CORNERSTONE REALTY INCOME TRUST INC, S-3/A, 1997-04-17

CORNERSTONE REALTY INCOME TRUST INC
S-3/A, 1997-04-17
REAL ESTATE INVESTMENT TRUSTS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1997
REGISTRATION NO. 333-23693

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
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

-----------------

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. [ ]

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 APRIL 17, 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.

------------------------------------------------------------------------------

<TABLE>
<CAPTION>
<S> <C> <C> <C>
Price Underwriting Proceeds
to Discounts and to
Public Commissions (1) Company (2)
Per Share.... $ $ $
Total (3).... $ $ $
</TABLE>

------------------------------------------------------------------------------

(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

<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.

<PAGE>
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 31, 1997,
the Company had approximately $87.4 million outstanding under the Unsecured Line
of Credit and expects to have approximately $39 million outstanding after the
closing of the Offering. As of March 31, 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 $48.8 million of total indebtedness outstanding, which is
approximately 10.9% 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.

<PAGE>

RECENT DEVELOPMENTS

In March 1997, the Company purchased the Paces Arbor Apartments, a 101-unit
apartment complex, and the Paces Forest Apartments, a 117-unit apartment
complex, both located near Raleigh, North Carolina. Both properties were built
in 1986, and the combined purchase price was $12,061,700, which the Company
borrowed under the Unsecured Line of Credit. The average unit size for Paces
Arbor and Paces Forest is 899 square feet and 883 square feet, respectively. The
average rent per month and economic occupancy for March 1997 were $678 and 96%
for Paces Arbor and $704 and 94% for Paces Forest.

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

<TABLE>
<CAPTION>
<S> <C>
Shares offered hereby ....................... 4,500,000 Common Shares

Common Shares to be outstanding after the
Offering.................................... 33,862,409 Common Shares(1)

Use of proceeds.............................. The net proceeds will be used to repay
indebtedness.

Proposed NYSE symbol......................... TCR ("The Cornerstone REIT")
</TABLE>
- ----------

(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").

<PAGE>

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.

<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 (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

</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.

<PAGE>

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.

<PAGE>

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 29,211,414 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."

<PAGE>
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

<PAGE>

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

<PAGE>

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 7.03% 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

<PAGE>

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.

<PAGE>

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,

<PAGE>

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

<PAGE>

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.

<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.

<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

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.

<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.

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 42 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

<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.

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.

<PAGE>

RECENT DEVELOPMENTS

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 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 31, 1997, the
interest rate on the Unsecured Line of Credit was 7.03%, and the outstanding
balance was approximately $87.4 million.

<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 31, 1997, the outstanding balance on this loan was
approximately $400,000. 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 $48.8 million or approximately 10.9%
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.

<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 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 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.

<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

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
============ ============ ======== ======== =========

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.

<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 at February 28, 1997 the
Company owned 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 at February 28, 1997 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>

<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.).

<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 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

<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.

<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 $39.0 million. As of March 31, 1997, the
outstanding balance under the Unsecured Line of Credit was approximately $87.4
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 $31.6 million and the Company would have
approximately $68.4 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

<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.

<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."

<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

<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 of 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

<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.

<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.

<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. In March 1997, the Company
acquired the Paces Arbor Apartments, a 101-unit apartment community, and the
Paces Forest Apartments, a 117-unit apartment community, both located in
Raleigh, North Carolina, for an aggregate of $12,061,700. 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 $12.6 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 $61.0 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 31, 1997, the outstanding balance on this loan was approximately $400,000.
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.

<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 $48.8 million in outstanding
indebtedness which will represent approximately 10.9% 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.

<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.

<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.

<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.

<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.

<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."

<PAGE>

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

<PAGE>

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

<PAGE>

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

<PAGE>

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)

<PAGE>

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,

<PAGE>

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.

<PAGE>

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

<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

<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.

<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.

<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.

<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, 1996 and 1995 and for each of the three years ended December 31, 1996,
incorporated by reference (including the schedule appearing therein) in
Cornerstone Realty Income Trust, Inc.'s Annual Report (Form 10-K) for the year
ended December 31, 1996, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon included and incorporated by
reference 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.

<PAGE>

Certain Statements of Income and Direct Operating Expenses of properties,
incorporated by reference herein, have been incorporated herein in reliance on
the report of L.P. Martin & Company, P.C., independent certified public
accountants, also incorporated by reference herein, and upon the authority of
said firm 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, 1996
the Company's Current Report on Form 8-K dated October 31, 1996 (including
Amendment No. 1 thereto on Form 8-K/A),

<PAGE>

and the Company's Registration Statements 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).

<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

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

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
============

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..........

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 have been previously filed, 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 March 31, 1997). Filed Herewith.
5 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to the legality of the securities being registered.
Filed Herewith.
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. Filed Herewith.
23.3 Consent of KPMG Peat Marwick LLP.
23.4 Consent of L.P. Martin & Company, P.C. Filed Herewith.
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 Amendment No. 2 to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Richmond, Commonwealth of Virginia, on
April 17, 1997.

Cornerstone Realty Income Trust,

By: /s/ Stanley J. Olander, Jr.
----------------------------------------------
Stanley J. Olander, Jr., Vice President

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the 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 April 17, 1997
- --------------------------------
Glade M. Knight

/s/* Stanley J. Olander Director, Vice President April 17, 1997
- -------------------------------- Secretary
Stanley J. Olander

/s/* Martin Zuckerbrod Director April 17, 1997
- --------------------------------
Martin Zuckerbrod

/s/* Harry S. Taubenfeld Director April 17, 1997
- --------------------------------
Harry S. Taubenfeld

/s/ Leslie A. Grandis Director April 17, 1997
- --------------------------------
Leslie A. Grandis

/s/* Glenn W. Bunting Director April 17, 1997
- --------------------------------
Glenn W. Bunting

/s/* Penelope W. Kyle Director April 17, 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 HAVE BEEN PREVIOUSLY FILED)

<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 March 31, 1997). Filed Herewith.
5 Opinion of McGuire, Woods, Battle & Boothe, L.L.P. as to the legality of the securities being
registered. Filed Herewith.
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. Filed Herewith.
23.3 Consent of KPMG Peat Marwick LLP
23.4 Consent of L.P. Martin & Co, P.C. Filed Herewith.
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>

Amended through:
March 31, 1997

BYLAWS

CORNERSTONE REALTY INCOME TRUST, INC.

<PAGE>

TABLE OF CONTENTS

ARTICLES: Page
- --------- ----

ARTICLE I
THE COMPANY; DEFINITIONS.............................................1
1.1 Name........................................................1
1.2 Nature of Company...........................................1
1.3 Definitions.................................................1

ARTICLE II
MINIMUM CAPITAL......................................................6
2.1 Minimum Capital.............................................6

ARTICLE III
OFFICES; FISCAL YEAR.................................................6
3.1 Principal Office............................................6
3.2 Other Offices...............................................6
3.3 Fiscal Year.................................................6

ARTICLE IV
MEETINGS OF SHAREHOLDERS.............................................7
4.1 Place of Meetings...........................................7
4.2 Annual Meetings.............................................7
4.3 Special Meetings............................................8
4.4 Notice; Affidavit of Notice.................................8
4.5 Record Date for Shareholder Notice, Voting and Giving
Consents....................................................9
4.6 Adjourned Meetings; Notice.................................10
4.7 Voting at Meetings of Shareholders.........................10
4.8 Quorum.....................................................10
4.9 Waiver of Notice or Consent of Absent Shareholders.........11
4.10 Action Without Meeting.....................................11
4.11 Proxies....................................................11
4.12 Inspectors of Election.....................................12

ARTICLE V
DIRECTORS...........................................................13
5.1 Powers.....................................................13
5.2 Number, Tenure and Qualifications..........................13
5.3 Nomination of Directors....................................14
5.4 Vacancies..................................................15
5.5 Place of Meeting...........................................16
5.6 Organization Meeting.......................................17
5.7 Special Meetings...........................................17
5.8 Adjournment................................................17
5.9 Notice of Adjournment......................................17
5.10 Entry of Notice............................................17
5.11 Waiver of Notice...........................................17
5.12 Quorum.....................................................18
5.13 Fees and Compensation......................................18
5.14 Action Without Meeting.....................................18

<PAGE>

5.15 Independent Directors......................................18
5.16 Removal of Director for Cause..............................20
5.17 Removal of Director Without Cause..........................21
5.18 Committees.................................................21
5.19 Fiduciary Relationship.....................................22

ARTICLE VI
OFFICERS............................................................22
6.1 Officers...................................................22
6.2 Election...................................................22
6.3 Subordinate Officers.......................................22
6.4 Removal and Resignation....................................22
6.5 Vacancies..................................................23
6.6 Chairman of the Board......................................23
6.7 President..................................................23
6.8 Vice Presidents............................................23
6.9 Secretary..................................................23
6.10 Assistant Secretaries......................................24
6.11 Chief Financial Officer....................................24
6.12 Assistant Chief Financial Officers.........................24

ARTICLE VII
SHARES OF STOCK.....................................................24
7.1 Registered Ownership, Share Certificates and Shares in
"Unissued Certificate" Form................................24
7.2 Transfer of Shares.........................................25
7.3 Disclosures by Holders of Shares; Redemption of
Shares.....................................................26
7.4 Right to Refuse to Transfer the Shares.....................27
7.5 Limitation on Acquisition of Shares........................27
7.6 Lost or Destroyed Certificates.............................29
7.7 Dividend Record Date and Closing Stock Books...............29
7.8 Dividend Reinvestment Plan.................................30

ARTICLE VIII
EMPLOYMENT OF ADVISOR, LIMITATION
ON EXPENSES AND LEVERAGE............................................30
8.1 Employment of Advisor......................................30
8.2 Term.......................................................31
8.3 Other Activities of Advisor................................31

ARTICLE IX
RESTRICTIONS ON INVESTMENTS AND ACTIVITIES..........................34
9.1 Restrictions...............................................34

ARTICLE X
TRANSACTIONS WITH AFFILIATES; CERTAIN DUTIES AND LIABILITIES
OF DIRECTORS, SHAREHOLDERS, ADVISOR AND AFFILIATES..................36
10.1 Transactions with Affiliates...............................36
10.2 Restriction of Duties and Liabilities......................37
10.3 Persons Dealing with Directors or Officers.................37
10.4 Reliance...................................................38

iii

<PAGE>

10.5 Income Tax Status..........................................38

ARTICLE XI
MISCELLANEOUS.......................................................38
11.1 Competing Programs.........................................38
11.2 Corporate Seal.............................................39
11.3 Inspection of Bylaws.......................................39
11.4 Inspection of Corporate Records............................39
11.5 Checks, Drafts, Etc........................................40
11.6 Contracts, Etc., How Executed..............................40
11.7 Representation of Shares of Other Corporations.............40
11.8 Annual Report..............................................40
11.9 Quarterly Reports..........................................41
11.10 Other Reports..............................................41
11.11 Provisions of the Company in Conflict with Law
or Regulation............................................41
11.12 Voluntary Dissolution......................................42
11.13 Distributions..............................................42
11.14 Shareholder Liability......................................42
11.15 Return of Offering Proceeds................................42
11.16 Certain New York Stock Exchange Requirements...............42

ARTICLE XII
AMENDMENTS TO BYLAWS................................................42
12.1 Amendments....................................................42

<PAGE>

ARTICLE I
THE COMPANY; DEFINITIONS

1.1 Name. The name of the corporation is CORNERSTONE REALTY
INCOME TRUST, INC. and is referred to in these Bylaws as the "Company." As far
as practicable and except as otherwise provided in the Organizational Documents,
the Directors shall direct the management of the business and the conduct of the
affairs of the Company, execute all documents and sue or be sued in the name of
the Company. If the Directors determine that the use of that name is not
practicable, legal or convenient, they may use such other designation or may
adopt another name under which the Company may hold property or conduct all or
part of its activities.

1.2 Nature of Company. The Company is a corporation organized
under the laws of the Commonwealth of Virginia. It is intended that the Company
shall carry on business as a "real estate investment trust" ("REIT").

1.3 Definitions. Whenever used in these Bylaws, the terms
defined in this Section 1.3 shall, unless the context otherwise requires, have
the respective meanings specified in this Section 1.3. In these Bylaws, words in
the singular number include the plural and in the plural number include the
singular.

(a) Acquisition Expenses. The total expenses,
including but not limited to legal fees and expenses, travel and communications
expenses, costs of appraisals, non-refundable option payments on property not
acquired, accounting fees and expenses, title insurance, and miscellaneous
expenses related to selection and acquisition of properties, whether or not
acquired. Acquisition Expenses shall not include Acquisition Fees.

(b) Acquisition Fees. The total of all fees and
commissions paid by any party in connection with the purchase or development of
real property by the Company, except a development fee paid to a person not
Affiliated with the Sponsor in connection with the actual development of a
project after acquisition of the land by the Company. Included in the
computation of such fees or commissions shall be any real estate commission,
selection fee, development fee, nonrecurring management fee, or any fee of a
similar nature, however designated.

(c) Adjusted Net Asset Value. The net assets of
the Company (total assets before deducting depreciation or non-cash reserves
less total liabilities) valued at fair market value as determined by qualified
appraisals or valuations of the assets.

(d) Advisor. The Person responsible for directing or
performing the day-to-day business affairs of the

<PAGE>

Company, including a Person to which the Advisor subcontracts substantially all
such functions.

(e) Affiliate. Means (i) any Person directly or
indirectly controlling, controlled by or under common control with another
Person, (ii) any Person owning or controlling 10% or more of the outstanding
voting securities or beneficial interests of such other Person, (iii) any
officer, director, trustee or general partner of such Person, and (iv) if such
other Person is an officer, director, trustee or partner of another entity, then
the entity for which that Person acts in any such capacity. "Affiliated" means
being an Affiliate of a specified Person.

(f) Annual Report. As set forth in Section 11.8.

(g) Appraisal. The values as of the date of the
appraisal or valuation of property in its existing state or in a state to be
created, as determined by the Directors, the Advisor or by another person, who
is a member in good standing of the American Institute of Real Estate Appraisers
(M.A.I.) or who in the sole judgment of the Directors is properly qualified to
make such a determination. The Directors may in good faith rely on a previous
Appraisal made on behalf of another Person, provided (i) it meets the standards
of this definition and was made in connection with an investment in which the
Company acquires the entire or a participating interest, and (ii) it was
prepared not earlier than two years prior to the acquisition by the Company of
its interest in the property. In appraising properties, appraisers may take into
consideration each of the specific terms and conditions of a purchase, including
any leaseback or other guarantee arrangement. The Appraisal may not necessarily
represent the cash value of the property but may consider the value of the
income stream from such property plus the discounted value of the fee interest
and other terms of the purchase. Such Appraisal shall be obtained from an
independent qualified appraiser if a majority of the Independent Directors so
decides or if the transaction is with the Advisor, Directors or any of their
Affiliates. Each Appraisal shall be maintained in the Company's records for a
minimum of five years and shall be available for inspection and duplication by
any Shareholder.

(h) Articles of Incorporation. The Articles of
Incorporation of the Company, including all amendments, restatements or
modifications thereof.

(i) Average Invested Assets. The average of the
aggregate book value of the assets of the Company invested, directly or
indirectly, in equity interests in and loans secured by real estate, before
reserves for depreciation or bad debts or other similar non-cash reserves,
computed by taking the average of such values at the end of each month during
any period.

<PAGE>

(j) Bylaws. These Bylaws, including all amendments,
restatements or modifications hereof.

(k) Competitive Real Estate Commission. The real
estate or brokerage commission paid for the purchase or sale of a property which
is reasonable, customary and competitive in light of the size, type and location
of such property.

(l) Contract Price. The amount actually paid or
allocated to the purchase, development, construction or improvement of real
property exclusive of Acquisition Fees and Acquisition Expenses.

(m) Directors. As of any particular time, the
directors of the Company holding office at such time.

(n) Dividend Reinvestment Plan. The program adopted
by the Board of Directors pursuant to Section 5.1 hereof and available to
Shareholders to reinvest dividends in Shares available under the Liquidity
Matching Program.

(o) Independent Director. A Director of the Company
who is not Affiliated, directly or indirectly, with the Advisor, whether by
ownership of, ownership interest in, employment by, any material business or
professional relationship with, or serving as an officer or director of, the
Advisor, or an Affiliated business entity of the Advisor (other than as an
Independent Director of up to three other real estate investment trusts advised
by the Advisor or an Affiliate of the Advisor). An Independent Director may
perform no other services for the Company, except as a Director. Notwithstanding
anything to the contrary herein, any member of a law firm whose only material
business or professional relationship with the Company, the Advisor and their
Affiliates is as legal counsel to any of such entities shall constitute an
Independent Director (unless such person serves as a director for more than
three REITs organized by the Advisor and its Affiliates). The independence of
any Independent Director must be maintained throughout his term as Director. An
"indirect" affiliation shall be deemed to refer to circumstances in which a
member of the "immediate family" of a Director is Affiliated with the Advisor,
and a person's "immediate family" shall mean such person's spouse, parents,
children, siblings, mother and father-in-law, sons and daughters- in-law and
brothers and sisters-in-law.

(p) Initial Investment. That portion of the initial
capitalization of the Company contributed by the Sponsor or its Affiliates.

(q) Leverage. The aggregate amount of indebtedness of
the Company for money borrowed (including

<PAGE>

purchase money mortgage loans) outstanding at any time, both secured and
unsecured.

(r) Liquidity Matching Program. The program adopted
by the Board of Directors pursuant to Section 5.1 hereof under which
Shareholders may tender Shares for resale to participants in the Dividend
Reinvestment Plan.

(s) Net Assets. The total assets of the Company
(other than intangible assets) at cost before deducting depreciation or other
non-cash reserves less total liabilities, calculated at least quarterly on a
basis consistently applied.

(t) Net Income. The total revenues of the Company for
any period, less the expenses applicable to such period other than additions to
reserves for depreciation or bad debts or other similar non-cash reserves. For
purposes of calculating Operating Expenses, Net Income shall exclude any gain
from the sale of the Company's assets.

(u) Offering and Organization Expenses. Those
expenses incurred in connection with the formation and registration of the
Company and in qualifying and marketing the Shares under applicable federal and
state law, and any other expenses actually incurred and directly related to the
qualification, registration, offer and sale of the Shares, including such
expenses as (i) all marketing expenses and payments made to broker-dealers as
compensation or reimbursement for all costs of reviewing the offering, including
due diligence investigations and fees and expenses of their attorneys,
accountants and other experts; (ii) registration fees, filing fees and taxes;
(iii) the costs of printing, amending, supplementing and distributing the
registration statement and Prospectus; (iv) the costs of obtaining regulatory
clearances of, printing and distributing sales materials used in connection with
the offer and sale of the Shares; (v) the costs related to investor and
broker-dealer sales meetings concerning the offering; and (vi) accounting and
legal fees incurred in connection with any of the foregoing.

(v) Operating Expenses. All operating, general and
administrative expenses of the Company as determined under generally accepted
accounting principles (including regular compensation payable to the Advisor),
excluding, however, the following:

(i) expenses of raising capital;

(ii) interest payments;

(iii) taxes;

<PAGE>

(iv) non-cash expenditures, such as depreciation,
amortization and bad debt reserve;

(v) incentive fees paid to the Advisor, if any; and

(vi) costs related directly to asset acquisition,
operation and disposition.

(w) Organizational Documents. The Articles of
Incorporation and these Bylaws.

(x) Person. An individual, corporation, partnership,
joint venture, association, company, trust, bank or other entity, or government
and any agency and political subdivision of a government.

(y) Prospectus. Shall mean a Prospectus as that term
is defined by the Securities Act of 1933, including a preliminary Prospectus, an
offering circular as described in Rule 256 of the General Rules and Regulations
promulgated under the Securities Act of 1933 and, in the case of an intra-state
offering, any document, by whatever name known, utilized for the purpose of
offering and selling securities to the public.

(z) REIT. A real estate investment trust, as defined
in Section 856 of the Internal Revenue Code of 1986, as amended.

(aa) REIT Provisions of the Internal Revenue Code.
Part II, Subchapter M of Chapter 1, of the Internal Revenue Code of 1986, as
amended, or successor statutes, and regulations and rulings promulgated
thereunder.

(ab) Securities. Any stock, shares, voting trust
certificates, bonds, debentures, notes or other evidences of indebtedness,
secured or unsecured, convertible, subordinated or otherwise, or in general any
instruments commonly known as "securities" or any certificates of interest,
shares or participations in temporary or interim certificates for, receipts (or,
guarantees of, or warrants, options or rights to subscribe to, purchase or
acquire any of the foregoing).

(ac) Shares or Common Shares. All of the common
shares of the Company, no par value.

(ad) Shareholders. As of any particular date, all
holders of record of outstanding Common Shares at such time.

(ae) Sponsor. Any Person directly or indirectly
instrumental in organizing, wholly or in part, the Company or any Person who
will manage or participate in the management of the

<PAGE>

Company, and any Affiliate of any such Person, but not including a Person who is
an Independent Director or whose only relationship with the Company is that of
an independent property manager, whose only compensation is as such, or wholly
independent third parties such as attorneys, accountants and underwriters whose
only compensation is for professional services. No Independent Director shall be
deemed to be a Sponsor.

(af) Unimproved Real Property. Property which
has the following three characteristics: (i) an equity interest in property
which was not acquired for the purpose of producing rental or other operating
income, (ii) has no development or construction in process on such land, and
(iii) no development or construction on such land is planned in good faith to
commence within one year.

ARTICLE II
MINIMUM CAPITAL

2.1 Minimum Capital. Prior to the public offering of the
Shares, the Sponsor or Affiliates of the Sponsor purchased 10 Common Shares for
an aggregate purchase price of $100, as an Initial Investment. The Sponsor or
its Affiliates may not withdraw the Initial Investment for a period of one year
following completion of the offering.

ARTICLE III
OFFICES; FISCAL YEAR

3.1 Principal Office. The principal executive office of the
Company shall be located at 306 East Main Street, Richmond, Virginia 23219,
until otherwise established by a vote of a majority of the Board of Directors.

3.2 Other Offices. Other offices may at any time be
established by the Board of Directors at any place or places they deem
appropriate.

3.3 Fiscal Year. The fiscal year of the Company shall end on
the 31st day of December.

<PAGE>

ARTICLE IV
MEETINGS OF SHAREHOLDERS

4.1 Place of Meetings. All annual and all other meetings of
Shareholders shall be held at such place, either within or outside of the
Commonwealth of Virginia as from time to time may be fixed by the President or
by the Board of Directors.

4.2 Annual Meetings. The annual meetings of Shareholders shall
be held on such date as is fixed by the Directors; provided, however, that the
first annual meeting of Shareholders who purchase Shares in the public offering
made by the Prospectus shall be held in the year following the year in which the
Initial Closing (as defined in the Prospectus) occurs; and provided further,
that such date fixed by the Directors shall not be less than 30 days after the
Board of Directors shall have caused to be sent to the Shareholders an Annual
Report as provided in Section 11.8 of these Bylaws, but if no such date and time
is fixed by the President or the Board of Directors, the meeting for any
calendar year shall be held on the first Tuesday in May in such year, if not a
legal holiday under the laws of Virginia. If the date fixed by the Directors
falls upon a legal holiday, then any annual meeting of Shareholders shall be
held at the same time and place on the next day which is not a legal holiday. At
each annual meeting of Shareholders, only such business shall be conducted as is
proper to consider and has been brought before the meeting (i) pursuant to the
Company's notice of the meeting, (ii) by or at the direction of the Board of
Directors, or (iii) by a Shareholder who is a Shareholder of record of a class
of Shares entitled to vote on the business such Shareholder is proposing, both
at the time of the giving of the Shareholder's notice hereinafter described in
this Section 4.2 and on the record date for such annual meeting, and who
complies with the notice procedures set forth in this Section 4.2.

In order to bring before an annual meeting of Shareholders any business
which may properly be considered and which a Shareholder has not had included in
the Company's proxy statement for the meeting, a Shareholder who meets the
requirements set forth in the preceding paragraph must give the Company timely
written notice. To be timely, a Shareholder's notice must be given, either by
personal delivery to the Secretary of the Company at the principal office of the
Company, or by first class United States mail, with postage thereon prepaid,
addressed to the Secretary of the Company at the principal office of the
Company. Any such notice must be received (i) on or after February 1st and
before March 1st of the year in which the meeting will be held, if clause (ii)
is not applicable, or (ii) not less than 60 days before the date of the meeting
if the date of such meeting is earlier than May 1 or later than May 31 in such
year.

<PAGE>

Each such Shareholder's notice shall set forth as to each matter the
Shareholder proposes to bring before the annual meeting (i) the name and
address, as they appear on the Company's stock transfer books, of the
Shareholder proposing business, (ii) the class and number of Shares of stock of
the Company beneficially owned by such Shareholder, (iii) a representation that
such Shareholder is a Shareholder of record at the time of the giving of the
notice and intends to appear in person or by proxy at the meeting to present the
business specified in the notice, (iv) a brief description of the business
desired to be brought before the meeting, including the complete text of any
resolutions to be presented and the reasons for wanting to conduct such
business, and (v) any interest which the Shareholder may have in such business.

The Secretary of the Company shall deliver each Shareholder's notice
that has been timely received to the Chairman for review.

4.3 Special Meetings. Special meetings of the Shareholders may
be called at any time for any purpose or purposes whatsoever by the President,
by a majority of the Board of Directors, by a majority of Independent Directors,
by the Chairman of the Board or by one or more Shareholders holding not less
than 10% of the eligible votes. If a meeting is called by any Person or Persons
other than the Board of Directors, the Chairman of the Board or the President, a
request shall be made in writing, specifying the time of the meeting and the
general nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the Chairman of the Board, the President, or the Secretary of
the Company. The officer receiving the request shall cause notice to be promptly
given to the Shareholders entitled to vote, in accordance with the provisions of
Section 4.4.

4.4 Notice; Affidavit of Notice. Notice of meetings of the
Shareholders of the Company shall be given in writing to each Shareholder
entitled to vote thereat, either personally or by first class mail, or, if the
Company has 500 or more Shareholders, by third-class mail, or other means of
written communication, charges prepaid, addressed to the Shareholder at his
address appearing on the books of the Company or given by the Shareholder to the
Company for the purpose of notice. Notice of any such meeting of Shareholders
shall be sent to each Shareholder entitled thereto not less than 10 nor more
than 60 days before the meeting; provided, however, that within 10 business days
after receipt by the Company, in person, or by registered mail, of a written
request for a meeting by Shareholders holding not less than 10% of the
outstanding Shares entitled to vote at such meeting, the Company shall provide
written notice of such meeting to all Shareholders, and such

<PAGE>

meeting shall be held not less than 20 nor more than 60 days after the Company's
receipt of such written Shareholder request; and, provided further, that if such
notice is not given within 10 business days after receipt of the request, the
Person or Persons requesting the meeting may give the notice. Nothing contained
in this Section 4.4 shall be construed as limiting, fixing or affecting the time
when a meeting of Shareholders called by action of the Board of Directors may be
held. All notices given pursuant to this Section shall state the place, date and
hour of the meeting and, (i) in the case of special meetings, the general nature
of the business to be transacted, and no other business may be transacted, or
(ii) in the case of annual meetings, those matters which the Board of Directors,
at the time of the mailing of the notice, intends to present for action by the
Shareholders, and (iii) in the case of any meeting at which Directors are to be
elected, the names of the nominees intended at the time of the mailing of the
notice to be presented by management for election. An affidavit of the mailing
or other means of giving any notice of any Shareholders' meeting shall be
executed by the Secretary, Assistant Secretary or any transfer agent of the
Company giving the notice, and shall be filed and maintained in the minute book
of the Company.

4.5 Record Date for Shareholder Notice, Voting and Giving
Consents. For purposes of determining the Shareholders entitled to notice of any
meeting or to vote or entitled to give consent to corporate action without a
meeting, the Board of Directors may fix, in advance, a record date, which shall
not be more than 60 days nor less than 10 days before the date of any meeting
nor more than 60 days before any action without a meeting, and in this event
only Shareholders of record on the date so fixed are entitled to notice and to
vote or to give consents, as the case may be, notwithstanding any transfer of
any Shares on the books of the Company after the record date.

If the Board of Directors does not so fix a record date:

(a) The record date for determining Shareholders
entitled to notice of or to vote at a meeting of Shareholders shall be at the
close of business on the business day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the business day next
preceding the date on which the meeting is held.

(b) The record date for determining Shareholders
entitled to give consent to corporate action in writing without a meeting, (i)
when no prior action by the Board has been taken, shall be the day on which the
first written consent in given, or (ii) when prior action of the Board has been
taken, shall be at the close of business on the day on which the

<PAGE>

Board adopts the resolution relating to that action, or the 60th day before the
date of the other action, whichever is later.

4.6 Adjourned Meetings; Notice. Any Shareholders' meeting,
annual or special, whether or not a quorum is present, may be adjourned from
time to time by the vote of the majority of the Shares, the holders of which are
either present in person or represented by proxy, but in the absence of a quorum
no other business may be transacted at the meeting.

When any Shareholders' meeting, either annual or special, is
adjourned for more than 45 days or if after the adjournment a new record date is
fixed for the adjourned meeting, notice of the adjourned meeting shall be given
as in the case of a special meeting. In all other cases, it shall not be
necessary to give any notice of an adjournment or of the business to be
transacted at any adjourned meeting other than by announcement at the meeting at
which the adjournment is taken.

4.7 Voting at Meetings of Shareholders. Subject to the
provisions of the Virginia Stock Corporation Act, and subject to the right of
the Board of Directors to provide otherwise, only Persons in whose name Shares
entitled to vote standing on the stock records of the Company on the record date
shall be entitled to the notice of and to vote at the meeting, notwithstanding
any transfer of any Shares on the books of the Company after the record date.

The vote may be via voice or by ballot; provided, however,
that all elections for Directors must be by ballot upon demand made by any
Shareholder at any election and before the voting begins. Except as provided in
this Section 4.7, each outstanding Share shall be entitled to one vote on each
matter submitted to a vote of Shareholders.

4.8 Quorum. The presence in person or by proxy of a majority
of the Shares entitled to vote at any meeting shall constitute a quorum for the
transaction of business. Except as otherwise expressly provided in these Bylaws,
if a quorum exists, action on a matter, other than the election of Directors, is
approved if the votes cast favoring the action exceed the votes cast opposing
the action unless a vote of a greater number is required by the Articles of
Incorporation or by the Virginia Stock Corporation Act. Directors shall be
elected by a plurality of the votes cast by the Shares entitled to vote in the
election at a meeting at which a quorum is present. The Shareholders present at
a duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
Shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the Shares required to
constitute a quorum.

<PAGE>

4.9 Waiver of Notice or Consent of Absent Shareholders. The
transactions of any meeting of Shareholders, either annual or special, however
called and noticed, shall be as valid as though made at a meeting duly held
after regular call and notice, if a quorum is present either in person or by
proxy and if, either before or after the meeting, each of the Shareholders
entitled to vote, not present in person or by proxy, signs a written waiver of
notice or a consent to the holding of the meeting or an approval of the minutes.
All waivers, consents or approvals shall be filed with the corporate records or
made a part of the minutes of the meeting.

4.10 Action Without Meeting. Any action which may be taken at
any annual or special meeting of Shareholders may be taken without a meeting and
without action by the Board of Directors, if the action is taken by all the
Shareholders entitled to vote on the action. The action shall be evidenced by
one or more written consents describing the action taken, signed by all the
Shareholders entitled to vote on the action, and delivered to the Secretary of
the Company for inclusion in the minutes or filing with the corporate records.
Action taken under this Section 4.10 shall be effective when all consents are in
the possession of the Company, unless the consent specifies a different
effective date and states the date of execution by each Shareholder, in which
event it shall be effective according to the terms of the consent. A Shareholder
may withdraw consent only be delivering a written notice of withdrawal to the
Company prior to the time that all consents are in the possession of the
Company.

The record date for determining Shareholders entitled to take
action without a meeting is the date the first Shareholder signs the consent
described in the preceding paragraph.

Any form of written consent distributed to 10 or more
Shareholders must afford the Person whose consent is thereby solicited an
opportunity to specify a choice among approval, disapproval or abstention as to
each matter or group of related matters presented, other than elections of
Directors or officers.

4.11 Proxies. Every Person entitled to vote or execute
consents shall have the right to do so either in person or by one or more agents
authorized by a written proxy executed by such Person or his duly authorized
agent and filed with the Secretary of the Company, provided that no such proxy
shall be valid after the expiration of 11 months from the date of its execution,
unless the Person executing it specifics in the proxy the length of time for
which the proxy is to continue in force.

A proxy shall be deemed signed if the Shareholder's name is
placed on the proxy (whether by manual signature,

<PAGE>

typewriting, telegraphic transmission or otherwise) by the Shareholder or the
Shareholder's attorney in fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless revoked by
the Person executing it before the vote pursuant to that proxy by (i) a writing
delivered to the Company stating that the proxy is revoked, (ii) execution of a
subsequent proxy, (iii) attendance at the meeting and voting in person (but only
as to any items on which the Shareholder chooses to vote in person), or (iv)
transfer of the Shares represented by the proxy to a transferee who becomes a
Shareholder of record prior to the record date established for the vote. A
validly executed proxy otherwise may be revoked by written notice of the death
or incapacity of the maker of that proxy received by the Company before the vote
pursuant to that proxy is counted.

Any proxy distributed to 10 or more Shareholders must afford
the Person voting an opportunity to specify a choice among approval, disapproval
or abstention as to each matter or group of related matters, other than election
of Directors or officers.

4.12 Inspectors of Election. Before any meeting of
Shareholders, the Board of Directors may appoint any Persons, other than
nominees for office, to act as inspectors of election at the meeting or its
adjournment. If no inspectors of election are so appointed, the Chairman of the
meeting may, and on the request of any Shareholder or a Shareholder's proxy
shall, appoint inspectors of election at the meeting. The number of inspectors
shall be either one or three. If inspectors are appointed at a meeting on the
request of one or more Shareholders or proxies, the holders of a majority of
Shares or their proxies present at the meeting shall determine whether one or
three inspectors are to be appointed. If any Person appointed as inspector fails
to appear or fails or refuses to act, the Chairman of the meeting may, and upon
the request of any Shareholder or a Shareholder's proxy shall, appoint a Person
to fill that vacancy.

These inspectors shall:

(a) Determine the number of Shares outstanding
and the voting power of each, the Shares represented at the
meeting, the existence of a quorum, and the authenticity,
validity and effect of proxies;

(b) Receive votes, ballots or consents;

(d) Count and tabulate all votes or consents;

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(e) Determine when the polls shall close;

(f) Determine the result; and

(g) Do any other acts that may be proper to
conduct the election or vote with fairness to all Shareholders.

ARTICLE V
DIRECTORS

5.1 Powers. Subject to limitations contained in the Articles of
Incorporation, these Bylaws and the Virginia Stock Corporation Act relating to
action required to be authorized or approved by the Shareholders, or by the
holders of a majority of the outstanding Shares, and subject to the duties of
Directors as prescribed by these Bylaws, all corporate powers shall be exercised
by or under the authority of, and the business and affairs of the Company shall
be controlled by, the Board of Directors. The Board of Directors may delegate
the management of the day-to-day operation of the business of the Company to the
Advisor, provided that the business and affairs of the Company shall be managed
and all corporate powers shall be exercised under the ultimate direction of the
Board of Directors. The Board of Directors shall establish policies on
investments and borrowings and shall monitor the administrative procedures,
investment operations and performance of the Company and the Advisor, to assure
that such policies are carried out. In addition, and unless otherwise contained
in the Articles of Incorporation, these Bylaws or the Virginia Stock Corporation
Act, the Board of Directors has the ability to adopt, renew, modify, extend,
consolidate or cancel the Dividend Reinvestment Plan and Liquidity Matching
Program.

Each individual Director, including each Independent Director,
may engage in other business activities of the type conducted by the Company and
is not required to present to the Company any investment opportunities presented
to them even though the investment opportunities may be within the Company's
investment policies.

5.2 Number, Tenure and Qualifications. The authorized number of
Directors of the Board of Directors shall be not less than three nor more than
15 as shall be determined from time to time by resolution of the Board of
Directors.

Commencing with the 1996 Annual Meeting of Shareholders, the
Board of Directors shall be divided into three classes, denominated as Class I,
Class II and Class III, each as nearly equal in number to the other two as
possible. At the 1996 Annual Meeting of Shareholders, Directors of Class I shall
be

<PAGE>

elected to hold office for a term expiring at the 1997 Annual Meeting of
Shareholders, Directors of Class II shall be elected to hold office for a term
expiring at the 1998 Annual Meeting of Shareholders, and Directors of Class III
shall be elected to hold office for a term expiring at the 1999 Annual Meeting
of Shareholders. At each Annual Meeting of Shareholders after 1996, the
successors to the class of Directors whose terms shall then expire shall be
identified as being of the same class of Directors they succeed and shall be
elected to hold office for a term expiring at the third succeeding Annual
Meeting of Shareholders. When the number of Directors is changed, any newly
created directorships or any decrease in directorships shall be so apportioned
among the classes by the Board of Directors as to make all classes as nearly
equal in number as possible. If any such Annual Meeting of Shareholders is not
held or the Directors are not elected, the Directors may be elected at any
special meeting of Shareholders held for that purpose. Each Director shall hold
office until his death, resignation or removal or until his successor is duly
elected.

Each individual Director, including each Independent Director,
shall have at least three years of relevant experience demonstrating the
knowledge and experience required successfully to acquire and manage the type of
assets being acquired by the Company, and as set forth in Section 5.15 at least
one Independent Director shall have relevant real estate experience.
Directors need not be Shareholders.

Except as provided in Section 5.3, the Directors elected by
the holders of the Shares at a meeting of Shareholders at which a quorum is
present shall be those persons who receive the greatest number of votes even
though they do not receive a majority of the votes cast. No individual shall be
named or elected as a Director without his prior consent.

5.3 Nomination of Directors. No person shall be eligible for
election as a Director at a meeting of Shareholders unless nominated (i) by the
Board of Directors or any committee thereof or (ii) by a Shareholder who is a
Shareholder of record of a class of Shares entitled to vote for the election of
Directors, both at the time of the giving of the Shareholder's notice
hereinafter described in this Section 5.3 and on the record date for the meeting
at which the nominee(s) will be voted upon, and who complies with the notice
procedures set forth in this Section 5.3.

In order to nominate for election as Directors at a meeting of
Shareholders any persons who are not listed as nominees in the Company's proxy
statement for the meeting, a Shareholder who meets the requirements set forth in
the preceding paragraph must give the Company timely written notice. To be
timely, a Shareholder's notice must be given, either by personal

<PAGE>

delivery to the Secretary of the Company at the principal office of the Company,
or by first class United States mail, with postage thereon prepaid, addressed to
the Secretary of the Company at the principal office of the Company. Any such
notice must be received (i) on or after February 1st and before March 1st of the
year in which the meeting will be held if the meeting is to be an annual meeting
and clause (ii) is not applicable, or (ii) not less than 60 days before an
annual meeting, if the date of the applicable annual meeting is earlier than May
1 or later than May 31 in such year, or (iii) not later than the close of
business on the tenth day following the day on which notice of a special meeting
of Shareholders called for the purpose of electing Directors is first given to
Shareholders.

Each such Shareholder's notice shall set forth the following:
(i) as to the Shareholder giving the notice, (a) the name and address of such
Shareholder as they appear on the Company's stock transfer books, (b) the class
and number of Shares of the Company beneficially owned by such Shareholder, (c)
a representation that such Shareholder is a Shareholder of record at the time of
giving the notice and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice, and (d) a description of
all arrangements or understandings, if any, between such Shareholder and each
nominee and any other person or persons (naming such person or persons) pursuant
to which the nomination or nominations are to be made; and (ii) as to each
person whom the Shareholder wishes to nominate for election as a Director, (a)
the name, age, business address and residence address of such person, (b) the
principal occupation or employment of such person, (c) the class and number of
Shares of the Company which are beneficially owned by such person, and (d) all
other information that is required to be disclosed about nominees for election
as Directors in solicitations of proxies for the election of Directors under the
rules and regulations of the Securities and Exchange Commission. In addition,
each such notice shall be accompanied by the written consent of each proposed
nominee to serve as a Director if elected and such consent shall contain a
statement from the proposed nominee to the effect that the information about him
or her contained in the notice is correct.

5.4 Vacancies. Vacancies in the Board of Directors may be
filled by a majority of the remaining Directors, though less than a quorum, or
by a sole remaining Director, except that a vacancy created by the removal of a
Director by the vote or written consent of the Shareholders or by court order
may be filled only by the vote of a majority of the Shares entitled to vote
represented at a duly held meeting at which a quorum is present, or by the
written consent of holders of a majority of the outstanding Shares entitled to
vote. Each Director so

<PAGE>

elected shall hold office until his successor is elected at an annual or a
special meeting of the Shareholders.

A vacancy or vacancies in the Board of Directors shall be
deemed to exist in case of the death, resignation or removal of any Director or
if the authorized number of Directors is increased or if the Shareholders fail,
at any annual or special meeting of Shareholders at which any Director or
Directors are elected, to elect the full authorized number of Directors to be
voted for at that meeting.

Any Director may resign effective on giving written notice to
the Chairman of the Board, the President, the Secretary, or the Board of
Directors. The Shareholders may elect a Director or Directors at any time to
fill any vacancy or vacancies not filled by the Directors. Any election by
written consent to fill a vacancy shall require the consent of a majority of the
outstanding Shares entitled to vote.

If the Board of Directors accepts the resignation of a
Director tendered to take effect at a future time, the Board or the Shareholders
shall have the power to elect a successor to take office when the resignation is
to become effective; provided, however, that any remaining Independent Directors
shall nominate replacements for vacancies among the Independent Director
positions.

No reduction of the authorized number of Directors shall have
the effect of removing any Director prior to the expiration of his term of
office.

If the number of vacancies occurring during a year is
sufficiently large that a majority of the Directors in office has not been
elected by the Shareholders, the holders of 5% or more of the outstanding Shares
entitled to vote may call a special meeting of Shareholders to elect the entire
Board of Directors.

5.5 Place of Meeting. Regular meetings of the Board of
Directors shall be held at any place within or without the Commonwealth of
Virginia which has been designated from time to time by the Chairman of the
Board or by written consent of all members of the Board. In the absence of a
designation, regular meetings shall be held at the principal office of the
Company. Special meetings of the Board may be held either at a place so
designated or at the principal office. Members of the Board may participate in a
meeting through use of conference telephone or similar communication equipment,
so long as all members participating in such meeting can hear one another.
Participation in a meeting by telephone or similar communication equipment shall
constitute presence in person at the meeting.

<PAGE>

5.6 Organization Meeting. Immediately following each annual
meeting of Shareholders, the Board of Directors shall hold a regular meeting for
the purpose of organization, election of officers and the transaction of other
business. Notice of that meeting is hereby dispensed with.

5.7 Special Meetings. Special meetings of the Board of
Directors for any purpose or purposes shall be called at any time by the
Chairman of the Board or the President or Vice President or the Secretary or any
two Directors.

Written notice of the time and place of special meetings shall
be delivered personally to the Directors or sent to each Director by mail or by
other form of written communication, charges prepaid, addressed to him at his
address as it appears upon the records of the Company or, if it is not so shown
or is not readily ascertainable, at the place in which the meetings of Directors
are regularly held. In case the notice is mailed, it shall be deposited in the
United States mail in the place in which the principal office of the Company is
located at least four days prior to the time of the meeting. In case the notice
is delivered personally, telegraphed or communicated by electronic means, it
shall be delivered, deposited with the telegraph company or communicated at
least 48 hours prior to the time of the meeting. Mailing, telegraphing or
delivery, as above provided, shall be due legal and personal notice to the
Director.

5.8 Adjournment. A majority of the Directors present, whether
or not a quorum is present, may adjourn any Directors' meeting to another time
and place.

5.9 Notice of Adjournment. If a meeting is adjourned for more
than 24 hours, notice of any adjournment to another time or place shall be given
prior to the time of the adjourned meeting to the Directors who were not present
at the time of adjournment.

5.10 Entry of Notice. Whenever any Director has been absent
from any special meeting of the Board of Directors, an entry in the minutes to
the effect that notice has been duly given shall be conclusive and
incontrovertible evidence that due notice of the special meeting was given to
that Director as required by law and the Bylaws of the Company.

5.11 Waiver of Notice. The transactions of any meeting of the
Board of Directors, however called and noticed, or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice if a
quorum is present and if, either before or after the meeting, each of the
Directors not present signs a written waiver of notice of or consent to holding
the meeting or an approval of the minutes. All waivers, consents

<PAGE>

or approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.

5.12 Quorum. A majority of the authorized number of Directors
shall be necessary to constitute a quorum for the transaction of business,
except to adjourn as provided below or to fill a vacancy. Every act or decision
done or made by a majority of the Directors at a meeting duly held at which a
quorum is present shall be regarded as an act of the Board of Directors unless a
greater number be required by law or by the Articles of Incorporation or these
Bylaws. However, a meeting at which a quorum is initially present may continue
to transact business notwithstanding the withdrawal of Directors, if any action
taken is approved by at least a majority of the required quorum for the meeting.

5.13 Fees and Compensation. The Directors shall be entitled to
receive such reasonable compensation for their services as Directors as the
Directors may fix or determine from time to time by resolution of the Board of
Directors; provided, however, that Directors and officers of the Company who are
Affiliated with the Advisor shall not receive compensation from the Company for
their services as Directors or officers of the Company. The Directors, either
directly or indirectly, shall also be entitled to receive remuneration for
services rendered to the Company in any other capacity. Those services may
include, without limitation, services as an officer of the Company, legal,
accounting or other professional services, or services as a broker, transfer
agent or underwriter, whether performed by a Director or any Person Affiliated
with a Director.

5.14 Action Without Meeting. Any action required or permitted
to be taken by the Board of Directors under the Virginia Stock Corporation Act
and these Bylaws may be taken without a meeting if all members of the Board
individually or collectively consent in writing to such action. The consent or
consents shall be filed with the minutes of the meetings of the Board. Any
certificate or other document filed under the provision of the Virginia Stock
Corporation Act which relates to action so taken shall state that the action was
taken by unanimous written consent of the Board of Directors without a meeting.

5.15 Independent Directors. At all times after Initial Closing
(as defined in the Prospectus), a majority of the Directors of the Company, and
a majority of the members of any Board committee, will be Independent Directors,
except during the 60 days following the departure of an Independent Director.
Successor Independent Directors will be nominated by any remaining Independent
Directors. At least one of the Independent Directors shall have had three years
of actual direct experience in acquiring or managing the type of real estate to
be acquired

<PAGE>

by the Company for his or her account or as an agent. The Directors shall, in
good faith, determine for all purposes which persons constitute or would
constitute Independent Directors and which persons do not or would not
constitute Independent Directors. Notwithstanding any other provision of these
Bylaws, the Independent Directors, in addition to their other duties, to the
extent that they may legally do so, shall:

(a) Monitor the relationship of the Company with the
Advisor. In this regard, the Independent Directors as a group, in addition to
all Directors as a group, will monitor the Advisor's performance of the advisory
contract and will determine at least annually that the Advisor's compensation is
reasonable in relation to the nature and quality of services performed. This
determination will be based on (i) the size of the advisory fee in relationship
to the size, composition and profitability of the invested assets; (ii) the
investment opportunities generated by the Advisor; (iii) advisory fees paid to
other advisors by other real estate investment trusts and to advisors performing
similar services by investors other than real estate investment trusts; (iv)
additional revenues realized by the Advisor and its Affiliates through their
relationship with the Company, including loan administration, underwriting or
broker commissions, servicing, engineering, inspection and other fees, whether
paid by the Company or by others with whom the Company does business; (v) the
quality and extent of service and advice furnished by the Advisor; (vi) the
performance of the investment portfolio of the Company, including income,
conservation or appreciation of capital, frequency of problem investments and
competence in dealing with distress situations; (vii) quality of the portfolio
of the Company in relationship to the investments generated by the Advisor for
its own account; and (viii) all other factors the Independent Directors may deem
relevant. The Independent Directors will also determine that the Advisor's
compensation is within the limits prescribed by Sections 8.5, 8.6 and 8.7.

The Independent Directors shall approve all transactions
between the Company and the Advisor or any Affiliates of the Advisor (other than
as provided in Section 10.1 herein). The material terms and circumstances of all
such approved transactions shall be fully disclosed in the Annual Report of the
Company as required by Section 11.8, and the Independent Directors shall examine
and comment in the Annual Report on the fairness of such transactions.

(b) Review at least annually the Company's investment
policies to determine that they remain in the best interests of the
Shareholders. The findings of the Independent Directors shall be set forth in
the minutes of meetings of the Board of Directors. Such investment policies may
be altered from time to time by the Board of Directors with the consent of a
majority of the Independent Directors and without approval of the

<PAGE>

Shareholders upon a determination that such a change is in the best interests of
the Company and the Shareholders.

(c) Take reasonable steps to ensure that the Annual
Report is sent to Shareholders and that the annual meeting is conducted pursuant
to Article IV.

(d) Determine at least annually that the total fees
and expenses of the Company are reasonable in light of its Net Assets and Net
Income, the investment experience of the Company, and the fees and expenses of
comparable advisors in real estate. In this regard, the Independent Directors
will have the fiduciary responsibility of limiting Operating Expenses to amounts
that do not exceed the limitation set forth in Section 8.5, unless they conclude
that a higher level of expense is justified for such a year based on unusual and
nonrecurring factors which they deem sufficient.

Within 60 days after the end of any fiscal quarter of the
Company for which Operating Expenses (for the 12 months then ended) exceed the
limitations set forth in Section 8.5, there shall be sent to the Shareholders a
written disclosure of such fact together with an explanation of the factors the
Independent Directors considered in arriving at the conclusion that the higher
Operating Expenses were justified. In the event the Independent Directors
determine that the excess expenses are not justified, the Advisor shall
reimburse the Company at the time and in the manner set forth in the Company's
agreement with the Advisor.

(e) The Independent Directors shall review at least
quarterly the aggregate borrowings, secured and unsecured, of the Company to
determine that the relation of such borrowings to Net Assets does not exceed the
limitations set forth in Sections 8.8 and 9.1(k) and (l) of these Bylaws. Any
excess in borrowings over the limitations set forth in Sections 9.1(k) and (l)
shall be approved by a majority of the Independent Directors and disclosed to
Shareholders in the next quarterly report of the Company, along with a
justification of the excess.

(f) For all purposes, a transaction which is subject
to approval by the Independent Directors shall be approved if the Independent
Directors voting to approve the transaction in any vote of the Directors or the
Independent Directors constitute an absolute majority of all Independent
Directors serving at such time.

5.16 Removal of Director for Cause. The Board of Directors may
declare vacant the office of a Director who has been declared of unsound mind by
an order of court, or who has pled guilty or nolo contendere to or been
convicted of a felony involving moral turpitude. In addition, throughout the
term of

<PAGE>

the existence of the Company, any Director may be removed for cause by: (i) a
vote or written consent of all Directors other than the Director who is to be
removed, or (ii) the vote of the holders of a majority of the outstanding Shares
of the Company at a meeting of the Shareholders called for such purpose. The
notice for such special meeting of Shareholders shall state that the purpose, or
one of the purposes, of the meeting is to vote on the removal of a Director.
"For cause" shall mean, for purposes of this Section, a willful violation of the
Articles of Incorporation or these Bylaws, or gross negligence in the
performance of a Director's duties.

5.17 Removal of Director Without Cause. Any or all Directors
may be removed without cause upon the affirmative vote of a majority of the
outstanding Shares entitled to vote. A Director may be removed by the
Shareholders only at a meeting called for the purpose of removing him and the
meeting notice must state that the purpose, or one of the purposes of the
meeting, is removal of the Director. Any reduction of the authorized number of
Directors shall not operate to remove any Director prior to the expiration such
Director's term of office.

5.18 Committees. The Board of Directors may, by resolution
adopted by a majority of the authorized number of Directors, designate one or
more committees, each consisting of three or more Directors, to serve at the
pleasure of the Board of Directors. The Board of Directors may designate one or
more Directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. The appointment of members or alternate
members of a committee requires the vote of a majority of the authorized number
of Directors. Any such committee, to the extent provided in the resolution of
the Board of Directors, shall have all the authority of the Board of Directors
in the management of the business and affairs of the Company, except that no
committee shall have authority to take any action with respect to (i) the
approval of any action requiring Shareholders' approval or approval of the
outstanding Shares, (ii) the filling of vacancies of the Board or any committee,
(iii) the fixing of compensation of Directors for serving on the Board or a
committee, (iv) the adoption, amendment or repeal of these Bylaws, (v) the
amendment or repeal of any resolution of the Board that by its express terms is
not so amendable or repealable, (vi) a distribution to Shareholders, except at a
rate or in a periodic amount or within a price range determined by the Board,
and (vii) the appointment of other committees of the Board or the members
thereof. A majority of the Directors on all committees must be Independent
Directors and only Independent Directors may serve as alternate members for
Independent Directors on committees. However, notwithstanding anything to the
contrary in these Bylaws, the Board of Directors may appoint a committee to
administer any stock incentive plan adopted by the Company, which committee may

<PAGE>

have as few as two (2) Directors, and each of whose Directors may be either an
Independent Director or not an Independent Director, except as otherwise
provided in the applicable stock incentive plan.

5.19 Fiduciary Relationship. The Directors of the Company have
a fiduciary relationship to the Shareholders as provided by applicable Virginia
law, which includes a fiduciary duty to the Shareholders to supervise the
relationship of the Company with the Advisor. A majority of the Independent
Directors must approve matters which these Bylaws state are subject to the
approval of the Independent Directors.

ARTICLE VI
OFFICERS

6.1 Officers. The officers of the Company shall be as
determined by the Board of Directors and shall include a President and
Secretary, and may include a Chairman of the Board, Chief Financial Officer
(Treasurer) and such other officers with such titles and duties as may be
appointed in accordance with the provisions of Section 6.3 of this Article. Any
number of offices may be held by the same person.

6.2 Election. The officers of the Company, except such
officers as may be appointed in accordance with the provisions of Section 6.3 or
Section 6.5 of this Article, shall be chosen annually by the Board of Directors
to serve at the pleasure of the Board of Directors, and each shall hold his
office until he shall resign or shall be removed or otherwise disqualified to
serve or his successor shall be elected and qualified. All officers serve at the
will of the Board of Directors and nothing in these Bylaws shall give any
officer any expectation or vesting of employment.

6.3 Subordinate Officers. The Board of Directors may appoint
other officers as the business of the Company may require, each of whom shall
hold office for the period, have the authority and perform the duties as are
provided in these Bylaws or as the Board of Directors may from time to time
determine.

6.4 Removal and Resignation. Any officer may be removed,
either with or without cause, by a majority of the Directors at the time in
office, at any regular or special meeting of the Board or, except in the case of
an officer chosen by the Board of Directors, by any officer upon whom such power
of removal may be conferred by the Board of Directors.

Any officer may resign at any time by giving written notice to
the Board of Directors or to the Chairman, the President or to the Secretary of
the Company. A resignation

<PAGE>

shall take effect at the date of the receipt of the notice or any later time
specified in the notice; and, unless otherwise specified, the acceptance of the
resignation shall not be necessary to make it effective.

6.5 Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular appointments to such office.

6.6 Chairman of the Board. The Chairman of the Board shall be
the Chief Executive Officer of the Company, and, if present, shall preside at
all meetings of the Board of Directors and Shareholders and exercise and perform
all other powers and duties as may from time to time be assigned to him by the
Board of Directors or prescribed by these Bylaws.

6.7 President. The President shall, subject to the Board of
Directors and the supervisory powers of the Chairman of the Board, have general
supervision, direction and control of the business of the Company. He shall
preside at meetings of the Shareholders or at meetings of the Board of Directors
if the Chairman is absent. He shall have general powers and duties of
management, together with any other powers and duties as may be prescribed by
the Board of Directors.

6.8 Vice Presidents. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Board of
Directors or, if not ranked, the Vice President designated by the Board of
Directors, shall perform all the duties of the President and, when so acting,
shall have all the powers of and be subject to all the restrictions upon, the
President. The Vice Presidents shall have any other powers and shall perform
other duties as from time to time may be prescribed for them respectively by the
Board of Directors or these Bylaws.

6.9 Secretary. The Secretary shall keep, or cause to be kept,
a book of minutes at the principal office, or any other place as the Board of
Directors may order, of all meetings of Directors or Shareholders, with the time
and place of holding, whether regular or special and, if special, how
authorized, the notice thereof given, the names of those present at Directors'
meetings, the number of Shares present or represented at Shareholders' meetings
and the proceedings of meetings.

The Secretary shall keep, or cause to be kept, at the
principal office or at the office of the Company's transfer agent, a Share
register or a duplicate Share register showing the names of the Shareholders and
their addresses, the number and classes of Shares held by each (whether in
certificate or "unissued certificate" form), the number and the date of

<PAGE>

certificates issues, if any, and the number and date of cancellation of every
certificate surrendered for cancellation.

The Secretary shall give, or cause to be given, notice of all
the meetings of the Shareholders and of the Board of Directors required by these
Bylaws or by law to be given, shall keep the seal of the Company (if any) in
safe custody and shall have such other powers and shall perform such other
duties as may be prescribed by the Board of Directors or these Bylaws.

6.10 Assistant Secretaries. In the absence or disability of
the Secretary, the Assistant Secretaries in order of their rank as fixed by the
Board of Directors or, if not ranked, the Assistant Secretary designated by the
Board of Directors, shall perform all the duties of the Secretary and, when so
acting, shall have all the powers of and be subject to all the restrictions
upon, the Secretary. The Assistant Secretaries shall have any other powers and
shall perform other duties as from time to time may be prescribed for them by
the Board of Directors or these Bylaws.

6.11 Chief Financial Officer. The Chief Financial Officer may
also be designated by the alternate title of "Treasurer." The Chief Financial
Officer shall have custody of all moneys and securities of the Company and shall
keep regular books of account. Such officer shall disburse the funds of the
Company in payment of the just demands against the Company, or as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the Board of Directors from time to time as may be required of
such officer, an account of all transactions as Chief Financial Officer and of
the financial condition of the Company. Such officer shall perform all duties
incident to such officer or which are properly required by the President or by
the Board of Directors.

6.12 Assistant Chief Financial Officers. The Assistant
Treasurer or the Assistant Treasurers, in the order of their seniority, shall,
in the absence or disability of the Chief Financial Officer, or in the event of
such officer's refusal to act, perform the duties and exercise the powers of the
Chief Financial Officer, and shall have such powers and discharge such duties as
may be assigned from time to time by the President or by the Board of Directors.

ARTICLE VII
SHARES OF STOCK

7.1 Registered Ownership, Share Certificates and Shares in
"Unissued Certificate" Form. Certificates shall be issued and transferred in
accordance with these Bylaws, but need not be issued if the Shareholder elects
to have his Shares

<PAGE>

maintained in "unissued certificate" form. The Persons in whose names
certificates of Shares in "unissued certificate" form are registered on the
records of the Company shall be deemed the absolute owners of the Shares
represented thereby for all purposes of the Company; but nothing in these Bylaws
shall be deemed to preclude the Directors or officers, or their agents or
representatives, from inquiring as to the actual ownership of Shares. The Shares
are non-assessable. Until a transfer is duly effected on the records of the
Company, the Directors shall not be affected by any notice of transfer, either
actual or constructive. The receipt by the Person in whose name any Shares are
registered on the records of the Company or of the duly authorized agent of that
Person, or if the Shares are so registered in the names of more than one Person,
the receipt by any one of these Persons, or by the duly authorized agent of that
Person, shall be a sufficient discharge for all dividends or distributions
payable or deliverable in respect of the Shares and from all liability to see
the application of those funds. The certificates of Shares of the capital stock
of the Company, if any, shall be in a form consistent with the Articles of
Incorporation and the laws of the Commonwealth of Virginia as shall be approved
by the Board of Directors. All certificates shall be signed by (i) the Chairman
of the Board or the President or a Vice President and (ii) the Treasurer or the
Secretary or any Assistant Secretary, certifying the number of Shares and the
class or series of Shares owned by the Shareholder. Any or all of the signatures
on the certificate may be facsimile signatures.

7.2 Transfer of Shares. Subject to the provisions of law and
of Sections 7.3, 7.4 and 7.5, Shares shall be transferable on the records of the
Company only by the record holder or by his agent thereunto duly authorized in
writing upon delivery to the Directors or a transfer agent of the certificate or
certificates (unless held in "unissued certificate" form, in which case an
executed stock power duly guaranteed must be delivered), properly endorsed or
accompanied by duly executed instruments of transfer and accompanied by all
necessary documentary stamps together with evidence of the genuineness of each
endorsement, execution or authorization and of other matters as may reasonably
be required by the Directors or transfer agent. Upon delivery, the transfer
shall be recorded in the records of the Company and a new certificate, if
requested, for the Shares so transferred shall be issued to the transferee and
in case of a transfer of only a part of the Shares represented by any
certificate or account, a new certificate or statement of account for the
balance shall be issued to the transferor. Any Person becoming entitled to any
Shares in consequence of the death of a Shareholder or otherwise by operation of
law shall be recorded as the holder of such Shares and shall receive a new
certificate, if requested, but only upon delivery to the Directors or a transfer
agent of instruments and other evidence required by the Directors or the
transfer agent to demonstrate that entitlement, the

<PAGE>

existing certificate (or appropriate instrument of transfer if held in "unissued
certificate" form) for the Shares and any necessary releases from applicable
governmental authorities. Nothing in these Bylaws shall impose upon the
Directors or a transfer agent any duty or limit their rights to inquire into
adverse claims.

7.3 Disclosures by Holders of Shares; Redemption of Shares.
The Holders of the Shares shall upon demand disclose to the Directors in writing
such information with respect to direct and indirect ownership of their Shares
as the Directors deem necessary to comply with the provisions of the Internal
Revenue Code of 1986, as amended, and applicable regulations, as amended, or to
comply with the requirements of any taxing authority. If the Directors shall at
any time and in good faith be of the opinion that direct or indirect ownership
of the Shares of the Company has or may become concentrated to an extent which
would prevent the Company from qualifying as a REIT under the REIT provisions of
the Internal Revenue Code, the Directors shall have the power by lot or other
means deemed equitable by them to prevent the transfer and/or call for
redemption of a number of the Shares sufficient in the opinion of the Directors
to maintain or bring the direct or indirect ownership of the Shares into
conformity with the requirements for a REIT. The redemption price shall be (i)
the last reported sale price of the Shares on the last business day prior to the
redemption date on the principal national securities exchange on which the
Shares are listed or admitted to trading, or (ii) if the Shares are not so
listed or admitted to trading, the average of the highest bid and lowest asked
prices on such last business day as reported by the NASDAQ, National Quotation
Bureau or a similar organization selected by the Company for that purpose, or
(iii) otherwise, as determined in good faith by the Directors. The holders of
any Shares so called for redemption shall be entitled to payment of such
redemption price within 21 days of the redemption date. From and after the date
fixed for redemption, the holders of such Shares shall cease to be entitled to
dividends, distributions, voting rights and other benefits with respect to the
Shares, excepting only the right to payment of the redemption price fixed as
described above. The redemption date with respect to any Shareholders shall be
the date specified by the Directors which is not less than one week after the
date postmarked on the disclosure demand made by the Directors under this
Section 7.3, or, if such date is not a business day, on the next business day
thereafter. For the purpose of this Section 7.3, the term "individual" shall be
construed as provided in Section 542(a)(2) of the Internal Revenue Code of 1986,
as amended, or any successor provisions and "ownership" of Shares shall be
determined as provided in Section 544 of the Internal Revenue Code of 1986, as
amended, or any successor provision.

<PAGE>

7.4 Right to Refuse to Transfer the Shares. Whenever it is
deemed by them to be reasonably necessary to protect the tax status of the
Company, the Directors may require statements or affidavits from any holder of
the Shares or proposed transferee of the Shares or warrants to purchase such
Shares, setting forth the number of Shares (and warrants to purchase such
Shares) already owned by him and any related Person specified in the form
prescribed by the Directors for that purpose. If, in the opinion of the
Directors, which shall be conclusive upon any proposed transferor or proposed
transferee of Shares, or warrants to purchase such Shares, any proposed transfer
or exercise would jeopardize the status of the Company as a REIT under the
Internal Revenue Code of 1986, as amended, the Directors may refuse to permit
the transfer or exercise. Any attempted transfer or exercise as to which the
Directors have refused their permission shall be void and of no effect to
transfer any legal or beneficial interest in the Shares. All contracts for the
sale or other transfer or exercise of the Shares or warrants to purchase such
Shares, shall be subject to this provision.

7.5 Limitation on Acquisition of Shares.

(a)(i) Subject to the provisions of Section 7.5(b),
no Person may own in excess of 9.8% of the total outstanding Shares, and no
Shares shall be transferred (or issued) to any Person if, following the
transfer, the Person's direct or indirect ownership of Shares would exceed this
limit. For the purpose of this Section 7.5, ownership of Shares shall be
computed in accordance with Internal Revenue Code Sections 856(h), 542(a)(2) and
544. The term "transfer" shall include any sale, transfer, gift, assignment,
devise or other disposition of Shares, whether voluntary or involuntary, whether
of record, constructive or beneficial, and whether by operation of law or
otherwise.

(ii) In the event any Person acquires Excess Shares
(as defined below) in contravention of the limitation on acquisition of Shares
set forth in Section 7.5(a)(i), such Excess Shares may be redeemed by the
Company at the discretion of the Board of Directors. The redemption price for
redeemed Excess Shares shall be the lesser of (i) the price paid for the Excess
Shares (or if there is no purchase price, at a price to be determined by the
Board of Directors, in its sole discretion, but no lower than the lowest market
price for the Common Shares during the year prior to the date the Company
exercises its purchase option) and (ii) the fair market value of such Excess
Shares, which shall be the fair market value of the Shares as determined in good
faith by the Board of Directors or, if the Shares are listed on a national
securities exchange, the closing price (average of closing bid and asked prices
if the Shares are quoted on the NASDAQ National Market System) on the last
business day prior to the redemption date. To redeem Excess Shares, the

<PAGE>

Directors shall give a notice of redemption to the holder of such Excess Shares
not less than one week before the date fixed by the Directors for redemption.
The holder of such Excess Shares may sell such Excess Shares before the date
fixed for redemption. The redemption right granted to the Company by this
Section 7.5(a)(ii) shall be in addition to any other redemption right granted by
these Bylaws or by law.

(b) If Shares are purportedly acquired by any Person
in violation of this Section 7.5, the acquisition shall be valid only to the
extent it does not result in a violation of this Section 7.5, and the
acquisition shall be null and void with respect to the excess ("Excess Shares")
unless the Person acquiring the Excess Shares provides the Independent Directors
with evidence so that the Independent Directors are satisfied that the Company's
qualification as a REIT will not be jeopardized. Excess Shares shall be deemed
to have been acquired and to be held on behalf of the Company, and, as the
equivalent of treasury shares for that purpose, shall not be considered to be
outstanding for quorum or voting purposes, and shall not be entitled to receive
dividends, interest or any other distribution. Holders of Excess Shares are not
entitled to voting rights, dividends or distributions. If, after the purported
transfer or other event resulting in an exchange of Common Shares for Excess
Shares and before discovery by the Company of such exchange, (i) voting rights
are purportedly exercised with respect to Common Shares which have become Excess
Shares, or (ii) dividends or distributions are paid with respect to Common
Shares that were exchanged for Excess Shares, then (A) any votes attributable to
such Excess Shares will be deemed rescinded and void ab initio, and (B) such
dividends or distributions are to be repaid to the Company upon demand.

(c) This Section 7.5 shall apply to the acquisition
of Shares only after conclusion of the Company's initial public offering of its
Shares, and a Shareholder will not be required to dispose of Excess Shares
acquired prior to the conclusion of that offering. So long as any Person holds
more than 9.8% of the outstanding Shares, a lower percentage limit may be
established by the Directors to the extent necessary to assure, to the extent
possible, that no five persons own in the aggregate more than 50% of the
outstanding Shares.

(d) The Company shall, if deemed necessary or
desirable to implement the provisions of any portion of this Article VII,
include on the face or back of each Share certificate issued by the Company an
appropriate legend referring the holder of the certificate to the restrictions
contained in any portion of this Article VII and stating that the complete text
of Article VII, or these Bylaws, is on file with the Secretary of the Company at
the Company's offices, and/or will be furnished without charge by the Company to
any Shareholder.

<PAGE>

(e) Subject in all respects to Section 11.16 hereof,
nothing in these Bylaws (other than such Section 11.16) shall limit the ability
of the Directors to impose, or to seek judicial or other imposition of
additional restrictions if deemed necessary or advisable to protect the Company
and the interests of its Shareholders by preservation of the Company's status as
a qualified REIT.

(f) If any provision of this Section 7.5 is
determined to be invalid, in whole or in part, by any federal or state court
having jurisdiction, the validity of the remaining provisions shall not be
affected and the provision shall be affected only to the extent necessary to
comply with the determination of the court.

(g) For purposes of this Section 7.5 only, "Shares"
means the Common Shares of the Company as defined in these Bylaws, and includes
any Shares issuable upon conversion, surrender or exercise of any other
Securities of the Company.

(h) The Advisor and its Affiliates shall not purchase
in the offering made by the Company's Prospectus dated December 31, 1992 more
than 2.5% of the total number of Shares sold in such offering. This limitation
shall not apply to any Shares issued pursuant to a stock incentive plan duly
adopted by the Company.

(i) The Company shall have the right to issue
fractional Shares.

7.6 Lost or Destroyed Certificates. The holder of any Shares
shall immediately notify the Company of any loss or destruction of the Share
certificates, and the Company may issue a new certificate in the place of any
certificate alleged to have been lost or destroyed upon approval of the Board of
Directors. The Board may, in its discretion, as a condition to authorizing the
issue of such new certificate, require the owner of the lost or destroyed
certificate, or his legal representative, to make proof satisfactory to the
Board of Directors of the loss or destruction and to give the Company a bond or
other security, in such amount and with such surety or sureties, as the Board of
Directors may determine as indemnity against any claim that may be made against
the Company on account of the certificate alleged to have been lost or
destroyed.

7.7 Dividend Record Date and Closing Stock Books. The Board of
Directors may fix a date in the future as a record date for the determination of
the Shareholders entitled to receive any dividend or distribution or any
allotment of rights or to exercise rights with respect to any change, conversion
or exchange of Shares. The record date so fixed shall not be more than 60 days
or less than 10 days prior to the date of the event

<PAGE>

for the purposes of which it is fixed. When a record date is so fixed, only
Shareholders of record on that day shall be entitled to receive the dividend,
distribution or allotment of rights or to exercise the rights, as the case may
be, notwithstanding any transfer of any Shares on the books of the Company after
the record date.

7.8 Dividend Reinvestment Plan. The Company's
Dividend Reinvestment Plan shall provide that:

(a) all material information regarding the
distribution to the Shareholder and the effect of reinvesting such distribution,
including the tax consequences thereof, shall be provided to the Shareholder at
least annually, and

(b) each Shareholder participating in the Dividend
Reinvestment Plan shall have a reasonable opportunity to withdraw from the
Dividend Reinvestment Plan at least annually after receipt of the information
required by Section 7.8(a) of these Bylaws.

ARTICLE VIII
EMPLOYMENT OF ADVISOR, LIMITATION
ON EXPENSES AND LEVERAGE

8.1 Employment of Advisor. The Directors have absolute and
exclusive control of the management of the Company, its property and the
disposition thereof. The Directors are responsible for the general policies of
the Company and for general supervision of the business of the Company conducted
by all officers, agents, employees, advisors, managers or independent
contractors of the Company as may be necessary to insure that the business
conforms to the provisions of these Bylaws. However, the Directors shall not be
required personally to conduct all the business of the Company, and subject to
their ultimate responsibility as stated above, the Directors shall have the
power to appoint, employ or contract with any Person (including one or more of
themselves or any corporation, partnership, or company in which one or more of
them may be directors, officers, stockholders, partners or directors) as the
Directors may deem necessary or proper for the transaction of the business of
the Company. The Directors may employ or contract with such a Person and the
Directors may grant or delegate authority to any such Person as the Directors
may in their sole discretion deem necessary or desirable without regard to
whether that authority is normally granted or delegated by Directors.

The Directors (subject to the provisions of this Article VIII)
shall have the power to determine the terms and compensation of the Advisor or
any other Person whom they may employ or with whom they may contract; provided,
however, that

<PAGE>

any determination to employ or contract with any Director or any Person of which
a Director is an Affiliate, shall be valid only if made, approved or ratified by
the Independent Directors. The Directors may exercise broad discretion in
allowing the Advisor to administer and regulate the operations of the Company,
to act as agent for the Company, to execute documents on behalf of the Company,
and to make executive decisions which conform to general policies and general
principals previously established by the Directors. The Directors must evaluate
the performance of the Advisor and the criteria used in such evaluation shall be
reflected in the minutes of the meeting.

Notwithstanding anything to the contrary in the advisory contract or
these Bylaws, the Advisor shall not be required to, and shall not, advise the
Company as to any investments in securities, except when, and to the extent
that, the Advisor and the Company specifically agree (i) that such advice is
desirable, and (ii) that such advice can be rendered consistently with
applicable legal requirements, including any applicable provisions of relevant
"investment advisor" laws. The Directors and officers of the Company shall be
responsible for decisions as to investments in securities, except insofar as the
Directors elect to consult with (i) the Advisor in compliance with the preceding
sentence, or (ii) any other Person in compliance with any applicable laws.

8.2 Term. The Directors shall not enter into any advisory
contract with the Advisor unless the contract has a term of no more than one
year and provides for annual renewal or extension thereafter, except that the
initial contract may have a term ending one year after Final Closing, where
"Final Closing" is the last closing of the sale of Shares offered by the
Prospectus. The Directors shall not enter into a similar contract with any
Person of which a Director is an Affiliate unless the contract provides for
renewal or extension by the Independent Directors. The advisory contract with
the Advisor may be terminated by the Advisor upon 60 days' written notice or by
the Company without cause by action of the Independent Directors of the Company
upon 60 days' written notice, in a manner to be set forth in the advisory
contract with the Advisor. The advisory contract shall also require the Advisor
to cooperate with the Company to provide an orderly management transition after
any termination. The Directors shall determine that any successor Advisor (i) is
qualified to perform advisory functions for the Company and (ii) can justify the
compensation provided for in the advisory contract.

8.3 Other Activities of Advisor. The Advisor shall not be
required to administer the investment activities of the Company as its sole and
exclusive function and may have other business interests and may engage in other
activities similar or in addition to those relating to the Company, including
the

<PAGE>

performance of services and advice to other Persons (including other real estate
investment companies) and the management of other investments (including
investments of the Advisor and its Affiliates). The Directors may request the
Advisor to engage in other activities which complement the Company's investment,
and the Advisor may receive compensation or commissions for those activities
from the Company or other Persons.

The Advisor shall be required to use its best efforts to
present a continuing and suitable investment program to the Company which is
consistent with the investment policies and objectives of the Company, but
neither the Advisor nor any Affiliate of the Advisor shall be obligated
generally to present any particular investment opportunity to the Company even
if the opportunity is of a character which, if presented to the Company, could
be taken by the Company, and, subject to the forgoing, shall be protected in
taking for its own account or recommending to others the particular investment
opportunity.

Upon request of any Director, the Advisor and any Person who controls,
is controlled by, or is under common control with the Advisor, shall from time
to time promptly furnish the Directors with information on a confidential basis
as to any investments within the Company's investment policies made by the
Advisor or the other Person for its own account.

8.4 Limitation on Offering and Organization Expenses and
Acquisition Fees and Expenses. The Offering and Organization Expenses paid by
the Company in connection with the Company's formation or the offering of its
Shares or other Securities shall in each case be reasonable and in no event
exceed an amount equal to 15% of the gross proceeds raised in any such offering.

The total of all Acquisition Fees and Acquisition Expenses
paid by the Company in connection with the purchase of real property by the
Company shall be reasonable and shall in no event exceed an amount equal to 6%
of the Contract Price for such real property, or, in the case of a mortgage
loan, 6% of the funds advanced, unless a majority of the Directors (including a
majority of the Independent Directors) not otherwise interested in the
transaction approve the transaction as being commercially competitive, fair and
reasonable to the Company.

Any Offering and Organization Expenses or Acquisition Fees and
Acquisition Expenses incurred by the Company in excess of the permitted limits
set forth in this Section 8.4 shall be payable by the Advisor immediately upon
demand of the Company.

8.5 Limitation on Operating Expenses. The total
Operating Expenses of the Company, including fees paid to the Advisor, shall not
exceed in any year the greater of 2% of the total Average Invested Assets of the
Company or 25% of the Net

<PAGE>

Income of the Company for such year. Subject to the determination referred to in
Section 5.14(d), the Advisor shall reimburse the Company at least annually for
the amount by which Operating Expenses of the Company exceed the above
limitations. All figures used in the foregoing computation shall be determined
in accordance with generally accepted accounting principals applied in a
consistent basis. The compensation of the Advisor shall be computed by an
independent certified public accountant at the end of each year and there shall
be made any necessary adjustments between the compensation so computed and that
already paid.

8.6 Limitation on Real Estate Brokerage Commissions on
Purchase and Resale of Property. If the Advisor, any Director or any Affiliate
thereof provides a substantial amount of the services in the effort to purchase
or sell the real property of the Company, then such Person may receive a real
estate or brokerage commission which is reasonable, customary and competitive in
light of the size, type and location of such property; provided that such
commission shall not exceed an amount equal to 2% of the contracted for purchase
or sales price for such property. In the event such real estate or brokerage
commissions are also payable to any other party pursuant to such transactions,
the Advisor, any Director or any Affiliate may receive up to one-half of the
brokerage commission paid but in no event to exceed an amount equal to 2% of the
contracted for purchase or sales price for such property. In addition, the
amount paid when added to the sums paid to unaffiliated parties in such a
capacity shall not exceed the lesser of the Competitive Real Estate Commission
or an amount equal to 6% of the contracted for sales price. The Company may
enter into an agreement (with any term approved by the Directors) pursuant to
which the Advisor, any Director or any Affiliate thereof will provide the
services referred to in this Section with respect to all of the Company's
properties, and will receive compensation therefor.

8.7 Limitation on Incentive Fees. An incentive fee based upon
an interest in the gain from the sale, financing or refinancing of real property
of the Company, for which full consideration is not paid in cash or property of
equivalent value, shall be allowed provided the amount or percentage of such
interest is reasonable. Such an interest in gain from the sale of real property
of the Company shall be considered reasonable if it does not exceed 15% of the
balance of such gain remaining after payment to Shareholders, in the aggregate,
of an amount equal to 100% of the adjusted price per Share (defined to be the
original issue price of the Common Shares reduced by prior distributions of gain
from the sale of the Company's assets), plus an amount equal to a 6% per annum
cumulative (noncompounded) return on the adjusted price per Share. In the case
of multiple Advisors, Advisors and their Affiliates shall be allowed incentive
fees provided such fees are distributed by a

<PAGE>

proportional method reasonably designed to reflect the value added to such
assets by each respective Advisor or Affiliate. Distribution of incentive fees
to Advisors and their Affiliates in proportion to the length of time served as
Advisor while such property was held by the Company or in ratio to the fair
market value of the asset at the time of the Advisor's termination, and the fair
market value of the asset upon its disposition by the Company shall be
considered reasonable methods by which to apportion incentive fees.

8.8 Limitations on Leverage. All borrowings by the Company
must be approved by the Directors. The aggregate borrowings of the Company,
secured and unsecured, shall be reasonable in relation to the Net Assets of the
Company and shall be reviewed by the Directors at least quarterly.

ARTICLE IX
RESTRICTIONS ON INVESTMENTS AND ACTIVITIES

9.1 Restrictions. Notwithstanding any other provision
of these Bylaws, the Company shall not:

(a) invest more than 10% of the total assets of the
Company in Unimproved Real Property or mortgage loans on Unimproved Real
Property;

(b) invest in commodities or commodity future
contracts or effect short sales of commodities or securities, except when done
solely for hedging purposes;

(c) invest in or make mortgage loans on property
unless the Company shall obtain a mortgagee's or owner's title insurance policy
or commitment as to the priority of the mortgage or the condition of the title;

(d) invest in contracts for the sale of real estate
unless they are recordable in the chain of title;

(e) make or invest in mortgage loans, including
construction loans, on any one property if the aggregate amount of all mortgage
loans outstanding on the property (at the time the Company makes or invests in
its mortgage loan), including the loans of the Company, would exceed 85% of the
appraised value of the property;

(f) make or invest in junior mortgage loans (provided
that this and the preceding limitation shall not apply to the Company taking
back secured debt in connection with the sale of any property);

(g) issue securities that are redeemable;

<PAGE>

(h) issue debt securities unless the historical debt
service coverage (in the most recently completed fiscal year) as adjusted for
known changes is sufficient to properly service the higher level of debt or
unless the cash flow of the Company (for the last fiscal year) excluding
extraordinary, nonrecurring items, is sufficient to cover the debt service on
all debt securities to be outstanding;

(i) invest in the equity securities of any non-
governmental issuer, including other REITs or limited partnerships for a period
in excess of 18 months;

(j) issue equity securities on a deferred payment
basis or other similar arrangement;

(k) incur any indebtedness, secured or unsecured,
which would result in an aggregate amount of indebtedness in excess of 100% of
Net Assets (before subtracting any liabilities), unless any excess borrowing
over such 100% level shall be approved by a majority of the Independent
Directors and disclosed to the Shareholders in the next quarterly report of the
Company, along with justification for such excess;

(l) allow aggregate borrowings of the Company to
exceed 50% of the Adjusted Net Asset Value (before subtracting any liabilities)
of the Company, unless any excess borrowing over such 50% level shall be
approved by a majority of the Independent Directors and disclosed to the
Shareholders in the next quarterly report of the Company, along with
justification for such excess;

(m) invest in single-family residential homes,
condominiums, secondary homes, resort or recreation properties, nursing homes,
gaming facilities, mobile home parks, any other commercial or industrial
properties (other than shopping centers), or undeveloped land except in
connection with the acquisition of an existing apartment complex or shopping
center;

(n) engage in any short sale, underwrite or
distribute, as an agent, securities issued by others, or engage in trading, as
compared with investment activities; and

(o) acquire Securities in any company holding
investments or engaging in activities prohibited by the Internal Revenue Code of
1986, as amended, Virginia law or this Section 9.1.

The foregoing limitations shall not limit the manner in which
any required investment by the Advisor or its Affiliates in the Company is made
or preclude the Company from structuring an investment in real property to
minimize Shareholder liability and facilitate the investment policies of the
Company under Article IX.

<PAGE>

ARTICLE X
TRANSACTIONS WITH AFFILIATES; CERTAIN DUTIES AND LIABILITIES
OF DIRECTORS, SHAREHOLDERS, ADVISOR AND AFFILIATES

10.1 Transactions with Affiliates.

(a) Neither the Advisor nor any Affiliate of the Advisor shall
sell, transfer or lend any assets or property to the Company or purchase, borrow
or otherwise acquire any assets or property from the Company, directly or
indirectly, unless the transaction comes within one of the following exceptions:

(i) the transaction consists of the acquisition of
property or assets at the formation of the Company or shortly
thereafter, and is fully disclosed in the Prospectus; or

(ii) the transaction is a borrowing of money by the
Company on terms not less favorable than those then prevailing
for comparable arms-length borrowings; or

(iii) the transaction consists of the acquisition by
the Company of federally insured or guaranteed mortgages at
prices not exceeding the currently quoted prices at which the
Federal National Mortgage Association is purchasing comparable
mortgages; or

(iv) the transaction consists of the acquisition of
other mortgages if an Appraisal is obtained concerning the
underlying property and on terms not less favorable to the
Company than similar transactions involving unaffiliated
parties; or

(v) the transaction consists of the acquisition by
the Company of other property at prices not exceeding the fair
value thereof as determined by an independent Appraisal.

All of the above transactions and all other transactions (other than
the entering into, and the initial term under, the Advisory Agreement, the
Property Acquisition/Disposition Agreement, and the Property Management
Agreement for each property acquired by the Company, each of which agreement is
specifically disclosed in the Prospectus), whether such transaction involves the
transfer of property, the lending of money or the rendition of any services, in
which any such Persons have any direct or indirect interest shall be permitted
only if:

(i) such transaction has been approved by the
affirmative vote of the majority of the Independent Directors;
and

<PAGE>

(ii) if the transaction involves the purchase or
acquisition of property, the purchase or acquisition from any
such Person is on terms not less favorable to the Company than
those then prevailing for arms-length transactions concerning
comparable property (based upon a determination of a majority
of the Directors, including a majority of the Independent
Directors); and

(iii) each such transaction is in all respects on
such terms at the time of the transaction and under the
circumstances then prevailing, fair and reasonable to the
Shareholders of the Company and, in the case of a purchase or
acquisition of property, at a price to the Company no greater
than the cost of the asset to such Persons (based upon a
determination of a majority of the Directors, including a
majority of the Independent Directors) or, if the price to the
Company is in excess of such cost, then substantial
justification for such excess must exist and such excess is
not unreasonable (based upon a determination of a majority of
the Directors, including a majority of the Independent
Directors).

(b) Neither the Advisor nor any Affiliate of the
Advisor shall invest in joint ventures with the Company, unless (i) such
transaction has been approved by the affirmative vote of a majority of the
Independent Directors; (ii) the transaction is on terms not less favorable to
the Company than those then prevailing for comparable arms-length transactions
(based upon a determination of a majority of the Directors, including a majority
of the Independent Directors); and (iii) each such transaction is in all
respects on such terms at the time of the transaction and under the
circumstances then prevailing, fair and reasonable to the Shareholders of the
Company and on substantially the same terms and conditions as those received by
other joint venturers (based upon a determination of a majority of the
Directors, including a majority of the Independent Directors).

10.2 Restriction of Duties and Liabilities. The duties and
liabilities of Shareholders, Directors and officers shall in no event be greater
than the duties and liabilities of shareholders, directors and officers of a
Virginia corporation. The Shareholders, Directors and officers shall in no event
have any greater duties or liabilities than those imposed by applicable law as
shall be in effect from time to time. However, in no event shall the duties and
liabilities of Shareholders, Directors and officers be inconsistent with the
standards contained in the Articles of Incorporation.

10.3 Persons Dealing with Directors or Officers. Any
act of the Directors or officers purporting to be done in their

<PAGE>

capacity as such shall, as to any Persons dealing in good faith with the
Directors or officers, be conclusively deemed to be within the purposes of this
Company and within the powers of the Directors and officers.

The Directors may authorize any officer or officers or agent
or agents to enter into any contract or execute any instrument in the name and
on behalf of the Company and/or Directors.

No Person dealing in good faith with the Directors or any of
them or with the authorized officers, employees, agents or representatives of
the Company, shall be bound to see to the application of any funds or property
passing into their hands or control. The receipt of the Directors, or any of
them, or of authorized officers, employees, agents, or representatives of the
Company, for moneys or other considerations, shall be binding upon the Company.

10.4 Reliance. The Directors and officers may consult with
counsel and the advice or opinion of the counsel shall be full and complete
personal protection to all of the Directors and officers in respect of any
action taken or suffered by them in good faith and in reliance on and in
accordance with such advice or opinion. In discharging their duties, Directors
and officers, when acting in good faith, may rely upon financial statements of
the Company represented to them to be correct by the Chairman or the officer of
the Company having charge of its books of account, or stated in a written report
by an independent certified public accountant fairly to present the financial
position of the Company. The Directors may rely, and shall be personally
protected in acting upon any instrument or other document believed by them to be
genuine.

10.5 Income Tax Status. Without limitation of any rights of
indemnification or non-liability of the Directors, the Directors by these Bylaws
make no commitment or representation that the Company will qualify for the
dividends paid deduction permitted by the Internal Revenue Code of 1986, as
amended, and the Rules and Regulations pertaining to real estate investment
trusts under the Internal Revenue Code of 1986, as amended, and any such failure
to qualify shall not render the Directors liable to the Shareholders or to any
other Person or in any manner operate to annul the Company.

ARTICLE XI
MISCELLANEOUS

11.1 Competing Programs. Nothing in these Bylaws
shall be deemed to prohibit any Affiliate of the Company from dealing, or
otherwise engaging in business with, Persons

<PAGE>

transacting business with the Company or from providing services relating to the
purchase, sale, management, development or operation of real property and
receiving compensation therefor, not involving any rebate, reciprocal
arrangement or other transaction which would have the effect of circumventing
any restrictions set forth herein relating to the dealings between the Company
and its Affiliates. The Company shall not have any right, by virtue of these
Bylaws, in or to such other ventures or activities or to the income or proceeds
derived therefrom, and the pursuit of such ventures, even if competitive with
the business of the Company, shall not be deemed wrongful or improper. No
Affiliate of the Company shall be obligated to present any particular investment
opportunity to the Company, even if such opportunity is of a character which, if
presented to the Company, could be taken by the Company; provided, however, that
until substantially all the net proceeds of the offering of the Shares have been
invested or committed to investment, the Sponsor shall be obligated to present
to the Company any investment opportunity which is of an amount and character
which, if presented to the Company, would be a suitable investment for the
Company. To the extent necessary, the Sponsor shall seek to allocate investment
opportunities between the Company and other entities based upon differences in
investment policies and objectives, the make-up of the investment portfolio of
each entity, the amount of cash available to each entity for investment
financing, the estimated income tax effects of the purchase on each entity, and
the policies of each relating to leverage. Subject to the limitations in this
Section, it will be within the discretion of the Sponsor to allocate the
investment opportunities as it deems advisable. The Sponsor shall attempt to
resolve any other conflicts of interests between the Company and others by
exercising the good faith required of fiduciaries.

11.2 Corporate Seal. The Company shall have a
corporate seal in the form of a circle containing the name of the Company and
such other details as may be required by the Board of Directors.

11.3 Inspection of Bylaws. The Company shall keep at
its principal office in this Commonwealth for the transaction of business, a
list of the names and addresses of the Company's Shareholders and the original
or a copy of the Bylaws, as amended, certified by the Secretary, which shall be
open to inspection by Shareholders at any reasonable time during office hours.

11.4 Inspection of Corporate Records. Shareholders of the
Company, or any holders of a voting trust certificate, shall have the right to
inspect the accounting books and records of the Company, and the minutes of
proceedings of the Shareholders and the Board and committees of the Board as
provided by the Virginia Stock Corporation Act.

<PAGE>

11.5 Checks, Drafts, Etc. All checks, drafts or other orders
for payment of money, notes or other evidences of indebtedness, issued in the
name of or payable to the Company, shall be signed or endorsed by the Person or
Persons and in the manner as from time to time shall be determined by resolution
of the Board of Directors.

11.6 Contracts, Etc., How Executed. The Board of Directors,
except as provided elsewhere in these Bylaws, may authorize any officer or
officers or agent or agents to enter into any contract or execute any instrument
in the name of and on behalf of the Company. That authority may be general or
confined to specific instances. Unless so authorized by the Board of Directors
or as otherwise provided in these Bylaws, no officer, agent or employee shall
have any power or authority to bind the Company by any contract or engagement or
to pledge its credit to render it liable for any purpose or to any amount.

11.7 Representation of Shares of Other Corporations. The
Chairman or the President or, in the event of their absence or inability to
serve, any Vice President and the Secretary or Assistant Secretary of this
Company, are authorized to vote, represent and exercise, on behalf of the
Company, all rights incidental to any and all shares of any other company
standing in the name of the Company. The authority granted to such officers to
vote or represent on behalf of the Company any and all shares held by the
Company in any other company may be exercised by any authorized Person in person
or by proxy or power of attorney duly executed by the officers.

11.8 Annual Report. The Board of Directors of the company
shall cause to be sent to the Shareholders, not later than 120 days after the
close of the fiscal or calendar year, and not less than 30 days before the date
of the Company's annual meeting of Shareholders as provided in Section 4.2 of
these Bylaws, an Annual Report in the form deemed appropriate by the Board of
Directors, including without limitation, any explanation of excess expenses as
set forth in Sections 5.14 and 8.5. The reports shall also disclose the ratio of
the cost of raising capital to the capital raised during the year and the
aggregate amount of the advisory fees and other fees paid during the year to the
Advisor and its Affiliates, including fees or charges paid to the Advisor and
Affiliates by a third party on behalf of the Company. The Annual Report also
shall include as required by Section 5.14 full disclosure of all material terms,
factors and circumstances surrounding any and all transactions involving the
Company and the Directors, Advisor and/or Affiliates thereof occurring during
the year, and the Independent Directors shall examine and comment in the report
as to the fairness of any such transactions. The Annual Report shall include a
statement of assets and liabilities and a statement of income and expense of the
Company prepared in accordance with generally accepted

<PAGE>

accounting principles. The financial statements shall be accompanied by the
report of an independent certified public accountant. A manually signed copy of
the accountant's report shall be filed with the Directors.

11.9 Quarterly Reports. At least quarterly, the Directors
shall send interim reports to the Shareholders having the form and content as
the Directors deem proper. The quarterly reports shall disclose (i) the ratio of
the costs of raising capital during the quarter to the capital raised, and (ii)
the aggregate amount of the advisory fees and the fees paid during the quarter
to the Advisor and its Affiliates, including fees or charges paid to the Advisor
and its Affiliates by third parties on behalf of the Company. The quarterly
report shall also disclose any excess in borrowings over the level specified in
Section 8.8, along with a justification for such excess.

11.10 Other Reports. The Directors shall furnish the
Shareholders at least annually with a statement in writing advising as to the
source of dividends or distributions so distributed. If the source has not been
determined, the communication shall so state and the statement as to the source
shall be sent to the Shareholders not later than 60 days after the close of the
fiscal year in which the distribution was made.

11.11 Provisions of the Company in Conflict with Law or
Regulation.

(a) The provisions of these Bylaws are severable, and
if the Directors shall determine, with the advice of counsel, that any one or
more of these provisions (the "Conflicting Provisions") are in conflict with the
REIT Provisions of the Internal Revenue Code, or with other applicable laws and
regulations, the Conflicting Provisions shall be deemed never to have
constituted a part of these Bylaws, and the Directors shall be able to amend or
revise the Bylaws to the extent necessary to bring the provisions of these
Bylaws into conformity with the REIT Provisions of the Internal Revenue Code, or
any other applicable law or regulation; however, this determination by the
Directors shall not affect or impair any of the remaining provisions of these
Bylaws or render invalid or improper any action taken or omitted (including but
not limited to the election of Directors) prior to the determination. A
certification in recordable form signed by a majority of the Directors setting
forth any such determination and reciting that it was duly adopted by the
Directors, or a copy of these Bylaws, with the Conflicting Provisions removed
pursuant to the determination, in recordable form, signed by a majority of the
Directors, shall be conclusive evidence of such determination when logged in the
records of the Company. The Directors shall not be liable for failure to make
any determination under this Section 11.11.

<PAGE>

(b) If any provisions of these Bylaws shall be held
invalid or unenforceable, the invalidity or unenforceability shall attach only
to that provision and shall not in any manner affect or render invalid or
unenforceable any other provision, and these Bylaws shall be carried out as if
the invalid or unenforceable provision were not present.

11.12 Voluntary Dissolution. The Company may elect to wind up
and dissolve by the vote of Shareholders entitled to exercise a majority of the
voting power of the Company.

11.13 Distributions. The payment of distributions on Shares
shall be at the discretion of the Directors, including a majority of the
Independent Directors, and shall depend upon the earnings, cash flow and general
financial condition of the Company, and such other facts as the Directors deem
appropriate.

11.14 Shareholder Liability. The holders of the Company's
Shares shall not be personally liable on account of any obligation of the
Company.

11.15 Return of Offering Proceeds. The Directors shall have
the right and power, at any time, to return to Shareholders offering proceeds to
the extent required by applicable law, including to the extent necessary to
avoid characterization of the Company as an "investment company."

11.16 Certain New York Stock Exchange Requirements. Nothing
contained in these Articles shall impair the settlement of transactions entered
into through the facilities of the New York Stock Exchange, Inc.

ARTICLE XII
AMENDMENTS TO BYLAWS

12.1 Amendments. These Bylaws may be amended or repealed by
the vote of Shareholders entitled to exercise a majority of the voting power of
the Company; provided, however, that any amendment to these Bylaws or any
provision hereof which would affect any rights with respect to any outstanding
Common Shares or other Securities, or diminish or eliminate any voting rights
pertaining thereto, may not be effected unless approved by the vote of the
holders of two-thirds of the outstanding securities of the class of Securities
affected. The Board of Directors may propose any such amendment to the
Shareholders, but the Board of Directors may not amend the Bylaws or any
portion, except to the extent expressly provided in Section 11.11.

EXHIBIT 5

April 17, 1997

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,

/s/ McGuire, Woods, Battle & Boothe, L.L.P.

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 Amendment No. 2 to the Registration
Statement (Form S-3 No. 333-23693) 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 reports dated
January 24, 1997, with respect to the financial statements of Cornerstone Realty
Income Trust, Inc. incorporated by reference in its Annual Report (Form 10-K)
for the year ended December 31, 1996 and the related financial statement
schedule included therein, filed with the Securities and Exchange Commission.

Ernst & Young, LLP

Richmond, Virginia
April 16, 1997

Exhibit 23.4

L.P. MARTIN & COMPANY, P.C.
4132 INNSLAKE DRIVE
GLEN ALLEN, VIRGINIA 23060
PHONE: 804-346-2626
FAX: 804-346-9311

Consent of Independent Auditors
- -------------------------------

The Board of Directors
Cornerstone Realty Income Trust, Inc.
Richmond, Virginia

We hereby consent to the incorporation by reference of the following reports
prepared by us in a Registration Statement on Form S-3 (File No. 333-23693) to
be filed with the Securities and Exchange Commission by Cornerstone Realty
Income Trust, Inc.:

(1) Our report dated March 7, 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 Franklin Towers Apartments for the
twelve-month period ended December 31, 1996, and (2) our report dated March 24,
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 Westchase Apartments for the twelve-month period ended December 31,
1996.

Richmond, Virginia /s/ L.P. Martin & Company, P.C.
April 17, 1997