, Director
of the Company
EXHIBIT 24.4
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Glade M. Knight and Stanley
J. Olander, Jr., each acting singly, his attorney-in-fact, to execute on his
behalf, individually and in each capacity stated below, and to file, any
documents referred to below relating to the registration of up to $100 million
of the common shares of Cornerstone Realty Income Trust, Inc. (the "Company"),
such documents being: a Registration Statement to be filed with the Securities
and Exchange Commission; such statements with, or applications to, the
regulatory authorities of any state in the United States as may be necessary to
permit such shares to be offered and sold in such states; and any and all
amendments to any of the foregoing, with all exhibits and documents required to
be filed in connection therewith. The undersigned further grants unto said
attorneys and each of them full power and authority to perform each and every
act necessary to be done in order to accomplish the foregoing registrations as
fully as he himself might do.
IN WITNESS WHEREOF, the undersigned has signed this power of attorney as of
this 23rd day of January, 1997.
/s/ Harry S. Taubenfeld
-----------------------------
Harry S. Taubenfeld, Director
of the Company
EXHIBIT 24.5
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Glade M. Knight and Stanley
J. Olander, Jr., each acting singly, her attorney-in-fact, to execute on her
behalf, individually and in each capacity stated below, and to file, any
documents referred to below relating to the registration of up to $100 million
of the common shares of Cornerstone Realty Income Trust, Inc. (the "Company"),
such documents being: a Registration Statement to be filed with the Securities
and Exchange Commission; such statements with, or applications to, the
regulatory authorities of any state in the United States as may be necessary to
permit such shares to be offered and sold in such states; and any and all
amendments to any of the foregoing, with all exhibits and documents required to
be filed in connection therewith. The undersigned further grants unto said
attorneys and each of them full power and authority to perform each and every
act necessary to be done in order to accomplish the foregoing registrations as
fully as she herself might do.
IN WITNESS WHEREOF, the undersigned has signed this power of attorney as of
this 23rd day of January, 1997.
/s/ Penelope W. Kyle
--------------------------
Penelope W. Kyle, Director
of the Company
EXHIBIT 24.6
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Glade M. Knight and Stanley
J. Olander, Jr., each acting singly, his attorney-in-fact, to execute on his
behalf, individually and in each capacity stated below, and to file, any
documents referred to below relating to the registration of up to $100 million
of the common shares of Cornerstone Realty Income Trust, Inc. (the "Company"),
such documents being: a Registration Statement to be filed with the Securities
and Exchange Commission; such statements with, or applications to, the
regulatory authorities of any state in the United States as may be necessary to
permit such shares to be offered and sold in such states; and any and all
amendments to any of the foregoing, with all exhibits and documents required to
be filed in connection therewith. The undersigned further grants unto said
attorneys and each of them full power and authority to perform each and every
act necessary to be done in order to accomplish the foregoing registrations as
fully as he himself might do.
IN WITNESS WHEREOF, the undersigned has signed this power of attorney as of
this 22nd day of January, 1997.
/s/ Glenn W. Bunting
-------------------------------
Glenn W. Bunting, Jr., Director
of the Company
