SMITH CHARLES E RESIDENTIAL REALTY INC, 424B3, 1999-08-13

SMITH CHARLES E RESIDENTIAL REALTY INC
424B3, 1999-08-13
REAL ESTATE

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SUBJECT TO COMPLETION, DATED JULY 14, 1999

CHARLES E. SMITH RESIDENTIAL REALTY, INC.

92,793 SHARES OF COMMON STOCK

PROSPECTUS

This prospectus relates to 92,793 shares of common stock
that we may issue to the holders of 92,793 units of limited
partnership interest of Charles E. Smith Residential Realty
L.P., or "Smith L.P.," upon tender of these units for
redemption. These units were issued on July 1, 1998, in
exchange for a property known as Cronin's Landing located in
Waltham, Massachusetts.

We are registering the issuance of the common stock to
permit the holders to sell without restriction in the open
market or otherwise, but the registration of the common stock
does not necessarily mean that any holders will elect to
redeem their units. Also, we may elect to pay cash for the
units tendered rather than issue common stock. Although we
will incur expenses in connection with the registration of the
92,793 shares of common stock, we will not receive any cash
proceeds upon their issuance.

Our common stock is listed on the New York Stock Exchange
under the trading symbol "SRW."

CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 3 IN
THIS PROSPECTUS FOR FACTORS THAT ARE RELEVANT TO AN INVESTMENT
IN THE COMMON STOCK, INCLUDING SPECIAL CONSIDERATIONS FOR THAT
APPLY TO REDEEMING UNITHOLDERS.

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The information contained in this prospectus is not
complete and may be changed. We may not sell these securities
until the registration statement relating to these securities
has been declared effective by the Securities and Exchange
Commission. This prospectus is neither an offer to sell nor a
solicitation of an offer to buy these securities in any state
where the offer or sale is unlawful.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY
STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

AUGUST 4, 1999

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TABLE OF CONTENTS
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Prospectus Summary...................................................................................1
Forward-Looking Information....................................................................1
The Company....................................................................................1
Recent Developments............................................................................1
The Stock Offering.............................................................................2
Important Risks in Owning Our Common Stock.....................................................3
Tax Status of the Company......................................................................3
Risk Factors.........................................................................................4
A Unitholder Who Redeems Units for Common Stock May Have Adverse Tax
Effects................................................................................4
If a Unitholder Redeems Units, the Original Receipt of the Units May Be Subject
to Tax.................................................................................4
Differences Between an Investment in Shares of Common Stock and Units May Affect Redeeming
Unitholders...........................................................................4
Some of Our Policies May Be Changed Without a Vote of Shareholders.............................4
Provisions of Our Charter Could Inhibit Changes of Control.....................................5
Our Ability to Issue Preferred Shares Could Inhibit Changes of Control.........................5
Maryland Law Limits Changes of Control.........................................................5
We Have Adopted a Shareholder Rights Plan Which Could Delay or Prevent a
Change of Control......................................................................5
We Have a Share Ownership Limit................................................................6
The Large Number of Shares Available for Future Sale Could Adversely Affect
the Market Price of Our Common Stock...................................................6
Changes in Market Conditions Could Adversely Affect the Market Price of Our
Common Stock...........................................................................6
Our Earnings and Cash Distributions Will Affect the Market Price of Our
Common Stock...........................................................................6
Market Interest Rates and Low Trading Volume May Have an Effect on the
Value of Our Common Stock..............................................................6
We Believe, but Cannot Guarantee, that We Qualify as a REIT....................................7
Our Failure to Qualify as a REIT Would Have Serious Adverse Consequences.......................7
We May Need to Borrow Money to Qualify as a REIT...............................................7
We Are Subject To Some Taxes Even If We Qualify as a REIT......................................7
Redeeming Unitholders Will Continue to be Subject to the Operational Risks of
Our Business...........................................................................7
Redemption of Units..................................................................................8
General........................................................................................8
Tax Consequences of Redemption.................................................................9
Comparison of Ownership of Units and Common Stock..............................................11
Federal Income Tax Considerations....................................................................20
General........................................................................................20
Our Tax Treatment..............................................................................20
Requirements for Qualification As a REIT.......................................................21
Tax Aspects of Our Investments in Smith L.P. and Property Service Businesses...................24
Taxation of Shareholders.......................................................................25
Other Tax Considerations.......................................................................30
Plan of Distribution.................................................................................31
Where You Can Find More Information..................................................................31
Incorporation of Certain Documents by Reference......................................................31
Experts..............................................................................................32
Legal Matters........................................................................................32
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PROSPECTUS SUMMARY

THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS
AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO
UNDERSTAND THIS COMMON STOCK OFFERING, YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY, INCLUDING THE RISK FACTORS AND FEDERAL INCOME TAX CONSIDERATIONS.

FORWARD-LOOKING INFORMATION

THIS PROSPECTUS INCLUDES FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. WHENEVER YOU SEE THE WORDS "BELIEVES," "ANTICIPATES," AND
"EXPECTS" AND SIMILAR WORDS INDICATING UNCERTAINTY, YOU SHOULD REMEMBER THAT THE
STATEMENTS ARE ASSUMPTIONS. THESE ASSUMPTIONS ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL FINANCIAL RESULTS OR MANAGEMENT PLANS AND
OBJECTIVES TO DIFFER MATERIALLY FROM THOSE PROJECTED OR EXPRESSED IN THIS
PROSPECTUS. FOR EXAMPLE, SUCH DIFFERENCES MAY OCCUR BECAUSE OF CHANGES IN:

- NATIONAL AND REGIONAL ECONOMIC CONDITIONS (ESPECIALLY IN MULTIFAMILY
PROPERTY OCCUPANCIES AND RENTAL GROWTH IN THE WASHINGTON, D.C.
METROPOLITAN AREA);

- OUR ABILITY TO IDENTIFY AND SECURE ADDITIONAL PROPERTIES AND PROPERTY
LOCATIONS;

- THE EFFECT OF PREVAILING MARKET INTEREST RATES AND THE PRICING OF OUR
COMMON STOCK;

- THE ACCEPTANCE OF OUR FINANCING PLANS BY THE CAPITAL MARKETS; AND

- OTHER RISKS WHICH MAY HAVE BEEN OR WILL BE DISCUSSED IN OUR FILINGS
WITH THE SEC.

WE RECOMMEND THAT YOU CONSIDER CAREFULLY THE RISKS OF SUCH ASSUMPTIONS BEFORE
MAKING ANY INVESTMENT IN OUR COMMON STOCK.

WE ARE NOT OBLIGATED TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS IN THIS PROSPECTUS. WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.

THE COMPANY

As a self-managed equity REIT, we acquire, develop, manage and operate
multifamily properties primarily in the Washington, D.C., Chicago, Boston, and
Southeastern Florida metropolitan areas. We are a fully integrated real estate
organization with in-house acquisition, development, financing, marketing,
property management and leasing expertise. Our primary strategy for growth is to
acquire, develop, own and manage high quality multifamily properties to generate
long-term income and increases in value.

We are the sole general partner of Smith L.P. As of June 30, 1999, we owned
approximately 59.9% of its outstanding units. Smith L.P. and its subsidiaries
own all of our properties, property interests and business assets.

As of June 30, 1999, we owned 50 multifamily apartment communities with a
total of 19,852 units. 44 of the properties were located in the Washington, D.C.
metropolitan area, two in the Boston metropolitan area and four in the Chicago
metropolitan area. We currently have approximately 2,100 units under
construction and approximately 1,200 additional units under construction which
are subject to pre-purchase agreements. We also manage approximately 3,800
additional apartment units for other property owners. Besides our residential
properties, we own two retail centers in the Washington, D.C. metropolitan area
with approximately 436,000 square feet of retail space.

RECENT DEVELOPMENTS

In May 1999, we announced three joint ventures with J.P. Morgan Strategic
Property Fund. Each of the joint ventures involves a separate property: an
acquisition property, a property to be developed, and a recently developed
property. These properties have a combined asset value of approximately $171
million. J.P. Morgan Strategic Property Fund's equity commitment for the three

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properties is approximately $53 million and our equity commitment totals $34
million.

The first joint venture acquired The Renaissance, a 330-unit high-rise
apartment building in Tysons Corner, Virginia, for $37 million. The venture is
owned 75% by the J.P. Morgan Strategic Property Fund and 25% by us. The venture
obtained a seven-year $19 million loan to finance the acquisition at an annual
interest rate of 6.48%.

The second joint venture will develop a new 630-unit community at
University Center in eastern Loudoun County, Virginia. The venture is owned 60%
by the J.P. Morgan Strategic Property Fund and 40% by us. The venture intends to
obtain a loan for 50% of the project's estimated $60 million development cost.
Our future equity contribution will be approximately $6 million and is expected
to fund the project through completion and leasing.

In the third transaction, we transferred our interest in Springfield
Station, a 631-unit mid-rise and garden style property in Springfield, Virginia,
to a joint venture. The venture is owned 52% by the J.P. Morgan Strategic
Property Fund and 48% by us. The venture has obtained a ten-year loan of $37
million at an interest rate of 6.85%. We received financing and reimbursement
proceeds of approximately $50 million from the transaction, which we plan to use
to fund other projects and repay corporate debt.

In addition, in July 1999, we acquired a 720-unit garden style apartment
complex known as the Countryside located in Palatine, Illinois and a 1,158-unit
garden style apartment complex known as the Somerset located in Glendale
Heights, Illinois. These were part of a portfolio of four apartment properties
totaling 2,444 units that we acquired for a total purchase price of $137
million, which included approximately $30 million in apartment units at prices
ranging from $31 to $35 per apartment unit, plus closing costs and debt
assumption.

We recently completed negotiations for a $75 million private placement of
convertible non-voting preferred stock for Security Capital Preferred Growth
Incorporated. On July 13, 1999, we issued an initial $25 million series of
shares and we plan to issue two additional $25 million series by the end of the
year. The issue prices for these three series range from $36.50 per share to
$39.00 per share. The dividend yield to be paid on these preferred shares will
be 7 3/4% in year one, 8 1/4% in year two, and 8 1/2% in year three and
thereafter, with a minimum equivalent to the dividend rate paid on the company's
common stock. The terms of the preferred stock may be converted to common stock
on a one-to-one basis with call protection varying by series between three and
six years, after which we have a right to call for cash or, under certain
conditions, convert to common stock. Proceeds from the transaction will enhance
the company's financial flexibility in funding new development projects stated
to start construction later in 1999.

Among upcoming 1999 development projects, we have an agreement with an
affiliate of Starwood Capital Group to jointly redevelop Alban Towers, a
prominent historic landmark in Washington, D.C. Preliminary plans involve
complete interior reconstruction of the 6-story structure to provide
approximately 225 luxury apartments, while preserving its historically
significant exterior and interior features. We estimate the cost of the project
to be in excess of $52 million and we plan to start construction within the next
few months.

THE STOCK OFFERING

This prospectus relates to 92,793 shares of common stock that we may issue
to holders of 92,793 units of limited partnership interest in Smith L.P. The
units were issued on July 1, 1998, in exchange for a property known as Cronin's
Landing located in Waltham, Massachusetts.

On July 1, 1999, the unitholders became eligible to redeem their units for
cash or, at our election, shares of our common stock equal to the number of
units being redeemed.

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IMPORTANT RISKS IN OWNING OUR COMMON STOCK

Before you decide to redeem your units for common stock, you should read
the "Risk Factors" section, which begins on page 4 of this prospectus.

TAX STATUS OF THE COMPANY

We have elected to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code. We believe that we qualify for taxation as a REIT and
generally will not be subject to federal income tax on net income that we
distribute to our shareholders. We are required, among other things, to
distribute at least 95% of our taxable income, excluding any net capital gain.
Even if we qualify to be taxed as a REIT, we are subject to certain federal,
state and local taxes on our income and property and to federal income and
excise tax on the income we do not distribute. In addition, the operating
companies in which we own 99% non-voting interests are subject to federal, state
and local income taxes. See "Federal Income Tax Considerations" for a more
detailed explanation.

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RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, YOU SHOULD
CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS.

A UNITHOLDER WHO REDEEMS UNITS FOR COMMON STOCK MAY HAVE ADVERSE TAX
EFFECTS. A unitholder who redeems units for common stock will be treated for tax
purposes as having sold the units. The sale will be taxable and the unitholder
will be treated as realizing an amount equal to the sum of the value of the
common stock the unitholder receives PLUS the amount of Smith L.P. nonrecourse
liabilities allocable to the redeemed units. It is possible that the amount of
gain the unitholder recognizes could exceed the value of the common stock the
unitholder receives. It is even possible that the tax liability resulting from
this gain could exceed the value of the common stock the unitholder receives.
See "Redemption of Units--Tax Consequences of Redemption."

In addition, the unitholder's ability to sell common stock in order to
raise cash to pay the resulting tax liability may be restricted due to our
common stock's relatively low trading volume. As a result of fluctuations in the
stock price, the price a unitholder receives for the shares may not equal the
value of the units redeemed. See "--Market Interest Rates and Low Trading Volume
May Have an Effect on the Value of Our Common Stock."

IF A UNITHOLDER REDEEMS UNITS, THE ORIGINAL RECEIPT OF THE UNITS MAY BE
SUBJECT TO TAX. If a unitholder redeems units, particularly within two years of
receiving them, there is a risk that the original receipt of the units may be
treated as a taxable sale under the "disguised sale" rules of the Internal
Revenue Code. Subject to several exceptions, the tax law generally provides that
a partner's contribution of property to a partnership and a simultaneous or
subsequent transfer of money or other consideration from the partnership to the
partner will be presumed to be a taxable sale. In particular, if money or other
consideration is transferred by a partnership to a partner within two years of
the partner's contribution of property, the transactions are presumed to be a
taxable sale of the contributed property unless the facts and circumstances
clearly establish that the transfers are not a sale. On the other hand, if two
years have passed between the original contribution of property and the transfer
of money or other consideration, the transactions will not be presumed to be a
taxable sale unless the facts and circumstances clearly establish that they
should be.

DIFFERENCES BETWEEN AN INVESTMENT IN SHARES OF COMMON STOCK AND UNITS
MAY AFFECT REDEEMING UNITHOLDERS. If a unitholder elects to redeem units, we
will determine whether the unitholder receives cash or shares of our common
stock in exchange for the units. Although an investment in shares of our common
stock is substantially similar to an investment in units in Smith L.P., there
are some differences between ownership of units and ownership of common stock.
These differences include form of organization, management structure, voting
rights, liquidity and federal income taxation. These differences, some of which
may be material to investors, are discussed in "Redemption of Units --
Comparison of Ownership of Units and Common Stock."

SOME OF OUR POLICIES MAY BE CHANGED WITHOUT A VOTE OF SHAREHOLDERS. Our
Board of Directors establishes many of our major policies, including those
relating to investment, financing, growth, acquisitions, development, debt
capitalization and distributions. Although the Board of Directors currently has
no intention to amend or revise these and other policies, it may do so from time
to time without a vote of our shareholders. In order to change our policy of
seeking to maintain our REIT qualification status, however, we must have the
approval of our shareholders. Changes in our policies may not fully serve the
interests of all shareholders.

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PROVISIONS OF OUR CHARTER COULD INHIBIT CHANGES OF CONTROL. There are
provisions of our charter that may delay or otherwise limit the ability of
outside parties to acquire control of us or engage in some other transaction.
These charter provisions include three-year staggered terms for directors, the
authority of the Board of Directors to classify capital stock into one or more
series having special preferences without shareholder approval, and a 9.8% share
ownership limit. See "-- We Have a Share Ownership Limit" below. These
limitations could prevent us from entering into a change of control transaction
or other transaction that could be in the best interests of our shareholders.

In addition, we cannot merge, consolidate or engage in any combination
with another person or sell all or substantially all of our assets unless the
transaction includes a merger of, or a sale of assets by, Smith L.P., which may
require approval of the holders of a majority of the units. We currently hold
approximately 59.9% of the units in Smith L.P. This voting requirement might
limit the possibility for acquisition or change in control, even if a change in
control were in our shareholders' interest. In this regard, the holders of units
might incur different, and more adverse, tax consequences as a result of an
acquisition or change in control that could motivate them to oppose a
transaction that is in the shareholders' interest.

OUR ABILITY TO ISSUE PREFERRED SHARES COULD INHIBIT CHANGES OF CONTROL.
Our charter authorizes the Board of Directors to issue preferred shares and to
establish the preferences and rights of any preferred shares issued, including
the right to vote and the right to convert them into shares of common stock.
This power to issue preferred shares could have the effect of delaying or
preventing a change in control even if a change in control were in our
shareholders' interest. As of June 30, 1999, we had outstanding two series of
preferred shares. The preferred shares outstanding rank senior to the common
stock with respect to dividend rights and distributions upon liquidation,
dissolution and winding up. We are subject to the risks normally associated with
preferred equity financing, including the risk that our cash flow will be
insufficient to meet the required payments on the shares.

MARYLAND LAW LIMITS CHANGES OF CONTROL. Provisions of Maryland
corporate law prohibit "business combinations," including issuances of equity
securities, between a Maryland corporation and any person who owns 10% or more
of the voting power of the corporation's shares of capital stock, or an
"interested stockholder," unless the transaction is approved by 80% of the
corporation's outstanding voting shares. In addition, an interested stockholder
may not engage in a business combination for five years following the date he
became an interested stockholder. Except as described below, we are subject to
these provisions. As a result, a change in control or other transaction that may
provide our shareholders with a premium or which might otherwise be in their
best interests may be prevented or delayed.

Our charter, as is permitted by Maryland corporate law, exempts any
business combination involving Messrs. Smith and Kogod and persons affiliated or
acting in concert with them. Consequently, Messrs. Smith and Kogod and their
affiliates are permitted to enter into business combinations with us without the
supermajority shareholder approval otherwise required by Maryland law.

WE HAVE ADOPTED A SHAREHOLDER RIGHTS PLAN WHICH COULD DELAY OR PREVENT
A CHANGE OF CONTROL. Our rights plan provides, among other things, that if a
person or group attempts to acquire 15% or more of our common stock on terms not
approved by our Board of Directors, shareholders will be entitled to purchase
shares of our stock, subject to our charter's ownership limit. These purchase
rights would cause substantial dilution to a person or group that acquires or
attempts to acquire 15% or more of our common stock in this manner and, as a
result, could delay or prevent a change in control or other transaction that
could provide our shareholders

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with a premium over the then-prevailing market price of their shares or which
might otherwise be in their best interests.

WE HAVE A SHARE OWNERSHIP LIMIT. Primarily to assist us in maintaining
our REIT qualification, our charter limits ownership of the issued and
outstanding shares of capital stock by any single shareholder to 9.8% of our
outstanding capital stock. The attribution provisions of the federal tax laws
that are used in applying the ownership limit are complex. They may cause a
shareholder to be considered to own the stock of a number of related
shareholders.
The ownership limit could inhibit changes of control.

THE LARGE NUMBER OF SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY
AFFECT THE MARKET PRICE OF OUR COMMON Stock. As of June 30, 1999, we had
outstanding approximately 19.6 million shares of common stock tradable without
restriction and had reserved for resale 16.7 million additional shares of common
stock for possible issuance upon redemption of units and 2.6 million shares for
possible issuance upon conversion of outstanding preferred stock. In addition,
we have reserved a number of shares available for possible issuance under our
employee benefit plans filed with the SEC. We may issue additional shares of
common stock and securities convertible into shares of common stock in the
future. We cannot predict the effect that future sales of shares of common
stock, or the perception that such sales could occur, will have on the market
prices of our shares.

CHANGES IN MARKET CONDITIONS COULD ADVERSELY AFFECT THE MARKET PRICE OF
OUR COMMON STOCK. As with other publicly traded securities, the value of our
common stock depends on various market conditions, which may change from time to
time. Among the market conditions that may affect the value of our common stock
are:

- - the extent of institutional investor interest in us;
- - the reputation of REITs and residential REITs generally;
- - the attractiveness of our equity securities in comparison to other
equity securities, including equity securities issued by other real
estate companies; and
- - our financial condition and performance.

OUR EARNINGS AND CASH DISTRIBUTIONS WILL AFFECT THE MARKET PRICE OF OUR
COMMON STOCK. We believe that the market value of a REIT's equity securities is
based primarily upon the market's perception of the REIT's growth potential and
its current and potential future cash distributions, and is secondarily based
upon the real estate market value of the underlying assets. For that reason, our
shares may trade at prices that are higher or lower than the net asset value per
share. To the extent we retain operating cash flow for investment purposes,
working capital reserves or other purposes, these retained funds, while
increasing the value of our underlying assets, may not correspondingly increase
the market price of our shares. In addition, we are subject to the risk that our
cash flow will be insufficient to meet the required payments on our preferred
shares. Our failure to meet the market's expectations with regard to future
earnings and cash distributions would likely adversely affect the market price
of our shares.

MARKET INTEREST RATES AND LOW TRADING VOLUME MAY HAVE AN EFFECT ON THE
VALUE OF OUR COMMON STOCK. One of the factors that investors consider important
in deciding whether to buy or sell shares of a REIT is the distribution rate on
those shares, as a percentage of the price of the shares, relative to market
interest rates. If market interest rates increase, prospective purchasers of our
shares may expect a higher annual distribution rate. Higher interest rates would
not, however, result in more funds for us to distribute and, in fact, would
likely increase our borrowing costs and potentially decrease funds available for
distribution. This could cause the market price of our common stock to go down.
In addition, although our common stock is listed on the New York Stock Exchange,
the daily trading volume of our shares may be lower than the trading volume for
certain other industries. As a result, our investors who desire to liquidate
substantial

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holdings may find that they are unable to dispose of their shares in
the market without causing a substantial decline in the market value of the
shares.

WE BELIEVE, BUT CANNOT GUARANTEE, THAT WE QUALIFY AS A REIT. We believe
we qualify as a REIT and generally will not be subject to federal income tax on
net income that we distribute to our shareholders. However, our qualification as
a REIT involves the application of technical and complex tax rules. For
instance, if we own a company's securities, we cannot qualify as a REIT unless
the value of those securities does not exceed 5% of the total value of our
assets. We believe that we meet this requirement, but this belief is based on
our analysis of the value of each of the corporations that conduct our property
service businesses and on our conclusion that each of these corporations will be
respected as a separate corporation. Also, to qualify as a REIT, we cannot own
more than 10% of a company's voting securities. We also believe that we meet
this requirement, but this belief is based on our conclusion that the shares of
stock that we own in each of the property service business corporations are not
voting securities. We cannot guarantee that the IRS will agree with us on these
points.

Moreover, our ability to qualify as a REIT may depend on facts and
circumstances that may not be within our control. Even a technical or
inadvertent mistake could jeopardize our REIT status. Furthermore, it is
possible that new tax laws or new interpretations of existing tax laws will
affect both our ability to qualify as a REIT and the tax consequences of REIT
qualification. For all of these reasons, we cannot guarantee that we currently
qualify or will be able to remain qualified as a REIT.

OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE SERIOUS ADVERSE
CONSEQUENCES. If we fail to qualify as a REIT, we will be subject to federal
income tax at regular corporate rates. This additional tax would significantly
reduce the cash we would have available to distribute to our shareholders and
could reduce significantly the value of our common stock. In addition, if we
fail to qualify as a REIT, we may be disqualified from electing to be treated as
a REIT for the next four taxable years.

WE MAY NEED TO BORROW MONEY TO QUALIFY AS A REIT. To obtain the
favorable tax treatment associated with REITs, we generally will be required
each year to distribute to our shareholders at least 95% of our net taxable
income, excluding net capital gain. Differences in timing between when we
receive income and when we have to pay expenses could require us to borrow money
to meet this requirement. The impact of large expenses also could have this
effect. We might need to borrow money even if we believe that market conditions
are not favorable for borrowing.

WE ARE SUBJECT TO SOME TAXES EVEN IF WE QUALIFY AS A REIT. Even if we
qualify as a REIT, we are subject to some federal, state and local taxes on our
income and property. For example, we pay tax on certain types of income that we
do not distribute. Also, our income derived from properties located in the
District of Columbia is subject to local tax and our net income from some
prohibited transactions will be subject to a 100% tax. In addition, we derive
income from the property service business corporations, whose income is subject
to federal, state and local income tax.

REDEEMING UNITHOLDERS WILL CONTINUE TO BE SUBJECT TO THE OPERATIONAL
RISKS OF OUR BUSINESS. A unitholder who receives our common stock upon
redemption of units will continue to be subject to the various operational risks
of our business. These risks include the following:

- - Our performance and ability to make distributions to our shareholders
are subject to risks associated with the real estate industry.
In particular --

We are dependent on the Washington, D.C. metropolitan area market.

We may be unable to renew leases or relet space as leases expire.

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New acquisitions may fail to perform as expected.

Because real estate investments are illiquid and we are subject to
other restrictions, we may not be able to sell properties when
appropriate.

Our properties may be subject to federal, state or local
regulations that could adversely affect distributions to our
shareholders.

Environmental problems are possible and can be costly.

Our properties in the District of Columbia are subject to special
tenants rights that may impede our sale of those properties.

Some potential losses are not covered by insurance.

- - Debt financing, financial covenants, the amount or percentage of
our debt and increases in interest rates could adversely affect
our economic performance for the following reasons, among others --

Our charter does not limit the amount or percentage of debt that
we may incur and this amount or percentage of debt may limit our
ability to obtain additional financing.

Our policy to limit debt may not ensure that we can incur and
continue to make expected distributions to shareholders.

We may not be able to refinance our debt on favorable terms or
make large payments on debt when our debts become due.

Rising interest rates could adversely affect our cash flow.

- - Our reliance on the property service businesses, where we lack of
voting control, may adversely affect our shareholders. These property
services businesses, which provide management, leasing, financing,
insurance, engineering and technical services, and tenant construction
and renovation services, are conducted by three operating companies in
which Smith L.P. has a 99% economic interest but does not own voting
stock.

- - We are dependent on our key personnel with whom we do not have
employment agreements and for whom we do not have "key-person" life
insurance.

REDEMPTION OF UNITS

GENERAL

Each unitholder may, subject to certain limitations, require that Smith
L.P. redeem units held by the unitholder. If we do not assume Smith L.P.'s
obligation to redeem the units, upon redemption the unitholder will receive cash
from Smith L.P. in an amount equal to the market value of the units to be
redeemed. The market value of a unit for this purpose will be equal to the
average of the closing trading price of a share of our common stock for the ten
trading days before the day on which the redemption notice was received by Smith
L.P. The partnership agreement of Smith L.P. provides that if that trading
information is not available, we can use another method to determine the value
of the common stock. The partnership agreement does not specify alternative
valuation methodologies.

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We have the right, however, to assume directly and satisfy the
redemption right of a unitholder by issuing our common stock or cash in exchange
for any units tendered for redemption. We generally expect that we will elect to
issue shares of our common stock in exchange for units tendered for redemption
rather than paying cash, although we will make the determination whether to pay
cash or issue common stock at the time units are tendered for redemption. With
each redemption, our interest in Smith L.P. will increase. Upon redemption, the
unitholder will no longer be entitled to receive distributions with respect to
the units redeemed. If units are redeemed for common stock, the unitholder will
have rights as a shareholder from the time the common stock is acquired.

A unitholder must notify Smith L.P. and us of the unitholder's desire
to require Smith L.P. to redeem units by sending a notice in the form attached
as an exhibit to Smith L.P.'s partnership agreement, a copy of which we can
provide to you upon request. The unitholder must request the redemption of at
least 1,000 units or all of the units held by such holder, if less. The
redemption generally will occur on the tenth business day after the notice is
delivered by the unitholder, except that no redemption or exchange can occur if
the delivery of common stock upon redemption would be prohibited under the
provisions of our charter designed to protect our REIT qualification or under
applicable federal or state securities laws.

TAX CONSEQUENCES OF REDEMPTION

The following discussion summarizes the material federal income tax
considerations that may be relevant to a unitholder who desires to have units
redeemed.

TAX TREATMENT OF A REDEMPTION OF UNITS. If we assume and perform Smith
L.P.'s redemption obligation, the redemption will be treated as a sale of units
by the unitholder at the time of the redemption. The sale will be fully taxable
to the unitholder in an amount equal to the sum of the cash or the value of the
common stock received in the exchange plus the amount of Smith L.P. nonrecourse
liabilities allocable to the redeemed units at the time of the redemption.

If we do not elect to assume the obligation to redeem units, Smith L.P.
will redeem the units for cash. If Smith L.P. redeems units for cash that we
contribute to Smith L.P. to effect the redemption, the redemption likely would
be treated for tax purposes as a sale of the units in a fully taxable
transaction, although the matter is not free from doubt. In that event, the
unitholder would be treated as realizing an amount equal to the sum of the cash
received in the exchange plus the amount of Smith L.P.'s nonrecourse liabilities
allocable to the redeemed units at the time of the redemption.

If Smith L.P. redeems units for cash that is not contributed by us to
effect the redemption, the tax consequences would be the same as described in
the previous paragraph. If Smith L.P. redeems less than all of a unitholder's
units, however, the unitholder would not be permitted to recognize any loss
occurring on the transaction and would recognize taxable gain only to the extent
that the cash, plus the share of Smith L.P.'s nonrecourse liabilities allocable
to the redeemed units, exceeded the unitholder's adjusted basis in all of the
unitholder's units immediately before the redemption.

TAX TREATMENT OF A SALE OF UNITS. If a unit redemption is treated as a
sale of the unit, the determination of gain or loss will be based on the
difference between the amount realized for tax purposes and the tax basis in the
unit. See "Basis of Units" below. The "amount realized" will be measured by the
sum of the cash and fair market value of common stock or other property received
plus the portion of Smith L.P.'s nonrecourse liabilities allocable to the unit
sold. To the extent that this amount exceeds the unitholder's basis in the unit,
the unitholder will recognize gain. It is possible that the amount of gain
recognized or even the tax liability resulting from the gain could

9
<PAGE>

exceed the amount of cash and the value of common stock or any other property
received upon the disposition.

Except as described below, any gain recognized upon a sale or other
disposition of units will be treated as gain attributable to the sale or
disposition of a capital asset. To the extent, however, that the amount realized
attributable to a unitholder's share of "unrealized receivables" of Smith L.P.
exceeds the unitholder's basis attributable to those assets, the excess will be
treated as ordinary income. Unrealized receivables include, to the extent not
previously included in Smith L.P.'s income, any rights to payment for services
rendered or to be rendered. Unrealized receivables also include amounts that
would be subject to recapture as ordinary income if Smith L.P. had sold its
assets at their fair market value at the time of the transfer of a unit.

For individuals, trusts and estates, the maximum rate of tax on the net
capital gain from a sale or exchange of an asset held for more than 12 months is
20%. Net capital gain from the sale of an asset held 12 months or less is
subject to tax at the applicable rate for ordinary income. It should be noted
that the maximum rate for net capital gains attributable to the sale of
depreciable real property held for more than 12 months is 25% to the extent of
the prior depreciation deductions not otherwise recaptured as ordinary income
under existing depreciation recapture rules. Currently, this rule does not apply
to a redemption of units because units are not depreciable real property, but
the IRS has authority to issue regulations that could apply this rule to a
redemption of units. The IRS has not yet issued these regulations, but it is
possible that if issued they would be applied retroactively. If these
regulations were to apply to the disposition of a unit, any gain on such
disposition likely would be treated partly as gain from the sale of a long-term
capital asset, partly as gain from the sale of a short-term capital asset, and
partly as gain from the sale of depreciable real property.

BASIS OF UNITS. In general, a unitholder who received units in exchange
for a contribution of property had an initial tax basis in the units equal to
the unitholder's basis in the contributed property. A unitholder's initial basis
generally is increased by the unitholder's share of Smith L.P.'s taxable income
and increases in the unitholder's share of the liabilities of Smith L.P.,
including any increase in the unitholder's share of nonrecourse liabilities. A
unitholder's initial basis generally is decreased, but not below zero, by the
unitholder's share of Smith L.P.'s distributions, decreases in the unitholder's
share of liabilities of Smith L.P., including nonrecourse liabilities, the
unitholder's share of losses of Smith L.P., and the unitholder's share of
nondeductible expenditures of Smith L.P. that are not chargeable to capital.

POTENTIAL APPLICATION OF THE DISGUISED SALE RULES TO A REDEMPTION OF
UNITS. There is a risk that if a unit is redeemed, particularly if it is
redeemed within two years of when it was issued, the IRS might contend that the
original transaction pursuant to which the units were issued should be treated
as a "disguised sale" of property. Under the IRS's disguised sale rules, unless
an exception applies, a partner's contribution of property to a partnership and
a simultaneous or subsequent transfer of money or other consideration, including
the assumption of or taking subject to a liability, from the partnership to the
partner may be treated as a sale, in whole or in part, of the property by the
partner to the partnership. If money or other consideration is transferred by a
partnership to a partner within two years of the partner's contribution of
property, the transactions are presumed to be a sale of the contributed property
unless the facts and circumstances clearly establish that the transfers do not
constitute a sale. If two years have passed between the transfer of money or
other consideration and the contribution of property, the transactions will not
be presumed to be a sale unless the facts and circumstances clearly establish
that the transfers constitute a sale.

10
<PAGE>

COMPARISON OF OWNERSHIP OF UNITS AND COMMON STOCK

An investment in our common stock is substantially equivalent
economically to an investment in units in Smith L.P. A holder of a share of
common stock receives the same distribution that a holder of a unit receives and
shareholders and unitholders generally share equally in the risks and rewards of
ownership in our enterprise. There are, however, some differences between
ownership of units and ownership of shares of common stock, some of which may be
material to investors.

The comparisons below are intended to assist unitholders in
understanding how their investment will be changed if their units are redeemed
for common stock.

<TABLE>
<CAPTION>
- ------------------------------------------------------------ -------------------------------------------------------
SMITH L.P. CHARLES E. SMITH RESIDENTIAL REALTY, INC.
- ------------------------------------------------------------ -------------------------------------------------------

FORM OF ORGANIZATION AND ASSETS OWNED
-------------------------------------
<S> <C>

Smith L.P. is a Delaware limited partnership. Smith L.P. We are a Maryland corporation. We elected to
owns interests, directly and through a be taxed as a REIT under the Internal
subsidiary, in our properties and, through Revenue Code and intend to maintain our
subsidiaries, conducts our management and qualification as a REIT. Our only significant
leasing business. Smith L.P. is not permitted to asset is our interest in Smith L.P., which gives
take any action which would adversely affect our us an indirect investment in the properties
REIT status. owned by Smith L.P. Under Smith L.P.'s
partnership agreement, we generally may not
conduct any business other than in connection
with the ownership of interests in, and
management of the business of, Smith L.P.

ADDITIONAL EQUITY
-----------------
Smith L.P. is authorized to issue unites and such Our Board of Directors may authorize the
other partnership interests, including issuances from time to time of additional
partnership interests of different series or classes equity securities of any class or series, or
that may be senior to units, as we may securities or rights convertible into such equity
determine. Smith L.P. may issue units and other securities, for such consideration as the Board
partnership interests to us in exchange for the of Directors determines.
proceeds we raised in an offering of our
comparable shares. In addition, Smith L.P. will
issue additional units upon exercise of the
options granted pursuant to our benefit plans.
</TABLE>

11
<PAGE>

- ------------------------------------------------------------ -------------------------------------------------------
OPERATING PARTNERSHIP COMPANY
- ------------------------------------------------------------ -------------------------------------------------------

BORROWING POLICIES
------------------
<S> <C>

Smith L.P. has no restrictions on borrowings, Under Smith L.P.'s partnership agreement, we
and we are authorized to borrow money on behalf may not incur any debts except those for which
of Smith L.P. Our Board of Directors has we may be liable as general partner of Smith
adopted a policy that currently limits the debt-to- L.P. and in other limited circumstances.
total market capitalization ratio of Smith L.P. to Therefore, all debt we incur will be through
60%, but the Board of Directors may alter this Smith L.P.
policy at any time.

MANAGEMENT CONTROL
------------------

Generally, all management powers over the business and The Board of Directors has exclusive control
affairs of Smith L.P. are vested in us as general partner over our business and affairs. The policies
of Smith L.P., and no limited partner of Smith L.P. has adopted by the Board of Directors generally
any right to participate in or exercise control or may be altered or eliminated without a vote of
management power over the business and affairs of Smith our shareholders. Accordingly, except for their
L.P. Exceptions to this are that: vote in the elections of directors, shareholders
will have no control over our ordinary business
- - we cannot take any action contrary to Smith policies. The Board of Directors cannot change
L.P.'s partnership agreement without written our policy of maintaining our REIT status,
consent of all the limited however, without the approval of a majority of
partners; our shareholders.

- - we cannot cause Smith L.P. to dispose of all
or substantially all of its assets without the
consent of the holders of a majority of the
outstanding units, including units we own;

- - until December 31, 2013, we cannot cause or
permit Smith L.P. to dissolve if one or more
of the original limited partners objects to
such dissolution; and

- - from January 1, 2014 through December 31,
2043, we cannot cause or permit Smith L.P.
to dissolve if original limited partners
holding at least 5% of the units object to such
dissolution.

The limited partners cannot remove us as
general partner.
</TABLE>

12
<PAGE>

FIDUCIARY DUTIES
----------------
<S> <C>

Under Delaware law, we, as general partner of Under Maryland law, the directors must
Smith L.P., are required to exercise good faith perform their duties in good faith, in a manner
and integrity in all of our dealings relating to that they reasonably believe to be in our best
partnership affairs. Under the partnership interests and with the care of an ordinarily
agreement, however, we are under no obligation prudent person in a like position. Our
to consider the tax consequences to, or separate directors who act in such a manner generally
interests of, the limited partners in deciding will not be liable to us for monetary damages
whether to cause Smith L.P. to take any actions. arising from their activities.
We are not liable for monetary damages for
losses sustained, liabilities incurred, or benefits
not derived by the limited partners in connection
with such decisions, provided that we have acted
in good faith.

MANAGEMENT LIABILITY AND INDEMNIFICATION
----------------------------------------

We are liable for the obligations and debts of Our charter provides that the liability of our
Smith L.P., unless limits as to these liabilities directors and officers to us and to our
are stated in the document or instrument shareholders for money damages is limited to
evidencing the obligation. Smith L.P. has the fullest extent permitted under Maryland
indemnified us and any of our directors or law. Our charter and state law provide broad
officers from and against all losses, claims, indemnification to directors and officers,
damages, liabilities, joint or several, expenses whether serving us or, at our request, any
including legal fees, fines, settlements and other other entity, to the fullest extent permitted
amounts incurred in connection with any under Maryland law.
specified actions relating to the operations of
Smith L.P. in which we or any such director or
officer is involved. Smith L.P. will not indemnify
us or our directors or officers, however, if an act
was done in bad faith and was material to the
lawsuit, any of us received an improper personal
benefit, or in the case of any criminal proceeding,
any of us had reasonable cause to believe an act
we did was unlawful. Smith L.P. may reimburse
reasonable expenses incurred by an indemnitee
in advance of the final disposition of the
proceeding if Smith L.P. receives an affirmation
by the indemnitee of his, her or its good faith
belief that the standard of conduct necessary for
indemnification has been met and an
undertaking by such indemnitee to repay the
amount if it is determined that such standard
was not met.
</TABLE>

13
<PAGE>

ANTITAKEOVER PROVISIONS
-----------------------
<S> <C>

Except in limited circumstances as described Our charter and by-laws and Maryland
below under "Voting Rights," we have exclusive corporate law contain provisions that may
management power over the business and affairs delay or discourage an unsolicited proposal to
of Smith L.P. The limited partners cannot acquire us or to remove incumbent
remove us as the general partner of Smith L.P. management. These provisions include,
We may prevent a limited partner from among others:
transferring an interest in Smith L.P. or any
rights as a limited partner except in limited - a staggered Board of Directors;
circumstances. We may exercise this right to
deter, delay or hamper attempts by persons to - authorized capital stock that may be
acquire a majority interest in Smith L.P. classified and issued as a variety of equity
securities in the discretion of the Board of
Directors, including securities having
superior voting rights to the common stock;

- restrictions on business combinations with
persons who acquire more than the
percentage of common stock specified in
our charter;

- a requirement that directors may be
removed only for cause and only by a vote
of at least 80% of the outstanding common
stock; and

- provisions designed to avoid concentration
of share ownership in a manner that would
jeopardize our REIT status under the
Internal Revenue Code.

Our Board of Directors has also adopted a
shareholder rights plan which has some
antitakeover effects. If triggered, the
shareholder rights plan would cause
substantial dilution to a person or group that
sought to acquire us without the approval of
our Board of Directors.
</TABLE>

14
<PAGE>

VOTING RIGHTS
-------------
<S> <C>

Limited partners have voting rights only as to Holders of our common stock are entitled to
the dissolution of Smith L.P., the sale of all or vote on the election and removal of directors
substantially all of the assets of Smith L.P. and and certain major corporate transactions,
amendments of the partnership agreement. including most amendments to our charter,
Otherwise, all decisions relating to the operation any proposal for our merger or consolidation
and management of Smith L.P. are made by us. with or into another entity or the sale or
As of June 30, 1999, we owned approximately disposition of all or substantially all of our
59.9% of the units. As units are redeemed by assets. Holders of common stock have one vote
partners, or if we acquire additional units in per share. Our charter permits the Board of
exchange for the proceeds of offerings of our Directors to classify and issue capital stock
securities, our percentage ownership of the units having voting power that may differ from that
will increase. If additional units are issued to of the common stock.
third parties, our percentage ownership of the
units will decrease.

AMENDMENT OF THE PARTNERSHIP AGREEMENT OR THE CHARTER
-----------------------------------------------------

We or any limited partner holding 25% or more Amendments to our charter must be approved
of the units may propose to amend the by the Board of Directors and by the vote of at
partnership agreement. Such proposal, in order least two-thirds of the votes entitled to be cast
to be effective, must be approved by the written at a meeting of shareholders. However, an
vote of holders of at least a majority in interest of amendment of the provisions relating to any of
Smith L.P. In addition, we may, without the the classification of the Board of Directors, the
consent of the limited partners, amend the power to remove directors and the share
partnership agreement as to ministerial matters. ownership limits designed to maintain our
REIT status must be approved by an 80% vote.
An amendment relating to termination of our
REIT status requires a majority vote of the
shareholders entitled to vote for such a matter.

VOTE REQUIRED TO DISSOLVE SMITH L.P. OR THE COMPANY
---------------------------------------------------

Through December 31, 2013, we cannot elect to Under Maryland law, the Board of Directors
dissolve Smith L.P. if any original limited must obtain approval of holders of at least two-
partner who became a limited partner on thirds of the outstanding shares of common
June 30, 1994 holding units issued at such time stock to dissolve us.
objects to such dissolution. From January 1,
2014 through December 31, 2043, we cannot
elect to dissolve Smith L.P. if any original limited
partner who became a limited partner on June
30, 1994 and who held at least 5% of the units on
June 30, 1994 objects to such dissolution. After
January 1, 2044, we may dissolve Smith L.P.
without the consent of the limited partners.
</TABLE>

15
<PAGE>

VOTE REQUIRED TO SELL ASSETS
----------------------------
<S> <C>

We cannot cause Smith L.P. to sell, exchange, Under Maryland law, the Board of Directors is
transfer or otherwise dispose of all or required to obtain approval of the shareholders
substantially all of Smith L.P.'s assets without by the affirmative vote of two-thirds of all the
the consent of holders of a majority of the votes entitled to be cast on the matter to sell
outstanding units, including units we hold. We all or substantially all of our assets. No
currently own a majority of the units and thus approval of the shareholders is required for the
expect that we would control the outcome of such sale of less than all or substantially all of our
a vote. assets.

VOTE REQUIRED TO MERGE
----------------------

We generally cannot cause Smith L.P. to merge Under Maryland law, the Board of Directors is
or consolidate without the consent of holders of a required to obtain approval of the shareholders
majority of the outstanding units, including units by the affirmative vote of two-thirds of all the
we hold. We currently own a majority of the votes entitled to be cast on the matter in order
units and thus expect that we would control the to merge or consolidate us.
outcome of such a vote.

LIABILITY OF INVESTORS
----------------------

The liability of the limited partners for Smith Under Maryland law, shareholders are not
L.P.'s debts and obligations is generally limited personally liable for our debts or obligations.
to the amount of their investment in Smith L.P., Shares of common stock, upon issuance, will be
together with an interest in any undistributed fully paid and nonassessable.
income, if any. Units, upon issuance, will be
fully paid and nonassessable.

REVIEW OF INVESTOR LISTS
------------------------

Limited partners, upon written demand with a Under Maryland law, a shareholder holding at
statement of the purpose of such demand and at least 5% of our outstanding stock may upon
the limited partner's expense, are entitled to written request inspect and copy during usual
obtain a current list of the name and last known business hours our shareholder list.
business, residence or mailing address of each
limited partner of Smith L.P.
</TABLE>

16
<PAGE>

THE FOLLOWING COMPARES CERTAIN OF THE INVESTMENT ATTRIBUTES AND LEGAL
RIGHTS ASSOCIATED WITH THE OWNERSHIP OF UNITS AND SHARES OF COMMON STOCK.

- ------------------------------------------------------------ -------------------------------------------------------
UNITS SHARES
- ------------------------------------------------------------ -------------------------------------------------------

NATURE OF INVESTMENT
--------------------
<S> <C>

The units constitute equity interests entitling Shares of our common stock constitute equity
each limited partner to his proportionate share of interests in us. We are entitled to receive our
cash distributions made to the limited partners proportionate share of distributions made by
of Smith L.P. Smith L.P. with respect to the units, and each
shareholder is entitled to a proportionate share
of any dividends or distributions paid with
respect to the common stock. The dividends
payable to the shareholders are not fixed in
amount and are only paid if, when and as
declared by the Board of Directors. In order to
qualify as a REIT, we must distribute at least
95% of our taxable income, including
capital gains, not distributed will be subject to
corporate income tax.

LIQUIDITY
---------

Units may be transferred by a limited partner Our common stock is freely transferable,
only with our consent, which consent may be subject to the ownership limit contained in our
withheld in our sole discretion. We will permit charter. The common stock is listed on the
transfers of units only in connection with gifts, NYSE, and a public market for the common
bequests and transfers by a unitholder to family stock exists. The breadth and strength of this
members and other persons. Subject to secondary market will depend, among other
conditions, each unitholder has the right to elect things, upon the number of shares
to have the unitholder's units redeemed by Smith outstanding, our financial results and
L.P. Upon redemption, such unitholder will prospects, the general interest in us and in our
receive, at our election, either shares of common real estate investments, and our dividend yield
stock or the cash equivalent in exchange for such compared to that of other debt and equity
units. securities.
</TABLE>

17
<PAGE>

TAXATION
--------
<S> <C>

Smith L.P. is not subject to federal income taxes. We have elected to be taxed as a REIT. So
Instead, each holder of units includes his long as we qualify as a REIT, we will be
allocable share of Smith L.P.'s taxable income or permitted to deduct dividends paid to our
loss in determining his individual federal income shareholders, which effectively will reduce the
tax liability. The maximum effective federal tax "double taxation" that typically results when a
rate for individuals under current law is 39.6%. corporation earns income and distributes that
income to its shareholders in the form of
Income and loss from Smith L.P. generally will dividends. Our property service businesses,
be subject to the "passive activity" limitations. however, will not qualify as REITs and thus
Under the "passive activity" rules, income and they will be subject to federal income tax on
loss from Smith L.P. that is considered "passive their net income at normal corporate rates.
income" generally can be offset against income The maximum effective tax rate for
and loss from other investments that constitute corporations under current law is 35%
"passive activities," unless Smith L.P. is
considered a "publicly traded partnership," in Dividends we pay will be treated as "portfolio"
which case income and loss from Smith L.P. can income and cannot be offset with losses from
be offset only against other income and loss from "passive activities."
Smith L.P. Income of Smith L.P., however,
attributable to dividends from our property Distributions we make to our taxable domestic
service businesses or interest paid by the shareholders out of current or accumulated
property service businesses will not qualify as earnings and profits will be taken into account
passive income and cannot be offset with losses by them as ordinary income. Distributions in
and deductions from a "passive activity," excess of current or accumulated earnings and
including losses and deductions attributable to profits that are not designated as capital gain
Smith L.P.'s multifamily rental activities. dividends will be treated as a non-taxable
return or basis to the extent of a shareholder's
Cash distributions from Smith L.P. will not be adjusted basis in its shares of common stock,
taxable to a holder of units except to the extent with the excess taxed as capital gain.
they exceed the holder's basis in his interest in Distributions that are designated as capital
Smith L.P., which includes the holder's allocable gain dividends generally will be taxed as gains
share of Smith L.P.'s debt. from the sale or exchange of a capital asset
held for more than one year, to the extent they
Each year, holders of units receive a Schedule do not exceed our actual net capital gain for
K-1 tax form containing detailed tax information the taxable year. For our taxable years
for inclusion in preparing their federal income commencing on or after January 1, [1998], we
tax returns. may elect to require our shareholders to
include our undistributed net capital gains in
Holders of units are required, in some cases, to their income. If we so elect, shareholders
file state income tax returns and/or pay state would include their proportionate share of
income taxes in the state in which Smith L.P. such gains in their income and be deemed to
owns property, even if they are not residents of have paid their share of the tax paid by us on
those states. such gains.
</TABLE>

18
<PAGE>

Each year, shareholders receive Form 1099
used by corporations to report dividends paid
to their shareholders.

Shareholders who are individuals generally
will not be required to file state income tax
returns and/or pay state incomes taxes outside
of their state of residence with respect to ou
operations and distributions. We may be
required to pay state income taxes in states
where we are authorized to do business.
</TABLE>

19
<PAGE>

FEDERAL INCOME TAX CONSIDERATIONS

GENERAL

The following discussion summarizes the material federal income tax
considerations to a prospective holder of our common stock. The following
discussion is for general information only, is not exhaustive of all possible
tax considerations, and is not intended to be and should not be construed as tax
advice. For example, it 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 its particular circumstances or to certain types of shareholders who
are subject to special treatment under the federal income tax laws. For example,
the discussion does discuss all of the aspects of federal income taxation that
may be relevant to insurance companies, tax-exempt entities, financial
institutions or broker-dealers, foreign corporations, and persons who are not
citizens or residents of the United States.

The information in this section is based on the Internal Revenue Code,
current, temporary and proposed regulations, the legislative history of the
Internal Revenue Code, administrative interpretations and practices of the IRS,
and court decisions. The reference to IRS interpretations and practices includes
IRS practices and policies as endorsed in private letter rulings, which are not
binding on the IRS except with respect to the taxpayer that receives the ruling.
In each case, these sources are relied upon as they exist on the date of this
prospectus. No assurance can be given that future legislation, regulations,
administrative interpretations and court decisions will not significantly change
current law or adversely affect existing interpretations of existing law. Any
change of this kind could apply retroactively to transactions preceding the date
of the change. Except as described below in "--Requirements for
Qualification--Income Tests," we have not received any rulings from the IRS
concerning our tax treatment. Therefore, no assurance can be provided that the
statements made in the following discussion, which do not bind the IRS or the
courts, will not be challenged by the IRS or will be sustained by a court if so
challenged.

EACH PROSPECTIVE HOLDER OF COMMON STOCK IS URGED TO CONSULT WITH ITS
OWN TAX ADVISOR TO DETERMINE THE IMPACT OF ITS PERSONAL TAX SITUATION ON THE
ANTICIPATED TAX CONSEQUENCES OF THE OWNERSHIP AND SALE OF COMMON STOCK. THIS
INCLUDES THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE
OWNERSHIP AND SALE OF COMMON STOCK, AND THE POTENTIAL CHANGES IN APPLICABLE TAX
LAWS.

OUR TAX TREATMENT

GENERAL. We have elected to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code commencing with its taxable year ending
December 31, 1994. We believe that our company was organized and has operated in
conformity with the requirements for qualification and taxation as a REIT under
the Internal Revenue Code and we intend to continue to operate as a REIT. We
cannot ensure, however, that we have operated in a manner so as to qualify as a
REIT or that we will continue to operate as a REIT in the future. Our
qualification and taxation as a REIT depend upon our ability to meet the various
qualification tests imposed under the Internal Revenue Code. These tests must be
met on a continuing basis through actual annual operating results, distribution
levels and diversity of stock ownership. While we intend to operate so that we
qualify as a REIT, given the highly complex nature of the rules governing REITs,
the ongoing importance of factual determinations, and the possibility of future
changes in our circumstances, we cannot ensure that the actual results of our
operations for any taxable year (our company) have satisfied or will satisfy the
REIT requirements. Further, the anticipated income tax treatment described
herein may be changed, perhaps retroactively, by legislative, administrative or
judicial action at any time. See "--Failure to Qualify."

20
<PAGE>

The following is a general summary of the Internal Revenue Code
provisions that govern the federal income tax treatment of a REIT and its
shareholders. These provisions are highly technical and complex. This summary is
qualified in its entirety by the applicable Internal Revenue Code provisions,
regulations, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.

In any year in which we qualify for taxation as a REIT, we generally
will not be subject to federal corporate income taxes on net income that we
distribute currently to shareholders. This treatment substantially eliminates
the "double taxation" at the corporate and shareholder levels that generally
results from investment in a corporation. However, we will be subject to federal
income tax on any income that we do not distribute. In addition, in some
circumstances, we will be subject to federal income tax on some types of income
even though that income is distributed. Moreover, our property services business
subsidiaries do not qualify as REITs and are subject to federal corporate income
tax on their net income.

REQUIREMENTS FOR QUALIFICATION AS A REIT.

ORGANIZATIONAL REQUIREMENTS. The Internal Revenue Code defines a REIT
as a corporation, trust or association--

(1) that is managed by one or more trustees or directors;

(2) the beneficial ownership of which is evidenced by transferable
shares, or by transfer certificates of beneficial interest;

(3) that would be taxable as a domestic corporation, but for
Sections 856 through 859 of the Internal Revenue Code;

(4) that is neither a financial institution nor an insurance
company subject to certain provisions of the Internal Revenue
Code;

(5) the beneficial ownership of which is held by 100 or more
persons;

(6) during the last half of each taxable year not more than 50% in
value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the
Internal Revenue Code to include certain entities); and

(7) that meets other tests, as described below, regarding the
nature of its income and assets.

The Internal Revenue Code provides that conditions (1) through (4),
inclusive, must be met during the entire taxable year and that condition (5)
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. We believe that we
currently satisfy requirements (1) through (6). In addition, our charter
includes restrictions regarding the transfer of our shares that are intended to
assist us in continuing to satisfy the share ownership requirements described in
(5) and (6) above. Moreover, if we comply with regulatory rules pursuant to
which we are required to send annual letters to holders of common stock
requesting information regarding the actual ownership of the common stock, and
we do not know, or exercising reasonable diligence would not have known, whether
we failed to meet requirement (6) above, we will be treated as having met the
requirement.

GROSS INCOME TESTS. In order to maintain qualification as a REIT, we
must satisfy two gross income requirements, which are applied on an annual
basis. First, at least 75% of our gross income, excluding some gross income from
prohibited transactions, for each taxable year must be derived directly or
indirectly from investments relating to real property or mortgages on real
property or from some types of temporary investments. Investments relating to
real property or mortgages on real property include "rents from real property"
and, in some circumstances, interest.

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Second, at least 95% of our gross income, excluding gross income from prohibited
transactions, for each taxable year must be derived from sources that qualify
for purposes of the 75% test, and from dividends, interest and gain from the
sale or disposition of stock or securities, or from any combination of the
foregoing.

Rents we receive will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. These conditions relate to the identity of the
tenant, the computation of the rent payable, and the nature of the property
leased. We believe that the portion of the rents that we receive that fails to
qualify as "rents from real property" has not caused, and will not in the future
cause, us to fail to comply with the 75% and 95% gross income tests. Our belief
with respect to this matter, however, is based upon the advice of counsel with
respect to certain technical issues regarding the determination of "rents from
real property" that are not definitively answered under federal tax law. We
cannot ensure that the IRS will agree with these conclusions.

In addition, for rents received to qualify as "rents from real
property," we generally must not operate or manage the property or furnish or
render services to tenants, other than through an "independent contractor" from
whom we derive no revenue. The "independent contractor" requirement, however,
does not apply to the extent the services are "usually or customarily rendered"
in connection with the rental space for occupancy only and are not otherwise
considered "rendered to the occupant." These services are referred to as
permissible services. Smith L.P. itself and the property service businesses,
which are not independent contractors, provide certain services with respect to
our properties. We received rulings from the IRS that the provision of some of
these services will not cause the rents received with respect to the properties
to fail to qualify as "rents from real property."

We also received rulings from the IRS to the effect that certain
revenues will qualify as "rents from real property." These revenues include the
following:

- rents from corporate apartments,

- revenues from laundry equipment,

- certain parking revenues, and

- certain revenues related to the provision of telephone and
cable television services.

Based upon our experience in the multifamily and retail property rental
markets in which our properties are located, we believe that all services
provided to tenants by us, whether through Smith L.P. or through the property
services businesses, should be considered permissible services, although there
can be no assurance that the IRS will not contend otherwise. In this regard, if
Smith L.P. contemplates providing services that reasonably might be expected not
to meet the "usual or customary" standard, we will arrange to have such services
provided by an independent contractor from which neither us nor Smith L.P.
receives any income.

Rents received generally will qualify as rents from real property
notwithstanding the fact that we provide services that are not permissible
services so long as the amount received for services does not exceed a set
level. Specifically, the amount received for "impermissible services" with
respect to a property cannot exceed one percent of all amounts received,
directly or indirectly, by us with respect to that property. The amount that we
will be deemed to have received for performing "impermissible services" will be
the greater of the actual amount so received or 150% of the direct cost to us of
providing those services.

Smith L.P. may receive fees for the performance of property management
and other services with respect to properties in which Smith L.P. has a partial
interest. Only the portion of the

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management fee that corresponds to Smith L.P.'s interest in such properties will
qualify as "rents from real property." The balance will not qualify. Smith L.P.
also may receive certain other types of non-qualifying income. This income
includes, for example, certain expense reimbursements, and dividends and
interest from the property service businesses, which qualify under the 95% gross
income test but not under the 75% gross income test. We believe, however, that
the aggregate amount of these fees and other non-qualifying income in any
taxable year will not cause us to exceed the limits on non-qualifying income
under the 75% and 95% gross income tests.

If we fail to satisfy one or both of the 75% or the 95% gross income
tests for any taxable year, we may nevertheless qualify as a REIT for the year
if we are entitled to relief under the Internal Revenue Code. We cannot state,
however, whether in all circumstances we would be entitled to this relief. Even
if this relief applied, a 100% tax would be imposed with respect to the "excess
net income" attributable to the failure to satisfy the 75% and 95% gross income
tests.

ASSET TESTS. At the close of each quarter of our taxable year, we must
satisfy the following three tests relating to the nature of our assets:

1. at least 75% of the value of our total assets must be
represented by "real estate assets," cash, cash items, and
government securities;

2. not more than 25% of our total assets may be represented by
securities, other than those in the 75% asset class; and

3. of the investments included in the 25% asset class, the value
of any one issuer's securities we own may not exceed 5% of the
value of our total assets, and we may not own more than 10% of
any one issuer's outstanding voting securities.

Smith L.P. owns 100% of the nonvoting stock of each of the property
service businesses. In addition, Smith L.P. holds notes from each of the
property service businesses. By virtue of our ownership of units, we are
considered to own our proportionate share of the assets of Smith L.P., including
the securities of each of the property service businesses described above. Smith
L.P., however, does not own more than 10% of the voting securities of any of the
property service businesses. In addition, we believe that our share of the value
of the securities of each of the property service businesses does not exceed 5%
of the total value of its assets. We cannot ensure, however, that the IRS might
not contend either that the value of the securities of one or more of the
property service businesses exceeds the 5% value limitation, or that all or some
of the property service businesses shall be viewed as a single corporation for
purposes of the 5% value limitation and that the value of the securities of that
corporation exceeds the 5% limitation, or that the nonvoting stock of one or
more of the property service businesses should be considered "voting securities"
for purposes of the 10% limitation.

The 5% value requirement must be satisfied not only on the date we
acquired securities of the property service businesses, but also each time
acquire additional securities of the property service businesses. Accordingly,
each time a unitholder exercises its right to redeem units and our interest in
Smith L.P. increases, the requirement will have to be met. Although we plan to
take steps to ensure that we satisfy the 5% value test for any quarter with
respect to which retesting is to occur, we cannot ensure that these steps always
will be successful or will not require a reduction in Smith L.P.'s overall
interest in the property service businesses.

ANNUAL DISTRIBUTION REQUIREMENTS. To qualify as a REIT, we generally
must distribute dividends to our shareholders in an amount at least equal to --

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(1) the sum of (a) 95% of our REIT taxable income, computed without
regard to the dividends paid deduction and our net capital gain, and (b) 95% of
our net income after tax, if any, from foreclosure property, MINUS

(2) the sum of certain items of noncash income.

Distributions must be made either during the taxable year to which they relate
or, if specific procedures are followed, during the subsequent taxable year. We
will be subject to tax on amounts not distributed at regular capital gains and
ordinary income rates.

In addition, if we fail to distribute during each calendar year at
least the sum of 85% of our ordinary income, 95% of our capital gain net income
and 100% of our undistributed income from prior years, we will be subject to a
4% nondeductible excise tax on the excess of this required amount over the sum
of the amounts we actually distribute and amounts retained with respect to which
we pay federal income tax.

We believe that we have made, and intend to continue to make, timely
distributions sufficient to satisfy the annual distribution requirements. It is
possible, however, that we, from time to time, may not have sufficient cash or
other liquid assets to meet the 95% distribution requirement. In that event, we
may cause Smith L.P. to arrange for short-term, or possibly long-term, borrowing
to permit the payments of required dividends.

FAILURE TO QUALIFY. If we fail to qualify for taxation as a REIT in any
taxable year and the relief provisions do not apply, we will be subject to tax,
including any applicable alternative minimum tax, on our taxable income at
regular corporate rates. Unless we are entitled to relief under specific
statutory provisions, we also will be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
We cannot state whether in all circumstances we would be entitled to this
statutory relief.

TAX ASPECTS OF OUR INVESTMENTS IN SMITH L.P. AND PROPERTY SERVICE BUSINESSES

GENERAL. All of our investments are through Smith L.P. Smith L.P. holds
substantially all the real estate properties through some of the subsidiary
partnerships. This structure may involve special tax considerations. These tax
considerations include the following:

(a) the allocations of income and expense items of Smith L.P. and
those subsidiary partnerships, which could affect the
computation of our taxable income,

(b) the status of Smith L.P. and each applicable subsidiary
partnership as partnership (as opposed to an association
taxable as a corporation) for income tax purposes, and

(c) the taking of actions by Smith L.P. or any of those subsidiary
partnerships that could adversely affect Charles E. Smith's
qualification as a REIT.

We believe that Smith L.P. and each of the subsidiary partnerships will
be treated for tax purposes as a partnership (and not as an association taxable
as a corporation). If, however, Smith L.P. or any of the subsidiary partnerships
were treated as an association taxable as a corporation, we would fail to
qualify as a REIT for a number of reasons.

TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Smith L.P. was formed
by way of contributions of appreciated property, including certain of the
apartment properties, at the time of its formation. In addition, it has acquired
a number of properties by contribution since that time. When property is
contributed to a partnership in exchange for an interest in the partnership, the
partnership generally takes a carryover basis in that property for tax purposes
equal to the adjusted

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basis of the contributing partner in the property, rather than a basis equal to
the fair market value of the property at the time of contribution. This
difference is referred to as a "book-tax difference."

Smith L.P.'s partnership agreement requires that all allocations of
partnership income, gain and loss be made in a manner consistent with Section
704(c) of the Internal Revenue Code and applicable regulations. Therefore,
allocations will tend to eliminate the book-tax differences with respect to the
contributed properties over the life of Smith L.P. However, the special
allocation rules of Section 704(c) of the Internal Revenue Code may not always
entirely eliminate the book-tax difference on an annual basis or with respect to
a specific taxable transaction such as a sale. Consequently, the carryover basis
of contributed properties in the hands of Smith L.P. could cause us to be
allocated lower amounts of depreciation and other deductions for tax purposes
than would be allocated to us if no property had a book-tax difference.
Similarly, the carryover basis of contributed properties in the hands of Smith
L.P. could cause us to possibly to be allocated taxable gain in the event of a
sale of contributed properties in excess of the economic or book income
allocated to us as a result of such sale.

PROPERTY SERVICE BUSINESSES. A substantial portion of the amounts used
by Smith L.P. to fund distributions to partners, which in turn are used by us to
fund distributions to holders of common stock, comes from the property service
businesses, through payments on notes issued by the property service businesses
and dividends on non-voting stock of the property service businesses held by
Smith L.P. The property service businesses do not qualify as REITs and therefore
pay federal, state and local income taxes on their net income at normal
corporate rates. The property service businesses attempt to limit the amount of
those taxes. We cannot ensure, however, whether or the extent to which measures
taken to limit taxes will be successful. Moreover, even if those measures are
successful, future increases in the income of the property service businesses
inevitably will be subject to income tax. To the extent that the property
service businesses are required to pay federal, state and local income taxes,
the cash available for distribution to shareholders will be reduced accordingly.

In addition, as described above, the value of the securities of each of
the property service businesses held by Smith L.P. cannot exceed 5% of the value
of Smith L.P.'s assets at a time when we acquire additional securities of a
property service business. This includes each instance in which a unitholder
redeems its units. Also, we cannot own 10% or more of the voting securities of
the property service businesses. See "--Requirements for Qualification--Asset
Tests." These limitations may restrict the ability of the property service
businesses to increase the size of their respective businesses unless the value
of the assets of Smith L.P. is increasing at a commensurate rate. Moreover, they
prohibit Smith L.P. from exercising control over the property service
businesses.

TAXATION OF SHAREHOLDERS

TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS. As used herein, the term
"U.S. shareholder" means a holder of common stock who for United States federal
income tax purposes is --

(1) a citizen or resident of the United States,

(2) a corporation, partnership, or other entity created or
organized in or under the laws of the United States or of any
political subdivision of the United States,

(3) an estate or trust the income of which is subject to United
States federal income taxation regardless of its source, or

(4) a trust whose administration is subject to the primary
supervision of a United States court and which has one or more
United States persons who have the authority to control all
substantial decisions of the trust.

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As long as we qualify as a REIT, distributions made to our taxable U.S.
shareholders out of current or accumulated earnings and profits, which are not
designated as capital gain dividends, will be taken into account by them as
ordinary income. Corporate shareholders will not be eligible for the dividends
received deduction with respect to these dividends. For purposes of determining
whether the distributions on shares of common stock are out of current or
accumulated earnings and profits, our earnings and profits will be allocated
first to shares of preferred stock and second to shares of common stock. We
cannot ensure that we will have sufficient earnings and profits to cover any
distributions on preferred stock.

To the extent they do not exceed our actual net capital gain for the
taxable year, distributions that are designated as capital gain dividends will
be taxed to taxable non-corporate U.S. shareholders as gains from the sale or
exchange of a capital asset held for more than one year. This tax treatment
applies regardless of the period non-corporate shareholders have held their
stock. Non-corporate U.S. shareholders include individuals, estates, and trusts.
On November 10, 1997, the IRS issued Notice 97-64, which provides generally that
we may classify portions of our designated capital gain dividend in the
following categories:

(1) a 20% gain distribution, which would be taxable to taxable
non-corporate U.S. shareholders at a maximum rate of 20%,

(2) an unrecaptured Section 1250 gain distribution, which would be
taxable to taxable non-corporate U.S. shareholders at a
maximum rate of 25%, or

(3) a 28% gain distribution which would be taxable to taxable
non-corporate U.S. shareholders at a maximum rate of 28%.

In light of the IRS Restructuring and Reform Act of 1998, which
eliminates the 18-month holding period that was required to be met to take
advantage of the lowest capital gain tax rates, the IRS is expected to issue
clarifying guidance regarding the designation of REIT capital gain dividends.
Notice 97-64 provides that a REIT must determine the maximum amounts that it may
designate as 20% and 25% capital gain dividends by performing the computation
required by the Internal Revenue Code as if the REIT were an individual whose
ordinary income were subject to a marginal tax rate of at least 28%. Notice
97-64 further provides that designations made by the REIT only will be effective
to the extent that they comply with Revenue Ruling 89-81, which requires that
distributions made to different classes of shares be composed proportionately of
dividends of a particular type.

To the extent that they do not exceed our actual net capital gain for
the taxable year, distributions made by us that are properly designated as
capital gain dividends will be taxable to taxable corporate U.S. shareholders as
long-term gain. This tax treatment applies regardless of the period corporate
shareholders have held their stock. Those corporate U.S. 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 taxable U.S. shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's common stock, but rather will
reduce the adjusted basis of such common stock. To the extent that distributions
exceed the adjusted basis of a taxable U.S. shareholder's common stock, they
will be included in income as capital gains, assuming the common stock is a
capital asset in the hands of the shareholder.

In general, a taxable U.S. shareholder will realize gain or loss on the
disposition of common stock equal to the difference between the amount of cash
and the fair market value of any property received on such disposition and the
U.S. shareholder's adjusted basis of such common stock. This gain or loss will
be capital gain or loss if the common stock has been held as a capital asset. In
the case of a taxable U.S. shareholder that is a corporation, such capital gain
or loss will be long-term

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capital gain or loss if such common stock has been held for more than one year.
Generally, in the case of a taxable non-corporate U.S. shareholder, such capital
gain or loss will be taxed for dispositions occurring after December 31, 1997,
at a maximum rate of 20%, and for dispositions occurring after December 31,
2000, at a maximum rate of 18% if the common stock is acquired after December
31, 2000 and held for more than five years. The Taxpayer Relief Act of 1997
allows the IRS to issue regulations relating to how the act's new capital gain
rates will apply to sales of capital assets by "pass-through entities," which
include REITs such as us, and to sales of interests in "pass-through entities."
To date, the IRS has not issued such regulations, but if issued, such
regulations could affect the taxation of gain and loss realized on the
disposition of common stock. Shareholders are urged to consult with their own
tax advisors with respect to the new rules contained in the Taxpayer Relief Act.

Loss upon a sale or exchange of common stock by a taxable U.S.
shareholder who has held the common stock for six months or less, after applying
certain holding period rules, will be treated as long-term capital loss to the
extent the distributions from us are required to be treated by the shareholder
as long-term capital gain. For a taxable non-corporate U.S. shareholder, the
long-term capital loss will be apportioned among the applicable long-term
capital gain groups to the extent that distributions received by such U.S.
shareholder were previously so treated.

We may elect to require the holders of common stock to include our
undistributed net capital gains in their income. If we make this election, the
holders of common stock will include in their income as long-term capital gains
their proportionate share of such undistributed capital gains. They will be
deemed to have paid their proportionate share of the tax paid by us on the
undistributed capital gains and receive in return a credit or refund for this
amount. A holder of common stock will increase the basis in its common stock by
the difference between the amount of capital gain included in its income and the
amount of the tax it is deemed to have paid. Our earnings and profits will be
adjusted appropriately.

Under certain circumstances, U.S. shareholders may be subject to backup
withholding at the rate of 31% with respect to dividends paid.

TAXATION OF TAX-EXEMPT SHAREHOLDERS. We do not expect our distributions
to a shareholder that is a tax-exempt entity will constitute "unrelated business
taxable income" ("UBTI"), provided that the tax-exempt entity has not financed
the acquisition of its common stock with "acquisition indebtedness" within the
meaning of the Internal Revenue Code, and the common stock is not otherwise used
in an unrelated trade or business of the tax-exempt entity. For a tax-exempt
shareholder that is a social club, voluntary employee benefit association,
supplemental unemployment benefit trust, or qualified group legal services plan
exempt from federal income taxation under Internal Revenue Code Sections 501
(c)(7), (c)(9), (c)(17) or (c)(20), respectively, income from an investment in
us will constitute UBTI unless the organization is able to properly deduct
amounts set aside or placed in reserve so as to offset the income generated by
its investment in us. The prospective shareholder should consult its own tax
advisors concerning these "set aside" and reserve requirements.

TAXATION OF FOREIGN SHAREHOLDERS. In the following paragraphs,
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign shareholders will be referred to collectively as foreign
shareholders. The rules governing U.S. federal income taxation of foreign
shareholders are complex. No attempt will be made in the following paragraphs to
provide more than a limited summary of these rules. Prospective foreign
shareholders should consult with their own tax advisors to determine the impact
of U.S. federal, state and local income tax laws with regard to an investment in
common stock, including any reporting requirements.

Distributions that are not attributable to gain from sales or exchanges
by us of U.S. real property interests and not designated by us as capital gain
dividends will be treated as dividends of

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ordinary income to the extent that they are made out of our current or
accumulated earnings and profits. These 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 that tax. Distributions in
excess of our current and accumulated earnings and profits will not be taxable
to a foreign shareholder to the extent that they do not exceed the adjusted
basis of the shareholder's common stock, but rather will reduce the adjusted
basis of such common stock. To the extent that such distributions exceed the
adjusted basis of a foreign shareholder's common stock, they will give rise to
tax liability if the foreign shareholder otherwise would be subject to tax on
any gain from the sale or disposition of his common stock as described below. To
the extent that such distributions exceed the adjusted basis of a foreign
shareholder's common stock, they will give rise to gain from the sale or
exchange of its common stock, the tax treatment of which is described below.

As a result of a legislative change made by the Small Business Job
Protection Act of 1996, it appears that we will be required to withhold 10% of
any distribution in excess of our current and accumulated earnings and profits.
Consequently, although we intend to withhold at a rate of 30% on the entire
amount of any distribution, or a lower applicable treaty rate, to the extent
that we do not do so, any portion of a distribution not subject to withholding
at a rate of 30%, or a lower applicable treaty rate, will be subject to
withholding at a rate of 10%. However, the foreign shareholder may seek a refund
of such amounts from the IRS if it subsequently determined that the distribution
was, in fact, in excess of our current or accumulated earnings and profits, and
the amount withheld exceeded our foreign shareholder's United States tax
liability, if any, with respect to the distribution.

For any year in which we qualify as a REIT, distributions that are
attributable to gain from sales or exchanges of U.S. real property interests
will be taxed to a foreign shareholder under the provisions of the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA"), 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. This tax treatment will apply whether or not the
distributions are designated as a capital gain dividend. Also, distributions
subject to FIRPTA may be subject to a 30% branch profits tax in the hands of a
corporate foreign shareholder not entitled to treaty relief or exemption. We are
required by applicable regulations to withhold 35% of any distribution that we
could designate as a capital gain dividend. This amount is creditable against
the foreign shareholder's FIRPTA tax liability.

Although the law is not entirely clear on the matter, it appears that
amounts we designate pursuant to the Taxpayer Relief Act as undistributed
capital gains in respect of shares of common stock would be treated with respect
to foreign shareholders in the manner outlined in the preceding paragraph. Under
that approach, foreign shareholders would be able to offset as a credit against
the resulting United States federal income tax liability their proportionate
share of the tax we paid on such undistributed capital gains. Also under that
approach, foreign shareholders would be able to receive from the IRS a refund to
the extent their proportionate share of the tax we paid exceeded their actual
United States federal income tax liability.

Gain recognized by a foreign shareholder upon a sale of common stock
generally will not be taxed under FIRPTA if we are a "domestically controlled
REIT." Generally, a "domestically controlled REIT" is a REIT in which at all
times during a specified testing period less than 50% in value of its stock was
held directly or indirectly by foreign persons. We believe that we currently are
a "domestically controlled REIT," and, therefore, the sale of common stock will
not be subject to taxation under FIRPTA. If gain on the sale of common stock
were to be subject to tax under FIRPTA, foreign shareholders would be subject to
the same treatment as U.S. shareholders with respect to this gain, subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals. The purchaser of common stock from a
foreign shareholder would be required to withhold and remit to the IRS 10% of
the purchase price.

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BACKUP WITHHOLDING TAX AND INFORMATION REPORTING. Backup withholding
tax generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements. Backup withholding tax and
information reporting will generally not apply to distributions paid to foreign
shareholders outside the United States that are treated as --

(1) dividends subject to the 30% (or lower treaty rate)
withholding tax discussed above,

(2) capital gains dividends, or

(3) distributions attributable to gain from our sale or exchange
of United States real property interests.

As a general matter, backup withholding and information reporting will
not apply to a payment of the proceeds of a sale of common stock by or through a
foreign office of a foreign broker. Information reporting (but not backup
withholding) will apply, however, to a payment of the proceeds of a sale of
common stock by a foreign office of a broker that --

(a) is a United States person,

(b) derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the United States,
or

(c) is a "controlled foreign corporation," generally, a foreign
corporation controlled by United States shareholders, for
United States tax purposes, unless the broker has documentary
evidence in its records that the holder is a foreign
shareholder and certain other conditions are met, or the
shareholder otherwise establishes an exemption.

Payment to or through a United States office of a broker of the
proceeds of a sale of common stock is subject to both backup withholding and
information reporting unless the shareholder certifies under penalty of perjury
that the shareholder is a foreign shareholder, or otherwise establishes an
exemption. A foreign shareholder may obtain a refund of any amounts withheld
under the backup withholding rules by filing the appropriate claim for refund
with the IRS.

The IRS has recently finalized regulations regarding the withholding
and information reporting rules discussed above. In general, these regulations
do not alter the substantive withholding and information reporting requirements
but unify certification procedures and forms and clarify and modify reliance
standards. Pursuant to IRS Notice 98-16, these regulations generally will be
effective for payments made after December 31, 2000, subject to certain
transition rules. Valid withholding certificates that are held on December 31,
1999, will remain valid until the earlier of December 31, 2000 or the date of
expiration of the certificate under rules currently in effect (unless otherwise
invalidated due to changes in the circumstances of the person whose name is on
such certificate). A foreign shareholder should consult its own advisor
regarding the effect of these regulations.

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OTHER TAX CONSIDERATIONS

STATE AND LOCAL TAXES; DISTRICT OF COLUMBIA UNINCORPORATED BUSINESS
TAX. Our company and our shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which we or they
transact business or reside. Our state and local tax treatment and that of our
shareholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective shareholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
common stock.

In this regard, the District of Columbia imposes an unincorporated
business income tax, at an effective rate of 9.975% on the "District of Columbia
taxable income" of partnerships doing business in the District of Columbia.
Because some of our properties are located in the District of Columbia, the
partnership owning these properties will be subject to this tax. In effect, our
share of the "District of Columbia taxable income" attributable to properties
located in the District of Columbia will be subject to this tax. Smith L.P. and
its subsidiary partnerships will attempt to reduce the amount of income that is
considered "District of Columbia taxable income." However, it is likely that
some portion of the income attributable to properties located in the District of
Columbia will be subject to the District of Columbia tax. To the extent Smith
L.P. or a subsidiary partnership is required to pay this tax, the cash available
for distribution to us and, therefore, to our shareholders as dividends will be
reduced. Moreover, our shareholder will not receive a credit against its own
state income tax liability for its share of any District of Columbia
unincorporated business income tax paid by Smith L.P. or a subsidiary
partnership. This tax would not apply if we were to own and operate our assets
directly, rather than through Smith L.P. However, our ability to eliminate Smith
L.P. and thus own its assets directly is severely limited.

PROPOSED CHANGES TO REIT QUALIFICATION REQUIREMENTS. Two legislative
proposals, one made by the Clinton administration and the other being comsidered
by the Ways and Means Committee of the House of Representatives, could change
the requirements that we must meet in order to qualify as a REIT. The
administration's fiscal year 2000 budget proposal includes a proposal that would
change the asset tests that we must meet in order to qualify as a REIT. First,
the proposal would change the 10% voting securities test to a 10% vote or value
test so that we would not be able to own more than 10% of the vote or value of
the outstanding securities of any corporation, except for a qualified REIT
subsidiary or another REIT. The proposal also would create an exception to the
5% and 10% asset tests that would allow us to have taxable REIT subsidiaries,
which could conduct activities not currently permitted, such as performing
noncustomary services for tenants and other customers, or undertaking
third-party management and development activities. Under the proposal, the size
of these subsidiaries would be limited and they would not be entitled to deduct
any interest on debt funded directly or indirectly by us.

On July 13, 1999, the Ways and Means Committee began consideration of
the Financial Freedom Act of 1999. Like the administration's proposal, the bill
would create taxable REIT subsidiaries that would not be subject to the 5% asset
test, but that would remain subject to the 25% asset test. The taxable REIT
subsidiaries also would be limited in their ability to deduct interest. Under
the bill, we would be able to rent up to 10% of a property to a taxable REIT
subsidiary and generally have the rent qualify as good income. The bill also
would change the 10% voting securities test to a 10% vote or value test unless
the subsidiary elected to be a taxable REIT subsidiary or the securities in the
subsidiary qualified under a "grandfather rule." In general, securities would
qualify if we owned them on July 12, 1999. They would cease to qualify if the
subsidiary acquired substantial assets or engaged in a substantial new line of
business after July 12, 1999.

Both proposals would allow us to combine and convert existing corporate
subsidiaries, such as the property service businesses, into taxable REIT
subsidiaries tax-free prior to a certain date. For our taxable years after the
effective date of either proposal and any applicable transition period, the 10%
vote or value test would apply to the property service businesses that are not
converted into

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taxable REIT subsidiaries. It is presently uncertain whether any proposal
regarding the REIT qualification tests will be enacted. In addition, if any
proposal is enacted, it is not clear what the final terms of the proposal would
be.

PLAN OF DISTRIBUTION

We may issue the shares of common stock covered by this prospectus to
parties who received units in exchange for our acquisition of Cronin's Landing,
if they request redemption of their units. A redeeming unitholder who receives
any shares of common stock covered by this prospectus will be entitled to sell
such shares without restriction in the open market or otherwise.

We will acquire one Unit from a redeeming unitholder in exchange for
each share of common stock that we issue. Thus, with each redemption, our
interest in Smith L.P. will increase.

WHERE YOU CAN FIND MORE INFORMATION

This prospectus does not contain all of the information included in the
registration statement. We have omitted parts of the registration statement in
accordance with the rules and regulations of the SEC. For further information,
we refer you to the registration statement on Form S-3, including its exhibits.
Statements contained in this prospectus about the provisions or contents of any
agreement or other document are not necessarily complete. If SEC rules and
regulations require that such agreement or document be filed as an exhibit to
the registration statement, please see such agreement or document for a complete
description of these matters. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of each
document.

We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy materials that we have
filed with the SEC, including the registration statement, at the following SEC
public reference rooms:

<TABLE>

<S> <C> <C>
450 Fifth Street. N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661
</TABLE>

Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms.

Our SEC filings can also be read at the following address:

New York Stock Exchange
20 Broad Street
New York, New York 10005

Our SEC filings are also available to the public on the SEC's Web Site
at http://www.sec.gov.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information filed with the
SEC will update and supersede this information. We incorporate by

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reference the documents listed below and any future filings made with the SEC
under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act.

1. Registration Statement on Form 8-A filed on August 16, 1994
registering our common stock under Section 12(b) of the Exchange
Act.

2. Registration Statement on Form 8-A filed on December 9, 1998
registering our rights under Section 12(b) of the Exchange Act.

3. Annual Report on Form 10-K for the year ended December 31, 1998
(amended on Form 10-K/A).

4. Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.

5. Current Reports on Form 8-K dated January 5, 1999 (amended on Form
8-K/A) and January 27, 1999.

You may request a copy of these filings (other than exhibits and
schedules to such filings, unless such exhibits or schedules are specifically
incorporated by reference into this prospectus), at no cost, by writing or
calling us at the following address

Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Arlington, Virginia 22202
Attention: Mr. Gregory Samay, Vice President and Treasurer
(703) 769-1000

You should rely on the information incorporated by reference or
provided in this prospectus. We have authorized no one to provide you with
different information. We are not making an offer of the common stock in any
state where the offer is not permitted.

EXPERTS

The financial statements and schedule incorporated by reference in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report dated February 9, 1999 with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving such report.

LEGAL MATTERS

In connection with this prospectus, Hogan & Hartson L.L.P., Washington,
D.C. has provided its opinion as to the validity of the issuance of the common
stock offered by this prospectus and the discussion of tax matters in this
prospectus.

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YOU SHOULD RELY ON THE INFORMATION INCORPORATED BY REFERENCE OR PROVIDED IN THIS
PROSPECTUS. WE HAVE AUTHORIZED NO ONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT MAKING AN OFFER OF THE COMMON STOCK IN ANY STATE WHERE THE OFFER IS
NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS DOCUMENT.

TABLE OF CONTENTS
<TABLE>
<CAPTION>

PAGE
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<S> <C>

PROSPECTUS SUMMARY............................... 1
RISK FACTORS..................................... 4
REDEMPTION OF UNITS.............................. 8
FEDERAL INCOME TAX CONSIDERATIONS................ 20
PLAN OF DISTRIBUTION............................. 30
WHERE YOU CAN FIND
MORE INFORMATION............................ 31
INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE...................... 31
EXPERTS.......................................... 32
LEGAL MATTERS.................................... 32
</TABLE>

<PAGE>

92,793 SHARES

CHARLES E. SMITH
RESIDENTIAL REALTY, INC.

COMMON STOCK

PROSPECTUS

AUGUST 4, 1999