CORNERSTONE REALTY INCOME TRUST INC
424B3, 2000-02-29
REAL ESTATE INVESTMENT TRUSTS
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                                                      FILED UNDER RULE 424(B)(3)
                                                REGISTRATION STATEMENT 333-94895


                      CORNERSTONE REALTY INCOME TRUST, INC.



                                   PROSPECTUS


                              185,887 COMMON SHARES



         The selling  securityholder  named in this  Prospectus  may offer up to
185,887 common  shares.  The purchase price of any shares offered by the selling
securityholder  will be the market  price of a common  share at that time unless
otherwise indicated in an accompanying prospectus supplement. Cornerstone Realty
Income Trust,  Inc. ("We") will not receive any proceeds from the sale of any of
the   securities   offered  by  the   selling   securityholder.   See   "Selling
Securityholders" at page 25.

         SEE "RISK  FACTORS"  BEGINNING  ON PAGE 6 FOR A  DISCUSSION  OF CERTAIN
FACTORS THAT YOU SHOULD  CONSIDER  BEFORE YOU INVEST IN THE COMMON  SHARES BEING
SOLD WITH THIS PROSPECTUS.

         Our common shares are listed on the New York Stock  Exchange  under the
symbol  "TCR." On February 24, 2000,  the last reported sale price of our common
shares was $9.25 per share.

         The  selling  securityholder  and any  agents  or  broker-dealers  that
participate with the selling securityholder in the distribution of common shares
may be deemed to be  "underwriters"  under the Securities Act of 1933. See "Plan
of Distribution" beginning on page 26.

         THE SECURITIES AND EXCHANGE  COMMISSION HAS NOT APPROVED OR DISAPPROVED
OF THESE  SECURITIES,  OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.
NOR HAS ANY  STATE  SECURITIES  COMMISSION  APPROVED  OR  DISAPPROVED  OF  THESE
SECURITIES,  OR  DETERMINED IF THIS  PROSPECTUS  IS TRUTHFUL OR COMPLETE.  IT IS
ILLEGAL FOR ANY PERSON TO TELL YOU OTHERWISE.






                       PROSPECTUS DATED FEBRUARY 24, 2000


<PAGE>



         NEITHER WE NOR THE SELLING SECURITYHOLDER HAVE AUTHORIZED ANY PERSON TO
MAKE A STATEMENT  THAT DIFFERS FROM THIS  PROSPECTUS.  IF ANY PERSON DOES MAKE A
STATEMENT  THAT  DIFFERS FROM THIS  PROSPECTUS,  YOU SHOULD NOT RELY ON IT. THIS
PROSPECTUS  IS NOT AN OFFER TO SELL,  NOR IS IT SEEKING  AN OFFER TO BUY,  THESE
SECURITIES  IN  ANY  STATE  WHERE  THE  OFFER  OR  SALE  IS NOT  PERMITTED.  THE
INFORMATION IN THIS  PROSPECTUS IS COMPLETE AND ACCURATE AS OF ITS DATE, BUT THE
INFORMATION MAY CHANGE AFTER THAT DATE.

                              AVAILABLE INFORMATION

         Cornerstone Realty Income Trust, Inc. (the "Company") is subject to the
information requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and in accordance therewith files annual, quarterly and current
reports, proxy statements and other information with the Securities and Exchange
Commission (the  "Commission").  Such reports,  proxy statements and information
may be inspected and copied,  at prescribed  rates, at the Public Reference Room
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 25049. Information
may be obtained on the  operation  of the Public  Reference  Room by calling the
Commission  at  1-800-SEC-0330.   Such  reports,   proxy  statements  and  other
information,  when  available,  also may be accessed  through the Internet  site
maintained by the Commission  (http://www.sec.gov).  In addition,  the Company's
common shares, no par value, are listed on the New York Stock Exchange ("NYSE"),
and such  material can also be inspected  and copied at the offices of the NYSE,
20 Broad Street, New York, New York 10005.

         The Company has filed with the Commission a  registration  statement on
Form S-3 (the  "Registration  Statement")  under the  Securities Act of 1933, as
amended  (the  "Securities  Act"),  with  respect to the  securities  registered
hereby. This prospectus, which constitutes a part of the Registration Statement,
does not contain all of the information set forth in the Registration  Statement
and in the exhibits and schedules thereto.  For further information with respect
to the  Company  and  the  common  shares,  reference  is  hereby  made  to such
Registration Statement,  exhibits and schedules.  The Registration Statement may
be inspected  without  charge at, or copies  obtained upon payment of prescribed
fees  from,  the  Commission.  Any  statements  contained  herein  concerning  a
provision of any document are not necessarily  complete,  and, in each instance,
reference  is made to the  copy of such  document  filed  as an  exhibit  to the
Registration  Statement  or  otherwise  filed  with the  Commission.  Each  such
statement is qualified in its entirety by such reference.

                                      -2-

<PAGE>




                 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

         The Company hereby  incorporates  by reference  into this  registration
statement the following documents which have been filed with the Commission:

         (a) the Company's  Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (including Amendment No. 1 thereto filed on Form 10-K/A);

         (b) the following reports filed with the Commission pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"),  which  include all reports  filed since the end of the fiscal year ended
December 31, 1998, including:

     o    Current  Report on Form 8-K,  filed  January 29,  1998,  relating to a
          property acquisition.

     o    Current  Report  on Form  8-K/A,  filed  March  30,  1998,  containing
          financial statements relating to a property acquisition.

     o    Current  Report on Form 8-K,  filed  June 12,  1998,  relating  to two
          property  acquisitions and containing financial statements relating to
          the two property acquisitions.

     o    Current  Report  on Form  8-K,  filed  June 17,  1998,  relating  to a
          property acquisition.

     o    Current  Report  on Form  8-K,  filed  July 17,  1998,  relating  to a
          property acquisition.

     o    Current  Report on Form  8-K/A,  filed  August  13,  1998,  containing
          financial statements relating to a property acquisition.

     o    Current  Report on Form 8-K,  filed  August 26,  1998,  relating  to a
          property acquisition.

     o    Current  Report on Form 8-K/A,  filed  September 14, 1998,  containing
          financial statements relating to a property acquisition.

     o    Current  Report on Form 8-K,  filed  December 28, 1998,  relating to a
          property  acquisition and containing  financial statements relating to
          the property acquisition.

     o    Quarterly Report on Form 10-Q for the period ended March 31, 1999.



                                      -3-
<PAGE>

     o    Current  Report on Form 8-K,  filed  April 5,  1999,  relating  to the
          agreement  for the  merger of Apple  Residential  Income  Trust into a
          subsidiary of the Company.

     o    Current Report on Form 8-K,  filed April 9, 1999,  relating to certain
          property acquisitions.

     o    Current  Report on Form 8-K,  filed  August 6, 1999,  relating  to the
          merger of Apple  Residential  Income Trust,  Inc. into a subsidiary of
          the Company.

     o    Current  Report on Form 8-K,  filed August 12,  1999,  relating to the
          amendment of certain loan documents.

     o    Quarterly Report on Form 10-Q for the period ended June 30, 1999.

     o    Current  Report on Form 8-K,  filed October 13, 1999,  relating to the
          Company's  announcement of a common share  repurchase  program and the
          closing of a $73.5 million secured fixed-rate borrowing.

     o    Current  Report  on Form  8-K,  filed  November  3,  1999,  containing
          additional  information on the Company's  closing of its $73.5 million
          secured borrowing.

     o    Quarterly Report on Form 10-Q for the period ended September 30, 1999.

     o    Current Report on Form 8-K, filed January 18, 2000, containing certain
          pro forma financial statements.

         (c)  all  documents  subsequently  filed  by the  Company  pursuant  to
Sections 13(a),  13(c), 14 and 15(d) of the Exchange Act, prior to the filing of
a  post-effective  amendment which indicates that all securities  offered hereby
have been sold or which  deregisters all such securities then remaining  unsold,
shall be deemed to be incorporated by reference in this  Registration  Statement
and to be part hereof from the respective dates of filing of such documents.

         The Company will furnish without charge upon written or oral request to
each  person  to whom a copy of this  Prospectus  is  delivered,  including  any
beneficial  owner,  a  copy  of  any  or  all  of  the  documents   specifically
incorporated  herein by reference (not including the exhibits to such documents,
unless  such  exhibits  are  specifically  incorporated  by  reference  in  such
documents).  Requests should be made to:  Cornerstone Realty Income Trust, Inc.,
Investor  Relations,  306  East  Main  Street,  Richmond,  Virginia  23219.  The
Company's telephone number is (804) 643-1761.


                                      -4-
<PAGE>

                                   THE COMPANY

         Unless the context  otherwise  requires,  the term "Company" shall mean
Cornerstone Realty Income Trust, Inc., and those entities owned or controlled by
Cornerstone Realty Income Trust, Inc.

         The  Company  is  a  self-administered  and  self-managed  real  estate
investment  trust ("REIT") that began  operations in 1993. At December 31, 1999,
the Company  owned or had an ownership  interest in 87  multifamily  communities
with 20,965 apartment units (collectively, the "Properties"). The Properties are
located in 20 markets in North  Carolina,  Texas,  Virginia,  Georgia  and South
Carolina.

         The Company was formed in Virginia  in 1992.  The  Company's  executive
offices are located at 306 East Main Street,  Richmond,  Virginia 23219, and its
telephone number is (804) 643-1761. The Company maintains six regional offices.


                                      -5-
<PAGE>

                                  RISK FACTORS

         Before you invest in our securities, you should be aware that there are
various risks,  including those described below.  You should consider  carefully
these  risk  factors,  together  with all  other  information  included  in this
prospectus, before you decide to purchase our securities.

         Some of the information in this prospectus may contain  forward-looking
statements.  Such  statements  can be identified  by the use of  forward-looking
terminology  such  as  "may,"  "will,"   "expect,"   "anticipate,"   "estimate,"
"continue" or other similar words. These statements discuss future expectations,
contain  projections of results of operations or of financial condition or state
other  "forward-looking"  information.  When  considering  such  forward-looking
statements,  you  should  keep in mind the risk  factors  and  other  cautionary
statements in this prospectus.  The risk factors noted in this section and other
factors  noted  throughout  this  prospectus  could cause our actual  results to
differ materially from those contained in any forward-looking statement

         In  addition  to the  risks  normally  associated  with  investment  in
apartment  communities,  investment  in our Company  may  involve the  following
risks:

o    The availability of attractive investment opportunities may fluctuate as we
     face competition from other companies with similar objectives.

o    There  can be no  assurance  that we  will  continue  to  grow at the  rate
     experienced  to date,  and there can be no assurance we will have access to
     suitable equity or debt financing necessary for our operations and growth.

o    We are dependent on our executive officers.  While we believe that we could
     find  replacements for them if necessary,  the loss of their services could
     have an adverse effect on us.  Furthermore,  Glade M. Knight,  our chairman
     and chief executive officer, is involved in other ventures that compete for
     his time.

o    Our current  unsecured line of credit bears interest at a variable rate. We
     are therefore  subject to the risks  associated  with market  interest rate
     increases.

o    The  limitations  on common share  ownership in our bylaws,  the  staggered
     terms for the board of directors,  and the provisions governing "Affiliated
     Transactions"  in the  Virginia  Stock  Corporation  Act may each  have the
     effect of  deterring  the  acquisition  of, or a change of control  in, our
     company.

o    We  are  not  aware  of  any  material  adverse  environmental  conditions,
     liabilities  or  compliance   concerns   affecting  any  of  our  apartment
     communities.  Nonetheless,  we may, under various federal,  state and local
     environmental  laws,  be  liable  or  may  incur  unexpected  costs  if any
     hazardous  or  toxic   substances  are  discovered  on,  under  or  in  our
     properties.



                                      -6-
<PAGE>

o    The market price of the common shares will largely depend on factors beyond
     our control,  including  interest  rates,  conditions  in the financial and
     stock  markets,  the general state of the economy,  and  perceptions  about
     future economic, political and other developments.


                                      -7-
<PAGE>

                   DESCRIPTION OF CAPITAL STOCK OF THE COMPANY

COMMON SHARES

         The Company has 100,000,000  authorized common shares, no par value, of
which  38,712,112  were issued and  outstanding  as of December 31,  1999.  Each
common share is fully paid and nonassessable upon payment therefor and issuance.

         Distribution  Rights.  The  holders of common  shares are  entitled  to
receive such distributions as are declared by our Board of Directors.

         Voting  Rights.  Except as described  below under "Series A Convertible
Preferred  Shares--Voting Rights," common shares will have the sole voting power
to elect  directors.  Each  common  share is entitled to one vote on all matters
submitted to a vote of common shareholders, including the election of directors.
There is no cumulative voting. Currently, the Board of Directors is divided into
three  classes,  as nearly equal in size as possible.  The terms of one class of
directors expire each year.

         Liquidation Rights. Upon any dissolution,  liquidation or winding up of
the Company,  the holders of common  shares are entitled to receive pro rata all
of the Company's  assets and funds remaining after payment of, or provision for,
creditors and after provision for any preferred shares which are superior to the
common shares.

         Preemptive Rights. Holders of common shares have no preemptive right to
purchase or subscribe for any shares of capital stock of the Company.

         Repurchase of Common Shares and Restrictions on Transfer. In order that
we may meet certain  requirements  under the Internal Revenue Code applicable to
real estate  investment  trusts,  the Company's  bylaws prohibit any person from
acquiring or holding,  directly or  indirectly,  ownership of a number of common
shares in excess of 9.8% of all the  outstanding  common  shares.  Common shares
owned by a person in excess of such  amounts  are  referred  to in the bylaws as
"Excess  Shares." For this purpose the term "Ownership" is defined in accordance
with certain ownership rules of the Internal Revenue Code.  Accordingly,  common
shares owned or deemed to be owned by a person who  individually  owns less than
9.8% of the common shares outstanding nevertheless may be Excess Shares.

         Holders of Excess Shares are not entitled to voting  rights,  dividends
or  distributions  with respect to the Excess  Shares.  If, after the  purported
transfer or other  event  resulting  in an exchange of common  shares for Excess
Shares and before  discovery  by  Cornerstone  of such  exchange,  dividends  or
distributions  are paid with respect to common  shares that were  exchanged  for
Excess  Shares,  then  such  dividends  or  distributions  are to be  repaid  to
Cornerstone upon demand.

         The bylaws also  provide that in the event any person  acquires  Excess
Shares,  such Excess Shares may be redeemed by us at the discretion of the Board
of  Directors.  Except as set forth  below,  the  redemption  price for redeemed
Excess Shares will be the lesser of (i) the price paid for the Excess Shares (or
if no notice of such purchase price is given, at


                                      -8-
<PAGE>

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  Cornerstone  exercises its purchase option) and (ii) the fair
market value of such Excess  Shares,  which will be the fair market value of the
common  shares as  determined in good faith by the Board of Directors or, if the
common shares are listed on a national  securities  exchange,  the closing price
(average of closing bid and asked prices if the common  shares are quoted on the
NASDAQ  National Market System) on the last business day prior to the redemption
date.  To redeem  Excess  Shares,  the Board of Directors  must give a notice of
redemption  to the holder of the  Excess  Shares not less than one week prior to
the date fixed by the Board of  Directors  for  redemption.  The holder may sell
such Excess  Shares  before the date fixed for  redemption.  If he does not, the
redemption  price for such  Excess  Shares will be paid on the  redemption  date
fixed by the Board of Directors and included in such notice.

         Under the bylaws,  any acquisition of common shares of the Company that
would  result in the  Company's  disqualification  as a REIT under the  Internal
Revenue  Code is void to the fullest  extent  permitted by law, and the Board of
Directors is authorized to refuse to transfer common shares to a person if, as a
result of the acquisition, that person would own Excess Shares.

         The  ownership  limitations  described  above  may have the  effect  of
precluding  changes in control of the Company,  or preventing a  transaction  in
which  some or all common  shareholders  might  receive a premium  for sale of a
large or control block of common shares.

         Transfer Agent and Registrar.  The transfer agent and registrar for the
common shares is First Union National Bank of North Carolina,  Charlotte,  North
Carolina.

SERIES A CONVERTIBLE PREFERRED SHARES

         The Company has 12,700,000  authorized  Series A convertible  Preferred
Shares,  no par value,  of which  12,650,046  were issued and  outstanding as of
December 31, 1999.  Each Series A Convertible  Preferred Share is fully paid and
non-assessable upon payment therefor and issuance.

         Designation,  Number  and  Rank.  The  Series A  Convertible  Preferred
Shares,  with  respect  to  distribution  rights and rights  upon  voluntary  or
involuntary  liquidation,  dissolution  or winding up of the  Company,  rank (a)
senior to all common shares and to all equity  securities  ranking junior to the
Series A Convertible  Preferred Shares, (b) on parity with all equity securities
issued by the Company the terms of which  specifically  provide that such equity
securities rank on a parity with the Series A Convertible  Preferred Shares, and
(c) junior to all other equity  securities  issued by the  Company.  The Company
retains the power and authority to issue  preferred  shares which rank senior to
or on parity with the Series A Convertible  Preferred Shares as to distributions
or as to rights in  liquidation,  but only if, at the time of and,  after giving
effect  to the  issuance  of such  shares  that  the  sum of (i)  the  aggregate
liquidation  preferences of all preferred shares which rank senior to the Series
A Convertible Preferred Shares, and (ii) the


                                      -9-
<PAGE>

aggregate  liquidation  preference of the Series A Convertible  Preferred Shares
does not exceed 20% of the Company's  total assets,  as disclosed on the balance
sheet of the Company's most recently filed with the SEC.

         Distributions.  Holders of outstanding  Series A Convertible  Preferred
Shares are entitled to receive, if, when and as declared by the Company's Board,
quarterly cash  distributions  at an annual rate per share of $2.125 during 1999
increasing  to  $2.25  during  2000 and to  $2.375  during  2001and  thereafter.
Dividends  will be  cumulative  and will accrue from and after the date of issue
thereof,  whether or not such  distributions  are declared or there are funds of
the Company legally  available for payment of such  distributions  for any given
distribution period.

         When  distributions  for the Series A Convertible  Preferred Shares and
any other  preferred  shares  ranking on parity  with the  Series A  Convertible
Preferred Shares are not paid in full (or a sum sufficient for such full payment
is not so set apart),  such  distributions will be declared pro rata so that the
amount of distributions  declared per share will in all cases bear to each other
the same ratio that accrued  distributions per share on the Series A Convertible
Preferred Shares and other preferred shares bear to each other.

         Unless  full  cumulative  distributions  on all  outstanding  Series  A
Convertible Preferred Shares and all preferred shares on parity with such shares
have been paid and all mandatory  sinking fund payments required pursuant to the
terms of any  outstanding  preferred  shares ranking senior to or on parity with
the Series A Convertible Preferred Shares as to rights in liquidation shall have
been paid then (i) no distribution  (other than distributions  payable solely in
shares  ranking  junior to the Series A  Convertible  Preferred  Shares) will be
declared  or paid  upon or any sum set apart for the  payment  of  distributions
upon, any shares ranking junior to the Series A Convertible  Preferred Shares as
to  distributions;  (ii) no other  distribution will be made with respect to any
shares of the  Company  ranking  junior to the  Series A  Convertible  Preferred
Shares as to  rights in  liquidation;  (iii) no  shares of the  Company  ranking
junior to the  Series A  Convertible  Preferred  Shares as to  distributions  or
rights in  liquidation  will be  purchased,  redeemed or otherwise  acquired for
value by the Company or by any  subsidiary  of the  Company;  and (iv) no monies
will be paid into,  set apart or made available for a sinking or other like fund
for the purchase,  redemption or other  acquisition  for value by the Company or
any of its  subsidiaries  of any  shares of the  Company  ranking  junior to the
Series  A  Convertible  Preferred  Shares  as  to  distributions  or  rights  in
liquidation.

         Dividends  accrued  but unpaid  will bear no  interest,  and holders of
Series A Convertible  Preferred  Shares will not be entitled to distributions in
excess of the full cumulative distributions to which they are entitled.

         No distributions  on the Series A Convertible  Preferred Shares will be
declared or funds set apart for the payment  thereof it at such time the Company
is party to any  agreement  related to its  indebtedness  which  prohibits  such
declaration,  payment  or  setting  apart  for  payment  or  such  action  would
constitute  a  default  under  any  such  agreement  or if such  declaration  is
restricted or prohibited by law.



                                      -10-
<PAGE>

         Voting Rights.  Except as described  below or to the extent provided by
law,  holders of Series A Convertible  Preferred  Shares are not entitled to (i)
vote at any meeting of  shareholders  for election of directors or for any other
purpose or (ii) receive notice of, or otherwise  participate,  in any meeting of
shareholders of the Company at which they are not entitled to vote.

         Whenever  distributions  due to the  holders  of  Series A  Convertible
Preferred  Shares or to any class or series of  preferred  shares which ranks on
parity therewith as to distributions  are six or more quarters in arrears,  then
the  Company's  Board will  automatically  be increased by two and at any annual
meeting or properly  called  special  meeting,  holders of Series A  Convertible
Preferred  Shares will have the right to nominate and elect these two additional
directors.  These  two  directors  will  continue  to serve  until  all  current
distributions  and  all  distributions  in  arrears  have  been  paid in full or
declared  and set  aside  for  payment.  The  right of the  holders  of Series A
Convertible  Preferred  Shares to nominate  and elect these two  directors  will
cease when all current  distributions and all distributions in arrears have been
paid in full or declared and set aside for payment.

         The  affirmative  vote  of a  majority  of  the  outstanding  Series  A
Convertible  Preferred  Shares,  voting as separate group,  will be required (i)
whenever such a vote is required  under the Virginia  Stock  Corporation  Act or
(ii) for the adoption of any amendment, alteration or repeal of any provision of
the Series A Convertible Preferred Shares or of any provision of the Articles of
Incorporation that adversely changes any preferences,  limitations,  privileges,
voting power or relative rights of the Series A Convertible  Preferred Shares or
the  holders  thereof;  provided,  however,  that the  authorization  of, or the
increase  in the  authorized  number of shares of,  any class of shares  ranking
senior to or on a parity with the Series A Convertible  Preferred  Shares is not
such an adverse change.

         Redemption.   Series  A  Convertible   Preferred  Shares  will  not  be
redeemable  by the  Company  for five  years  after the first  issuance  of such
shares.  At any time after the fifth  anniversary of such issuance,  the Company
may,  at its  option,  redeem  all or any  portion of the  outstanding  Series A
Convertible  Preferred  Shares for an amount  equal to, at the  election  of the
Company,  (i) the  liquidation  payment owed as described below plus accrued but
unpaid  distributions  or (ii) such number of common shares of the Company equal
to  (A)  the   liquidation   price  described  below  plus  accrued  but  unpaid
distributions, divided by (B) the conversion price as described below. Notice of
any such  redemption  must be  provided  not less  than 30 nor more than 60 days
before  the  redemption  date.  If fewer  than all of the  Series A  Convertible
Preferred  Shares  outstanding  are to be redeemed,  the redemption  will be pro
rated among the holders of Series A Convertible  Preferred Shares based upon the
number of such shares  registered in their names. The Company may not redeem any
of  the  Series  A  Convertible   Preferred   Shares  if  the  full   cumulative
distributions to holders of such shares have not been paid.

         The Company may also acquire  shares of Series A Convertible  Preferred
Shares other than by redemption for such  consideration  as is acceptable to the
holders  thereof,  provided  that if all past and current  distributions  on the
Series A Convertible Preferred


                                      -11-
<PAGE>

Shares have not been paid in full or  declared  and set aside for  payment,  the
Company may not  acquire any Series A  Convertible  Preferred  Shares  except in
accordance  with a  purchase  or  exchange  offer  made on the same terms to all
holders of outstanding Series A Convertible Preferred Shares.

         Liquidation. Upon any voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Company, the holders of outstanding Series A
Convertible  Preferred Shares will be entitled to be paid $25 per share in cash,
plus an amount equal to all unpaid  distributions  accrued thereon,  after which
payment,  the holders of the Series A Convertible  Preferred Shares will have no
right or claim to the remaining assets of the Company. Neither the consolidation
nor merger of the Company with or into any other entity,  nor the sale, lease or
other disposition of substantially  all of the Company's  properties and assets,
will, without further corporate action, be deemed a liquidation,  dissolution or
winding up of the affairs of the Company.

         If the assets of the Company legally  available for distribution to its
shareholders  are  insufficient  to pay the holders of the Series A  Convertible
Preferred  Shares the full amounts to which they are entitled,  such assets will
be distributed  ratably to the holders of Series A Convertible  Preferred Shares
and the holders of preferred shares, if any, ranking on a parity with the Series
A Convertible  Preferred Shares as to rights in liquidation in proportion to the
full amount to which they are respectively entitled.

         The Company will give written notice of any liquidation, dissolution or
winding  up of the  Company  not less than 30 nor more than 60 days  before  the
payment date related thereof.

         Conversion.  Each holder of outstanding Series A Convertible  Preferred
Shares  will have the right,  upon  notice  properly  given to the  Company,  to
convert any or all such shares into such number of the  Company's  common shares
equal to $25  divided  by the  conversion  price  times  the  number of Series A
Convertible  Preferred Shares  converted.  The initial  conversion price will be
$15.80,   subject  to  adjustment  described  below.  Any  holder  of  Series  A
Convertible  Preferred  Shares called for  redemption may convert such shares at
any time prior to the close of business on the last full  business  day prior to
the redemption date. Common shares issued upon conversion will be rounded to the
nearest  thousandth  of a share,  and no cash will be paid in lieu of fractional
shares.

         The  issuance  of common  shares in  exchange  of Series A  Convertible
Preferred  Shares will be done by the Company without charge for expenses or for
any tax in respect of the issuance of such common  shares,  but the Company will
not be required  to pay any tax which may be payable in respect of any  transfer
involved in the issuance  and  delivery of common  shares in any name other than
that of the  holder  of  record  on the  books of the  Company  of the  Series A
Convertible Preferred Shares converted.

         Holders of Series A Convertible  Preferred  Shares on any  distribution
record  date  will  still  be  entitled  to  receive  all   previously   accrued
distributions  payable on such shares  notwithstanding  the  conversion  of such
shares after any such distribution record date.



                                      -12-
<PAGE>

         If the Company (i) pays a distribution on its outstanding common shares
in common shares or subdivide or otherwise split its  outstanding  common shares
into a larger  number of shares,  (ii)  combines its  outstanding  shares into a
smaller  number  of  shares,  or  (iii)  reclassifies  its  common  shares,  the
Conversion Price will be adjusted so that the holder of any Series A Convertible
Preferred  Shares  surrendered for conversion  after the applicable  record date
will be entitled to receive the same aggregate number of common shares that such
holder would have owned or have been  entitled to receive after the happening of
such  event  had the  Series  A  Convertible  Preferred  Shares  been  converted
immediately prior to such record date.

         If the Company shall issue  rights,  warrants or options to all holders
of common shares  entitling them to subscribe for or purchase common shares at a
price  which is less  than  the  current  market  value of  common  shares,  the
Conversion  Price will be adjusted to a price  determined by multiplying (i) the
current conversion price and (ii) a fraction, the numerator of which will be the
sum of (w) the number of common shares  outstanding and (x) the number of common
shares  which the  aggregate  purchase  price of all such  rights,  warrants and
options would purchase at the then current market value,  and the denominator of
which will be the sum of (y) the number of common shares outstanding and (z) the
number of additional  shares offered for  subscription  pursuant to such rights,
warrants or options.


                                      -13-
<PAGE>

                        FEDERAL INCOME TAX CONSIDERATIONS


GENERAL

         The following  summary of material  federal  income tax  considerations
that may be relevant to a holder of common shares is based on current law and is
not intended as tax advice.  The  statements  of law and legal  conclusions  set
forth in this summary represents the opinion of McGuire,  Woods, Battle & Boothe
LLP, special tax counsel to the Company. The following discussion,  which is not
exhaustive  of all  possible  tax  considerations,  does not  include 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.

         The statements in this  discussion  are based on current  provisions of
the Internal Revenue Code,  existing,  temporary and currently proposed Treasury
Regulations  under the  Code,  the  legislative  history  of the Code,  existing
administrative  rulings and  practices  of the IRS and  judicial  decisions.  No
assurance can be given that legislative, judicial or administrative changes will
not affect the accuracy of any  statements  in this  prospectus  with respect to
transactions  entered into or  contemplated  prior to the effective  date of the
changes.

THIS  DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING.  EACH
PROSPECTIVE PURCHASER OF COMMON SHARES IS ADVISED TO CONSULT WITH HIS OR HER OWN
TAX  ADVISOR  REGARDING  THE  SPECIFIC  TAX  CONSEQUENCES  TO  HIM OR HER OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF COMMON SHARES IN AN ENTITY ELECTING TO BE
TAXED AS A REIT,  INCLUDING  THE FEDERAL,  STATE,  LOCAL,  FOREIGN AND OTHER TAX
CONSEQUENCES  OF THE  PURCHASE,  OWNERSHIP,  DISPOSITION  AND  ELECTION,  AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.

         The  Company  elected to be treated  as a REIT for  federal  income tax
purposes  commencing  with our taxable year ended  December  31, 1993.  Based on
assumptions and  representations  summarized  below,  McGuire,  Woods,  Battle &
Boothe LLP, our legal counsel, is of the opinion that beginning with our taxable
year ended December 31, 1993:

     -    we are organized in conformity with the requirements for qualification
          and taxation as a REIT under the Code, and



                                      -14-
<PAGE>

     -    our proposed  method of operations  described in this  prospectus will
          enable us to continue to satisfy the requirements for qualification as
          a REIT.

         The rules  governing  REITs are highly  technical  and require  ongoing
compliance  with a variety of tests that depend,  among other things,  on future
operating  results.  McGuire,  Woods,  Battle & Boothe LLP will not  monitor our
compliance with these requirements.  While we expect to satisfy these tests, and
will use our best  efforts to do so, we cannot  ensure we will qualify as a REIT
for any  particular  year,  or that  the  applicable  law will  not  change  and
adversely  affect us and our  shareholders.  The  following  is a summary of the
material  federal  income  tax  considerations  affecting  us as a REIT  and our
shareholders:

REIT QUALIFICATION


         In order to maintain our REIT qualification, we must meet the following
criteria:

     -    We must be organized  as an entity that would,  if we did not maintain
          our REIT status, be taxable as a regular corporation;

     -    We must be managed by one or more directors;

     -    Our taxable year must be the calendar year;

     -    Our beneficial ownership must be evidenced by transferable shares;

     -    Our capital stock must be held by at least 100 persons during at least
          335 days of a taxable year of 12 months or during a proportionate part
          of a taxable year of less than 12 months; and

     -    Not more than 50% of the value of our shares of  capital  stock may be
          held, directly or indirectly,  applying constructive  ownership rules,
          by five or fewer  individuals at any time during the last half of each
          our taxable years.

         To protect against violations of these requirements, our bylaws provide
restrictions  on  transfers of our common  shares,  as well as  provisions  that
automatically convert shares of stock into nonvoting, non-dividend paying excess
stock to the extent  that the  ownership  otherwise  might  jeopardize  our REIT
status.

         To monitor our compliance with the share ownership requirements, we are
required to and will maintain records  disclosing the actual ownership of common
shares.  To do so, we will demand written  statements  each year from the record
holders of certain  percentages  of shares in which the  record  holders  are to
disclose the actual  owners of the shares.  A list of those  persons  failing or
refusing to comply with this demand will be  maintained  as part of our records.
Shareholders who fail or refuse to comply with the


                                      -15-
<PAGE>

demand  must submit a statement  with their tax  returns  disclosing  the actual
ownership of the shares and other information.

         We expect to satisfy each of the requirements  discussed above. We also
expect  to  satisfy  the  requirements  that  are  separately   described  below
concerning  the  nature  and  amounts of our income and assets and the levels of
required annual distributions.

SOURCES OF GROSS INCOME

         In order to qualify as a REIT for a particular  year, we also must meet
two tests  governing  the  sources of our income.  These  tests are  designed to
ensure  that a REIT  derives its income  principally  from  passive  real estate
investments.  In  evaluating  a REIT's  income,  the  REIT  will be  treated  as
receiving its  proportionate  share of the income produced by any partnership in
which the REIT holds an interest  as a partner,  and that income will retain the
character that it has in the hands of the partnership. The Code allows us to own
and operate a number of our properties through  wholly-owned  subsidiaries which
are  "qualified  REIT  subsidiaries."  The Code provides  that a qualified  REIT
subsidiary  is not  treated as a separate  corporation,  and all of its  assets,
liabilities  and items of income,  deduction  and credit are  treated as assets,
liabilities and items of the REIT.

75% GROSS INCOME TEST

         At least 75% of a REIT's  gross  income for each  taxable  year must be
derived  from  specified  classes of income  that  principally  are real  estate
related. The permitted categories of principal importance to us are:

     -    rents from real property;

     -    interest on loans secured by real property;

     -    gain from the sale of real  property or loans secured by real property
          (excluding  gain from the sale of property held  primarily for sale to
          customers  in the  ordinary  course of a company's  trade or business,
          referred to below as "dealer property");

     -    income from the operation and gain from the sale of property  acquired
          in  connection  with  the  foreclosure  of a  mortgage  securing  that
          property ("foreclosure property");

     -    distributions on, or gain from the sale of, shares of other qualifying
          REITs;

     -    abatements and refunds of real property taxes; and

     -    "qualified temporary investment income" (described below).



                                      -16-
<PAGE>

         In evaluating our compliance with the 75% gross income test, as well as
the 95% gross income test described  below,  gross income does not include gross
income from "prohibited  transactions." In general, a prohibited  transaction is
one involving a sale of dealer property,  not including foreclosure property and
dealer property held by us for at least four years.

         We expect that  substantially all of our operating gross income will be
considered rent from real property. Rent from real property is qualifying income
for purposes of the gross income tests only if certain conditions are satisfied.
Rent from real property  includes charges for services  customarily  rendered to
tenants,  and rent  attributable  to personal  property leased together with the
real  property  so long as the  personal  property  rent is less than 15% of the
total rent. We do not expect to earn material amounts in these categories.  Rent
from real  property  generally  does not  include  rent  based on the  income or
profits  derived  from the  property.  We do not  intend to lease  property  and
receive rentals based on the tenant's net income or profit.  However, rent based
on a percentage  of gross income is permitted as rent from real  property and we
will have leases where rent is based on a percentage of gross income.

         Also excluded  from "rents from real  property" is rent received from a
person or corporation in which we (or any of its 10% or greater owners) directly
or indirectly through the constructive  ownership rules contained in section 318
of the Code, owns a 10% or greater  interest.  A third exclusion  covers amounts
received with respect to real property if we furnish  services to the tenants or
manage or operate the property,  other than through an "independent  contractor"
from whom we do not derive any  income.  The  obligation  to operate  through an
independent  contractor  generally  does not  apply,  however,  if the  services
provided by us are usually or customarily rendered in connection with the rental
of space for occupancy  only and are not considered  rendered  primarily for the
convenience of the tenant.  Further,  if the value of the non-customary  service
income  with  respect to a  property  (valued at no less than 150% of our direct
cost of performing  the services) is 1% or less of the total income derived from
the property, then all rental income from that property except the non-customary
service income will qualify as rents from real property.

         Upon the ultimate  sale of any of our  properties,  any gains  realized
also are expected to constitute qualifying income, as gain from the sale of real
property (not involving a prohibited transaction).

95% GROSS INCOME TEST

         In addition to earning 75% of its gross income from the sources  listed
above, at least an additional 20% of our gross income for each taxable year must
come either from those sources,  or from  dividends,  interest or gains from the
sale or other  disposition of stock or other  securities  that do not constitute
dealer property.  This test permits a REIT to earn a significant  portion of its
income from traditional  "passive"  investment  sources that are not necessarily
real estate related. The term "interest" (under both the 75% and 95% tests) does
not  include  amounts  that are based on the income or  profits  of any  person,
unless the computation is based only on a fixed percentage of receipts or sales.



                                      -17-
<PAGE>

FAILING THE 75% OR 95% TESTS; REASONABLE CAUSE

         As a result of the 75% and 95% tests, REITs generally are not permitted
to earn more than 5% of their gross income from active sources such as brokerage
commissions  or other  fees for  services  rendered.  We may  receive  this type
income. This type of income will not qualify for the 75% test or 95% test but is
not  expected  to  be   significant   and  this  income,   together  with  other
non-qualifying income, is expected to be at all times less than 5% of our annual
gross income.  While we do not  anticipate we will earn  substantial  amounts of
non-qualifying  income, if non-qualifying income exceeds 5% of our gross income,
we could lose our status as a REIT. We may in the future establish  subsidiaries
in which we will hold  less  than 10% of the  voting  stock.  The  gross  income
generated  by these  subsidiaries  would not be  included  in our gross  income.
However, dividends from subsidiaries to us would be included in our gross income
and qualify for the 95% income test.

         If we fail to meet either the 75% or 95% income  tests during a taxable
year, we may still qualify as a REIT for that year if

     -    we report the  source  and nature of each item of our gross  income in
          our federal income tax return for that year;

     -    the inclusion of any incorrect information in our return is not due to
          fraud with intent to evade tax; and

     -    the  failure to meet the tests is due to  reasonable  cause and not to
          willful neglect.

         However,  in that case we would be  subject  to a 100% tax based on the
greater  of the amount by which we fail  either the 75% or 95% income  tests for
the year, multiplied by a fraction intended to reflect our profitability.

CHARACTER OF ASSETS OWNED

         On the last day of each calendar  quarter,  we also must meet two tests
concerning the nature of our  investments.  First,  at least 75% of the value of
our total assets generally must consist of real estate assets,  cash, cash items
and  government  securities.  For  this  purpose,  real  estate  assets  include
interests  in real  property,  interests  in loans  secured by mortgages on real
property or by  interests  in real  property,  shares in other REITs and certain
options,  but excluding  mineral,  oil or gas royalty  interests.  The temporary
investment  of new capital in debt  instruments  also  qualifies  under this 75%
asset test,  but only for the one-year  period  beginning on the date we receive
the new capital.

         Second,  although the balance of our assets  generally  may be invested
without  restriction,  we will not be permitted to own (1) securities of any one
non-governmental  issuer that  represent  more than 5% of the value of our total
assets or (2) more than 10% of the outstanding  voting  securities of any single
issuer. A REIT, however, may own


                                      -18-
<PAGE>

100% of the stock of a  qualified  REIT  subsidiary,  in which case the  assets,
liabilities  and items of income,  deduction  and credit of the  subsidiary  are
treated as those of the REIT. In evaluating a REIT's assets, if the REIT invests
in a partnership,  it is deemed to own its proportionate  share of the assets of
the partnership. We expect to satisfy these asset tests.

ANNUAL DISTRIBUTIONS TO SHAREHOLDERS

         To  maintain  REIT  status,   we  generally  must   distribute  to  our
shareholders in each taxable year at least 95% of our net ordinary income.  More
precisely,  we must  distribute an amount equal to (1) 95% of the sum of (a) our
REIT taxable  income  before  deduction of dividends  paid and excluding any net
capital gain and (b) any net income from  foreclosure  property  less the tax on
the income,  minus (2) limited  categories of excess noncash income  (including,
cancellation of indebtedness and original issue discount income).

         REIT  taxable  income is defined to be the taxable  income of the REIT,
computed as if it were an ordinary corporation, with modifications. For example,
the  deduction  for  dividends  paid is  allowed,  but  neither  net income from
foreclosure property, nor net income from prohibited transactions,  is included.
In addition,  the REIT may carry over,  but not carry back, a net operating loss
for 20 years following the year in which it was incurred.

         A REIT may satisfy the 95% distribution test with dividends paid during
the taxable  year and with  dividends  paid after the end of the taxable year if
the dividends fall within one of the following categories:

     -    Dividends paid in January that were declared  during the last calendar
          quarter of the prior year and were payable to  shareholders  of record
          on a date  during  the last  calendar  quarter  of that prior year are
          treated as paid in the prior year for ourselves and our shareholders.

     -    Dividends  declared  before  the due  date of our tax  return  for the
          taxable year  (including  extensions)  also will be treated as paid in
          the prior year for  ourselves if they are paid (1) within 12 months of
          the end of the  taxable  year and (2) no later  than our next  regular
          distribution payment.

         Dividends  that are paid after the close of a taxable  year that do not
qualify under the rule governing payments made in January (described above) will
be taxable to the  shareholders  in the year paid,  even though we may take them
into  account for a prior year. A  nondeductible  excise tax equal to 4% will be
imposed  on a  company  for each  calendar  year to the  extent  that  dividends
declared and distributed or deemed  distributed before December 31 are less than
the sum of (a) 85% of a company's  "ordinary income" plus (b) 95% of a company's
capital gain net income plus (c) any undistributed income from prior periods.



                                      -19-
<PAGE>

         Dividends  that are paid after the close of a taxable  year that do not
qualify under the rule governing  payments made in January  described above will
be taxable to our  shareholders  in the year paid, even though we may be able to
take them into account for a prior year.  We will incur a  nondeductible  excise
tax  equal  to 4% will for  each  calendar  year to the  extent  that  dividends
declared and distributed or deemed  distributed before December 31 are less than
the sum of (a) 85% of our "ordinary income" plus (b) 95% of our capital gain net
income plus (c) any undistributed income from prior periods.

         We will be taxed at regular corporate rates to the extent we retain any
portion of our taxable  income.  It is possible that we may not have  sufficient
cash or other liquid  assets to meet the  distribution  requirement.  This could
arise  because  of  competing  demands  for our  funds,  or  because  of  timing
differences between tax reporting and cash receipts and disbursements.  Although
we do not anticipate any  difficulty in meeting this  requirement,  no assurance
can be given that necessary  funds will be available.  In the event this occurs,
we may arrange for short-term,  or possibly long-term,  borrowings to permit the
payment of required dividends and meet the 95% distribution requirement.

         If we fail  to meet  the 95%  distribution  requirement  because  of an
adjustment  to our taxable  income by the IRS,  we may be able to  retroactively
cure the failure by paying a deficiency dividend, as well as applicable interest
and penalties, within a specified period.

TAXATION AS A REIT

         As a REIT, we generally will not be subject to corporate  income tax to
the extent we currently  distribute our REIT taxable income to our shareholders.
This treatment effectively eliminates the double taxation imposed on investments
in most  corporations.  We  generally  will be taxed only on the  portion of our
taxable income which we retain,  including any  undistributed  net capital gain,
because we will be entitled to a deduction  for dividends  paid to  shareholders
during the taxable  year.  A  dividends  paid  deduction  is not  available  for
dividends that are considered  preferential  within any given class of shares or
as between classes except to the extent a class is entitled to a preference.  We
do not anticipate we will pay any preferential dividends.

         Even  as  a  REIT,   we  will  be  subject  to  tax  in  the  following
circumstances:

     -    any  income or gain  from  foreclosure  property  will be taxed at the
          highest corporate rate;

     -    a tax of 100% applies to any net income from prohibited  transactions,
          which are, in general,  sales or other  dispositions  of property held
          primarily for sale to customers in the ordinary course of business;

     -    if we fail to meet  either  the 75% or 95% source of income  tests,  a
          100% tax would be imposed equal to the amount  obtained by multiplying
          (1) the greater of the amount,  if any, by which we failed  either the
          75%  income


                                      -20-
<PAGE>

          test or the 95% income  test,  times (2) the ratio of our REIT taxable
          income to our gross income (excluding capital gain and other items);

     -    items of tax preference, excluding items specifically allocable to our
          shareholders, will be subject to the alternative minimum tax;

     -    if we fail to  distribute  with respect to each calendar year at least
          the sum of (1) 85% of our REIT ordinary  income for the year,  (2) 95%
          of our  REIT  capital  gain  net  income  for  the  year,  and (3) any
          undistributed  taxable income from prior years, we would be subject to
          a 4% excise tax on the excess of the  required  distribution  over the
          amounts actually distributed; and

     -    under regulations that are to be promulgated,  we also may be taxed at
          the  highest   regular   corporate  tax  rate  on  any  built-in  gain
          attributable to assets we acquire in tax-free corporate  transactions,
          to the extent the gain is recognized  during the first ten years after
          we acquire the assets.

FAILURE TO QUALIFY AS A REIT

         If we fail to  qualify  as a REIT  and are not  successful  in  seeking
relief,  we will be  taxed at  regular  corporate  rates  on all of our  taxable
income.  Distributions to our shareholders  would not be deductible in computing
that taxable income,  and we would no longer be required to make  distributions.
Any corporate  level taxes  generally  would reduce the amount of cash available
for  distribution  to our  shareholders  and,  because  our  shareholders  would
continue to be taxed on any distributions they receive,  the net after tax yield
to our shareholders likely would be substantially reduced.

         As a result,  our failure to qualify as a REIT during any taxable  year
could have a material  adverse effect upon us and our  shareholders.  If we lose
our REIT status, unless we are able to obtain relief, we will not be eligible to
elect REIT status  again until the fifth  taxable  year which  begins  after the
taxable year during which our election was terminated.

TAXATION OF SHAREHOLDERS

         In general,  distributions  will be taxable to shareholders as ordinary
income to the extent of our earnings and profits.  Specifically,  dividends  and
distributions will be treated as follows:

     -    Dividends  declared  during the last  quarter  of a calendar  year and
          actually paid during  January of the  immediately  following  calendar
          year are  generally  treated as if  received  by the  shareholders  on
          December 31 of the calendar year during which they were declared.



                                      -21-
<PAGE>

     -    Distributions   paid  to  shareholders  will  not  constitute  passive
          activity income,  and as a result generally cannot be offset by losses
          from passive activities of a shareholder who is subject to the passive
          activity rules.

     -    Distributions  we designate as capital gains dividends  generally will
          be taxed as long term capital gains to shareholders to the extent that
          the  distributions  do not exceed our actual net capital  gain for the
          taxable year.  Corporate  shareholders  may be required to treat up to
          20% of any capital gains dividends as ordinary income.

     -    If we elect to retain and pay income tax on any net long-term  capital
          gain,  our  shareholders  would  include in their  income as long-term
          capital gain their  proportionate share of net long-term capital gain.
          Our  shareholders   would  receive  a  credit  for  the  shareholder's
          proportionate  share of the tax paid by us on retained  capital  gains
          and an  increase  in basis in their  shares in an amount  equal to the
          difference  between the undistributed  long-term capital gains and the
          amount of tax we paid.

     -    Any distributions we make, whether characterized as ordinary income or
          as  capital  gains,  are  not  eligible  for  the  dividends  received
          deduction for corporations.

     -    Shareholders   are  not   permitted  to  deduct  our  losses  or  loss
          carry-forwards.

         We may generate  cash in excess of our net  earnings.  If we distribute
cash to our  shareholders in excess of our current and accumulated  earnings and
profits,  other than as a capital gain dividend,  the excess cash will be deemed
to be a return of capital to each  shareholder to the extent of the adjusted tax
basis of the shareholder's  shares.  Distributions in excess of the adjusted tax
basis  will be  treated  as gain  from the sale or  exchange  of the  shares.  A
shareholder  who has  received  a  distribution  in  excess of our  current  and
accumulated  earnings  and profits may,  upon the sale of the shares,  realize a
higher taxable gain or a smaller loss because the basis of the shares as reduced
will be used for purposes of computing the amount of the gain or loss.

         Generally,  gain or loss  realized  by a  shareholder  upon the sale of
common  shares will be  reportable  as capital  gain or loss.  If a  shareholder
receives  a  long-term  capital  gain  dividend  and has held the shares for six
months or less,  any loss  incurred  on the sale or  exchange  of the  shares is
treated as a long-term capital loss to the extent of the corresponding long-term
capital gain dividend received.

         In any year in which we fail to  qualify  as a REIT,  our  shareholders
generally  will  continue  to be treated in the same  fashion  described  above,
except that none of our  dividends  will be eligible  for  treatment  as capital
gains dividends,  corporate shareholders will qualify for the dividends received
deduction and the  shareholders  will not be required to report any share of our
tax preference items.



                                      -22-
<PAGE>

BACKUP WITHHOLDING

         We will report to our  shareholders and the IRS the amount of dividends
paid  during each  calendar  year and the amount of tax  withheld,  if any. If a
shareholder is subject to backup withholding,  we will be required to deduct and
withhold from any  dividends  payable to that  shareholder  a tax of 31%.  These
rules may apply in the following circumstances:

     -    when a shareholder  fails to supply a correct taxpayer  identification
          number,

     -    when the IRS notifies us that the  shareholder is subject to the rules
          or has furnished an incorrect taxpayer identification number, or

     -    in the case of corporations or others within exempt  categories,  when
          they fail to demonstrate that fact when required.

         A shareholder that does not provide a correct  taxpayer  identification
number may also be subject to penalties  imposed by the IRS. Any amount withheld
as backup  withholding may be credited against the shareholder's  federal income
tax  liability.  We also may be required  to withhold a portion of capital  gain
distributions made to shareholders who fail to certify their non-foreign status.

         The United  States  Treasury  has  recently  issued  final  regulations
regarding the withholding and  information  reporting rules discussed  above. In
general,  the final  regulations do not alter the  substantive  withholding  and
information reporting  requirements but unify current  certification  procedures
and clarify reliance  standards.  The final regulations are generally  effective
for payments  made on or after  January 1, 2001,  subject to  transition  rules.
Prospective  investors  should  consult  their own tax advisors  concerning  the
adoption of the final regulations and the potential effect on their ownership of
common shares.

TAXATION OF TAX EXEMPT ENTITIES

         In  general,  a tax exempt  entity  that is a  shareholder  will not be
subject to tax on  distributions  with respect to our shares or gain realized on
the sale of our shares.  In Revenue  Ruling  66-106,  the IRS  confirmed  that a
REIT's distributions to a tax exempt employees' pension trust did not constitute
unrelated  business taxable income ("UBTI").  A tax exempt entity may be subject
to UBTI,  however,  to the extent that it has  financed the  acquisition  of its
shares with acquisition indebtedness within the meaning of the Code. The Revenue
Reconciliation  Act of 1993 has  modified  the rules for tax  exempt  employees'
pension and profit sharing trusts which qualify under section 401(a) of the Code
and are exempt from tax under section 501(a) of the Code for tax years beginning
after  December 31, 1993. In determining  the number of  shareholders a REIT has
for purposes of the "50% test"  described  above,  any stock held by a qualified
trust will be treated as held  directly by its  beneficiaries  in  proportion to
their  actuarial  interests  in the trust and will not be treated as held by the
trust.



                                      -23-
<PAGE>

         A  qualified  trust  owning  more than 10% of a REIT may be required to
treat a  percentage  of  dividends  from  the REIT as UBTI.  The  percentage  is
determined by dividing the REIT's gross  income,  less direct  expenses  related
thereto, derived from an unrelated trade or business for the year (determined as
if the REIT were a qualified trust) by the gross income of the REIT for the year
in which the dividends are paid.  However,  if this  percentage is less than 5%,
dividends  are not  treated as UBTI.  These  UBTI  rules  apply only if the REIT
qualifies as a REIT because of the change in the 50% test discussed above and if
the trust is  predominantly  held by qualified  trusts.  A REIT is predominantly
held by qualified trusts if at least one pension trust owns more than 25% of the
value of the REIT or a group of pension  trusts each owning more than 10% of the
value of the REIT collectively own more than 50% of the value of the REIT.

         For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt from
federal income taxation under sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of
the Code, respectively, income from an investment our securities will constitute
UBTI unless the  organization  is able to deduct an amount properly set aside or
placed in reserve for certain  purposes so as to offset the  unrelated  business
taxable income  generated by the investment our  securities.  These  prospective
investors  should  consult their own tax advisors  concerning  the set aside and
reserve requirements.

TAXATION OF FOREIGN INVESTORS

         The rules  governing  federal  income  taxation  of  nonresident  alien
individuals,  foreign  corporations,  foreign  partnerships  and  other  foreign
shareholders are complex. 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 common  shares,  including any
reporting requirements,  as well as the tax treatment of an investment under the
laws of their home country.

STATE AND LOCAL TAXES

         We may be subject to state or local  taxation in various state or local
jurisdictions,  including those in which we transact business. In addition,  our
shareholders  may also be  subject  to state  or local  taxation.  Consequently,
prospective  shareholders  should  consult their own tax advisors  regarding the
effect of state and local tax laws on an investment in our securities.


                                      -24-
<PAGE>

                             SELLING SECURITYHOLDERS

         This  Prospectus  relates to the resale of 185,887  common  shares (the
"Resale  Securities") by the Selling  Securityholder  named herein (the "Selling
Securityholder").

         The Resale  Securities  may be offered from time to time by the Selling
Securityholder.   The  following   table   provides  the  name  of  the  Selling
Securityholder  and the number of common shares  beneficially  owned and offered
hereby.  Because the Selling  Securityholder may offer all or some of the Resale
Securities,  no  estimate  can be given as to the amount of shares  that will be
held by the Selling Securityholder after completion of the offering.

        Name of Selling                Number of               Number of Shares
       Securityholder (1)      Shares Beneficially Owned        Offered Hereby
       ------------------      -------------------------        --------------

       State Street, LLC                185,887                     185,887

(1)  A "Selling  Securityholder"  shall also  include  any person or entity that
     receives Resale  Securities as a result of (i) their pro rata  distribution
     by an entity to its equity  holders,  (ii) a gift,  or (iii) a pledge.  Any
     Selling Securityholder who is not specifically named in the foregoing table
     will be named in a supplement  to the  Prospectus  if such a supplement  is
     required  by the rules  and  regulations  of the  Securities  and  Exchange
     Commission  at the time  such  Selling  Securityholder  offers  any  Resale
     Securities.


                                      -25-
<PAGE>

                              PLAN OF DISTRIBUTION

         This Prospectus  relates to the resale of the Resale  Securities by the
Selling Securityholder.

         The  Company  is  registering  the Resale  Securities  on behalf of the
Selling Securityholder.  As used herein, "Selling  Securityholder"  includes any
person or entity that  receives  Resale  Securities as a result of (i) their pro
rata  distribution by an entity to its equity  holders,  (ii) a gift, or (iii) a
pledge.  All costs,  expenses and fees  (estimated  to be $25,471) in connection
with the registration of the Resale  Securities  offered hereby will be borne by
the  Company.  Brokerage  commissions  and  similar  selling  expenses,  if any,
attributable  to the sale of  Resale  Securities  will be  borne by the  Selling
Securityholder.  Sales of  Resale  Securities  may be  effected  by the  Selling
Securityholder from time to time in one or more types of transactions (which may
include block  transactions)  on the NYSE, in the  over-the-counter  market,  in
negotiated  transactions,  through put or call options transactions  relating to
the  Resale  Securities,   through  short  sales  of  Resale  Securities,  or  a
combination of such methods of sale, at market prices  prevailing at the time of
sale, or at negotiated prices.  Such transactions may or may not involve brokers
or dealers.  The Selling  Securityholder has not advised the Company that it has
entered  into  any  agreements,   understandings   or   arrangements   with  any
underwriters or broker-dealers  regarding the sale of their securities,  or that
there is an underwriter  or  coordinating  broker acting in connection  with the
proposed sale of Resale Securities by the Selling Securityholder.

         The  Selling  Securityholder  may effect such  transactions  by selling
Resale Securities directly to purchasers or to or through broker-dealers,  which
may act as agents or principals. Such broker-dealers may receive compensation in
the  form  of  discounts,   concessions,   or   commissions   from  the  Selling
Securityholder  and/or  the  purchasers  of  Resale  Securities  for  whom  such
broker-dealers  may act as agents or to whom  they  sell as  principal,  or both
(which  compensation  as to a  particular  broker-dealer  might be in  excess of
customary commissions).

         The  Selling   Securityholder  and  any  broker-dealers   that  act  in
connection  with  the  sale  of  Resale   Securities   might  be  deemed  to  be
"underwriters"  within the meaning of Section 2(11) of the  Securities  Act, and
any commissions  received by such broker-dealers and any profit on the resale of
the Resale Securities sold by them while acting as principals might be deemed to
be underwriting  discounts or commissions  under the Securities Act. The Company
has agreed to indemnify the Selling  Securityholder against certain liabilities,
including   liabilities   arising   under  the   Securities   Act.  The  Selling
Securityholder  may agree to indemnify any agent,  dealer or broker-dealer  that
participates in transactions  involving sales of the Resale  Securities  against
certain liabilities, including liabilities arising under the Securities Act.

         Because the Selling Securityholder may be deemed to be an "underwriter"
within  the  meaning  of  Section  2(11)  of the  Securities  Act,  the  Selling
Securityholder  will be subject to the prospectus  delivery  requirements of the
Securities  Act, which may include


                                      -26-
<PAGE>

delivery  through  the  facilities  of the NYSE  pursuant  to Rule 153 under the
Securities  Act. The Company has informed  the Selling  Securityholder  that the
anti-manipulative  provisions of Regulation M promulgated under the Exchange Act
may apply to their sales in the market.

         The  Selling  Securityholder  also may  resell  all or a portion of the
Resale  Securities in open market  transactions  in reliance upon Rule 144 under
the  Securities  Act,  provided  it  meets  the  criteria  and  conform  to  the
requirements of such Rule.


                                      -27-
<PAGE>

                                     EXPERTS

         Ernst & Young LLP,  independent  auditors,  have audited the  Company's
consolidated  financial statements and schedule included in its Annual Report on
Form 10-K for the year ended  December 31, 1998,  as set forth in their  report,
which is  incorporated  by reference  in this  prospectus  and  elsewhere in the
registration  statement.  The Company's  financial  statements  and schedule are
incorporated  by reference in reliance on Ernst & Young LLP's  report,  given on
their authority as experts in accounting and auditing.

         The  Statements of Income and Direct  Operating  Expenses of properties
purchased by the Company referred to below,  incorporated herein by reference in
this prospectus and registration  statement,  have been  incorporated  herein in
reliance on the following  reports of L.P. Martin & Company,  P.C.,  independent
certified public accountants,  also incorporated  herein by reference,  and upon
the authority of that firm as experts in accounting  and auditing:  (1) a report
dated  February  5, 1998 with  respect  to the  statement  of income  and direct
operating  expenses  exclusive of items not  comparable  to the proposed  future
operations of the property Sterling Point Apartments for the twelve-month period
ended  December 31,  1997,  (2) a report dated April 8, 1998 with respect to the
statement  of  income  and  direct  operating  expenses  exclusive  of items not
comparable  to the proposed  future  operations of the property  Hampton  Pointe
Apartments for the  twelve-month  period ended February 28, 1998, (3) a reported
dated April 8, 1998 with respect to the statement of income and direct operating
expenses  exclusive of items not comparable to the proposed future operations of
the  property  Edgewood  Knoll  Apartments  for the  twelve-month  period  ended
February  28,  1998,  (4) a report  dated  June 25,  1998  with  respect  to the
statement  of  income  and  direct  operating  expenses  exclusive  of items not
comparable  to the  proposed  future  operations  of the  property  The  Timbers
Apartments  for the  twelve-month  period ended April 30,  1998,  (5) a reported
dated  August  6, 1998 with  respect  to the  statement  of  income  and  direct
operating  expenses  exclusive of items not  comparable  to the proposed  future
operations of the property The Gables  Apartments  for the  twelve-month  period
ended May 31, 1998,  and (6) a report dated November 5, 1998 with respect to the
statement  of  income  and  direct  operating  expenses  exclusive  of items not
comparable  to the  proposed  future  operations  of the  property  Cape Landing
Apartments for the twelve-month period ended September 30, 1998.

                                  LEGAL MATTERS

         Certain legal matters have been passed upon for the Company by McGuire,
Woods, Battle & Boothe LLP.


                                      -28-
<PAGE>

<TABLE>
<S>                                                   <C>
====================================================  ====================================================



         NO  DEALER,  SALESMAN  OR OTHER  PERSON HAS
BEEN  AUTHORIZED TO GIVE ANY  INFORMATION OR TO MAKE         CORNERSTONE REALTY INCOME TRUST, INC.
ANY  REPRESENTATIONS  OTHER THAN THOSE  CONTAINED IN
THIS  PROSPECTUS  IN  CONNECTION  WITH THE  OFFERING
MADE BY THIS PROSPECTUS,  AND, IF GIVEN OR MADE, ANY
OTHER  INFORMATION  OR  REPRESENTATIONS  MUST NOT BE
RELIED UPON.  THIS  PROSPECTUS  DOE SNOT  CONSTITUTE
AN  OFFER IN ANY  STATE  IN  WHICH AN OFFER  MAY NOT
LEGALLY BE MADE.  THE DELIVER OF THIS  PROSPECTUS AT
ANY TIME DOES NOT IMPLY THAT  INFORMATION  CONTAINED
IN THIS  PROSPECTUS  HAS NOT  CHANGED AS OF ANY TIME
AFTER ITS DATE.

                 -----------------
                 TABLE OF CONTENTS                                  _______________________
                 -----------------

                                               PAGE                        PROSPECTUS
                                               ----
Available Information...........................2                   _______________________
Incorporation of Certain Documents
     by Reference...............................3
The Company.....................................5
Risk Factors....................................6
Description of Capital Stock of the Company.....8
Federal Income Tax Considerations..............14
Selling Securityholders........................25
Plan of Distribution...........................26                      February 24, 2000
Experts........................................28
Legal Matters..................................28

====================================================  ====================================================
</TABLE>


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