SMITH CHARLES E RESIDENTIAL REALTY INC, 424B3, 2000-03-03

SMITH CHARLES E RESIDENTIAL REALTY INC
424B3, 2000-03-03
REAL ESTATE

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CHARLES E. SMITH RESIDENTIAL REALTY, INC.
[LOGO]
PROSPECTUS 424,242 SHARES OF COMMON STOCK

This prospectus relates to 424,242 shares of common stock
that we may issue to the holders of 424,242 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 January 13, 1999, in
exchange for a property known as Terrace Apartments located in
Elk Grove Village, Illinois and a property known as Park West
Apartments located in Chicago, Illinois.

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
424,242 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.

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

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.

FEBRUARY 3, 2000

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TABLE OF CONTENTS

PAGE

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PROSPECTUS SUMMARY................................................................. 1
Forward-Looking Information.................................................... 1
The Company.................................................................... 1
Recent Developments............................................................ 2
Offered Shares ................................................................ 2
Important Risks in Owning Our Common Stock..................................... 2
Tax Status of the Company...................................................... 2
RISK FACTORS....................................................................... 3
A Unitholder Who Redeems Units for Common Stock May Have Adverse Tax Effects... 3
If a Unitholder Redeems Units, the Original Receipt of the Units May Be Subject
to Tax..................................................................... 3
Differences Between an Investment in Shares of Common Stock and Units May Affect
Redeeming Unitholders...................................................... 3
Some of Our Policies May Be Changed Without a Vote of Shareholders............. 3
Provisions of Our Charter Could Inhibit Changes of Control..................... 4
Our Ability to Issue Preferred Shares Could Inhibit Changes of Control......... 4
Maryland Law Limits Changes of Control......................................... 4
We Have Adopted a Shareholder Rights Plan Which Could Delay or Prevent a Change
of Control................................................................. 4
We Have a Share Ownership Limit................................................ 5
The Large Number of Shares Available for Future Sale Could Adversely Affect the
Market Price of Our Common Stock........................................... 5
Changes in Market Conditions Could Adversely Affect the Market Price of Our
Common Stock............................................................... 5
Our Earnings and Cash Distributions Will Affect the Market Price of Our Common
Stock...................................................................... 5
Market Interest Rates and Low Trading Volume May Have an Effect on the Value of
Our Common Stock........................................................... 5
We Believe, but Cannot Guarantee, that We Qualify as a REIT.................... 6
Our Failure to Qualify as a REIT Would Have Serious Adverse Consequences....... 6
We May Need to Borrow Money to Qualify as a REIT............................... 6
We Are Subject To Some Taxes Even If We Qualify as a REIT...................... 6
Redeeming Unitholders Will Be Subject to the Operational Risks of Our Business. 7
REDEMPTION OF UNITS................................................................ 8
General........................................................................ 8
Tax Consequences of Redemption................................................. 8
Comparison of Ownership of Units and Common Stock.............................. 10
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... 25
Taxation of Shareholders....................................................... 26
Other Tax Considerations....................................................... 32
PLAN OF DISTRIBUTION............................................................... 33
WHERE YOU CAN FIND MORE INFORMATION................................................ 33
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................... 33
EXPERTS............................................................................ 34
LEGAL MATTERS...................................................................... 35

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PROSPECTUS SUMMARY

THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
IT IS NOT COMPLETE 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 THIS PROSPECTUS
OR IN OUR OTHER 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 December 31, 1999, we
owned approximately 59.9% of its outstanding common units. Smith L.P. and its
subsidiaries own all of our properties, property interests and business assets.

As of December 31, 1999, we owned all or a portion of 54 multifamily
apartment communities with a total of 24,948 units. 44 of the properties were
located in the Washington, D.C. metropolitan area, two in the Boston
metropolitan area, six in the Chicago metropolitan area and two in the Southeast
Florida area. We currently have approximately 1,800 units under construction and
approximately 1,200 additional units under construction which are subject to
pre-purchase agreements. We also manage approximately 2,400 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.

Our principal executive offices are located at 2345 Crystal Drive,
Arlington, Virginia 22202, and our telephone number is (703) 920-8500.

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RECENT DEVELOPMENTS

We have recently acquired a 2,669-unit portfolio in Southeast Florida from
a partnership comprised of institutional investors. The portfolio includes eight
high-rise buildings located in the Hollywood/Aventura Beach area. Four of the
buildings are located on the oceanfront and the others located on the
intracoastal waterway. The total investment included approximately $178 million
payable to the seller of the buildings and an estimated $33 million in capital
improvements planned over the next two years. Closing on three of the buildings
occurred on December 21, 1999 and the remaining five buildings on January 13,
2000. The transaction was funded with proceeds from the disposition of four
multifamily properties (totaling approximately $71 million) and our bank credit
line.

OFFERED SHARES

This prospectus relates to 424,242 shares of common stock that we may issue
to the holders of 424,242 units of Smith L.P. upon tender of these units for
redemption. These units were issued on January 13, 1999, in exchange for a
property known as Terrace Apartments located in Elk Grove Village, Illinois and
a property known as Park West Apartments located in Chicago, Illinois. For
purposes of this prospectus the term "unitholder" refers to holders of units
issued as described in the previous sentence.

On January 13, 2000 (or the date of this prospectus, if later), the
unitholders will become eligible to redeem their units for cash or, at our
election, shares of our common stock equal to the number of units being
redeemed.

IMPORTANT RISKS IN OWNING OUR COMMON STOCK

Before you decide to redeem your Units, you should read the "Risk Factors"
section, which begins on page 3 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 currently are required, among other things,
to distribute at least 95% of our taxable income, excluding any net capital
gain. For our taxable years beginning after December 31, 2000, this requirement
will be relaxed but we still will be required to distribute 90% of this amount.
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 MAY HAVE ADVERSE TAX EFFECTS. A
unitholder who redeems units 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 or cash that 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 or cash that
the unitholder receives. It is even possible that the tax liability resulting
from this gain could exceed the value of the common stock or cash that the
unitholder receives. See "Redemption of Units--Tax Consequences of Redemption."

In addition, the unitholder's ability to sell common stock received
upon redemption 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 common 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 December 31, 1999, we had outstanding six 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 December 31, 1999, we had
outstanding approximately 20.7 million shares of common stock tradable without
restriction and had reserved for resale 15.7 million additional shares of common
stock for possible issuance upon redemption of units and 6.8 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

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volume for certain other industries. As a result, our investors who desire to
liquidate substantial 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 businesses are not voting
securities. We cannot guarantee that the IRS will agree with us on these points.
Furthermore, for our taxable years beginning after December 31, 2000, we will be
precluded from owning more than 10% of the value of a company's securities
unless the company elects to be a taxable REIT subsidiary. The securities of the
property service businesses might be excepted from this rule. If they are not,
however, then these corporations would have to make the taxable REIT subsidiary
election because we hold more than 10% of the value of the securities of each of
them. At least two of our subsidiaries will make the taxable REIT subsidiary
election because they will not be excepted from the 10% value test, but we have
not yet made a determination as to the others.

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 example, the asset tests described above will be modified for
our taxable years beginning after December 31, 2000. We believe we will satisfy
the modified tests but we will need to change the tax status of one or more of
our subsidiaries to do so. 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 currently are required each
year to distribute to our shareholders at least 95% of our net taxable income,
excluding net capital gain. For our taxable years beginning after December 31,
2000, this requirement will be relaxed but we still will be required to
distribute 90% 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

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prohibited transactions will be subject to a 100% tax. In addition, we derive
income from the property service businesses, whose income is subject to federal,
state and local income tax. It should be noted that the property service
businesses currently take steps to limit their tax liability. If any one of
these corporations is required to elect to be treated as a taxable REIT
subsidiary, its ability to limit its tax liability will be reduced.

REDEEMING UNITHOLDERS WILL CONTINUE BE SUBJECT TO THE OPERATIONAL RISKS
OF OUR BUSINESS. An investment in our common stock will 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.

- 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
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.

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- 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.

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

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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 depend on whether or not the
redemption is a redemption of all of a unitholder's units. If the redemption is
a redemption of all of a unitholder's units, the tax consequences would be the
same as described in the previous paragraph. If the redemption is a redemption
of less than all of a unitholder's units, 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 tax 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 exceed the
amount of cash and the value of common stock or any other property received upon
the redemption.

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. Although this rule currently does
not apply to a redemption of units because units are not depreciable real
property, the IRS has proposed regulations that, if finalized, would apply this
rule to a redemption of units. If the proposed regulations are finalized without
material changes, any gain on the disposition of a unit held for more than 12
months would be treated partly as gain from the sale of a long-term capital
asset subject to a 20% tax rate, partly as gain from the sale of depreciable
real property subject to a 25% tax rate, and to the extent attributable to
"unrealized receivables," partly as ordinary income. This potential new rule
would not apply to the disposition of units held 12 months or less.

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

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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.

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.

- ------------------------------------------------------------ -------------------------------------------------------
SMITH L.P. CHARLES E. SMITH RESIDENTIAL REALTY, INC.
- ------------------------------------------------------------ -------------------------------------------------------
<S> <C>
FORM OF ORGANIZATION AND ASSETS OWNED

Smith L.P. is a Delaware limited partnership. Smith L.P. We are a Maryland corporation. We elected to be
owns interests, directly and through a subsidiary, in our taxed as a REIT under the Internal Revenue Code and
properties and, through subsidiaries, conducts our intend to maintain our qualification as a REIT. Our
management and leasing business. Smith L.P. is not only significant asset is our interest in Smith L.P.,
permitted to take any action which would adversely affect which gives us an indirect investment in the
our REIT status. properties 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.

</TABLE>

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<PAGE>

- ------------------------------------------------------------ -------------------------------------------------------
OPERATING PARTNERSHIP COMPANY
- ------------------------------------------------------------ -------------------------------------------------------
<S> <C>
ADDITIONAL EQUITY

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

BORROWING POLICIES

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

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

- - 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.

FIDUCIARY DUTIES

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

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We are liable for the obligations and debts of Smith L.P., Our charter provides that the liability of our
unless limits as to these liabilities are stated in the directors and officers to us and to our shareholders
document or instrument evidencing the obligation. Smith for money damages is limited to the fullest extent
L.P. has indemnified us and any of our directors or permitted under Maryland law. Our charter and state
officers from and against all losses, claims, damages, law provide broad indemnification to directors and
liabilities, joint or several, expenses including legal officers, whether serving us or, at our request, any
fees, fines, settlements and other amounts incurred in other entity, to the fullest extent permitted under
connection with any specified actions relating to the Maryland law.
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>

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

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<PAGE>

Limited partners have voting rights only as to the Holders of our common stock are entitled to vote on
dissolution of Smith L.P., the sale of all or the election and removal of directors and certain
substantially all of the assets of Smith L.P. and major corporate transactions, including most
amendments of the partnership agreement. Otherwise, we amendments to our charter, any proposal for our
make all decisions relating to the operation and merger or consolidation with or into another entity
management of Smith L.P. As of December 31, 1999, we or the sale or disposition of all or substantially
owned approximately 59.9% of the common units. As all of our assets. Holders of common stock have one
partners redeem units, or if we acquire additional units vote per share. Our charter permits the Board of
in exchange for the proceeds of offerings of our Directors to classify and issue capital stock having
securities, our percentage ownership of the units will voting power that may differ from that of the common
increase. If additional units are issued to third stock.
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 of the units Amendments to our charter must be approved by the
may propose to amend the partnership agreement. Such Board of Directors and by the vote of at least
proposal, in order to be effective, must be approved by two-thirds of the votes entitled to be cast at a
the written vote of holders of at least a majority in meeting of shareholders. However, an amendment of the
interest of Smith L.P. In addition, we may, without the provisions relating to any of the classification of
consent of the limited partners, amend the partnership the Board of Directors, the power to remove directors
agreement as to ministerial matters. and the share 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 dissolve Under Maryland law, the Board of Directors must
Smith L.P. if any original limited partner who became a obtain approval of holders of at least two-thirds of
limited partner on June 30, 1994 holding units issued at the outstanding shares of common stock to dissolve us.
such time objects to such dissolution. From January 1,
2014 through December 31, , we cannot elect to dissolve
Smith L.P. if any original limited partner who 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>

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

VOTE REQUIRED TO MERGE

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

LIABILITY OF INVESTORS

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

REVIEW OF INVESTOR LISTS

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

</TABLE>

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

The units constitute equity interests entitling each Shares of our common stock constitute equity
limited partner to his proportionate share of cash interests in us. We are entitled to receive our
distributions made to the limited partners of Smith L.P. proportionate share of distributions made by 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, excluding capital gains, and any
taxable income, including capital gains, not
distributed will be subject to corporate income tax.

LIQUIDITY

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

</TABLE>

17
<PAGE>

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

</TABLE>

18
<PAGE>

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

</TABLE>

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<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 not 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, current 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 As
a REIT--Gross 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

We have elected to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code commencing with our taxable year ending December 31,
1994. We believe that our company is 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 on a continuing basis 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 "Requirements
for Qualification as a REIT--Failure to Qualify."

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<PAGE>

The following is a general description 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
description 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 service 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 transferable 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 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. Second, at

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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. There are two exceptions to this rule. First, we can
engage in these activities through an "independent contractor" from whom we
derive no revenue. Second, for taxable years beginning after December 31, 2000,
we will be able to engage in these activities through a "taxable REIT
subsidiary." A taxable REIT subsidiary is a corporation other than a REIT in
which a REIT directly or indirectly holds stock and that has made a joint
election with the REIT to be treated as a taxable REIT subsidiary. For a further
discussion of taxable REIT subsidiaries, see "--Asset Tests" below. In addition,
the rule restricting us from operating or managing properties or furnishing or
rendering services to tenants does not apply to the extent that the services we
render are "usually or customarily rendered" in connection with the rental of
space for occupancy only and are not otherwise considered "rendered to the
occupant." These services are referred to as permissible services.

Smith L.P. and the property service businesses provide certain services
with respect to our properties. The property service businesses are not
independent contractors. We have received rulings from the IRS that the
provision of some of the services provided by Smith L.P. and the property
service businesses will not cause the rents received with respect to the
properties to fail to qualify as "rents from real property." In addition, for
our taxable years beginning after December 31, 2000, if one or more of our
property service businesses elects to be treated as taxable REIT subsidiary,
they will be permitted to provide services to our tenants that we currently must
provide through an independent contractor. We should emphasize, though, that a
final decision has not been made regarding which, if any, property service
businesses will elect to be treated as taxable REIT subsidiaries.

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

1. rents from corporate apartments,

2. revenues from laundry equipment,

3. certain parking revenues, and

4. 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
service 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 in the future that reasonably might
be expected not to meet the

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"usual or customary" standard, we will arrange to have such services provided by
an independent contractor from which we receive no income or, for taxable years
beginning after December 31, 2000, a taxable REIT subsidiary.

Even if we provide services that are not permissible services, rents
received generally will qualify as rents from real property so long as the
amount received for the "impermissible services" does not exceed a de minimis
amount. Specifically, so long as the amount received by us for all of the
impermissible services rendered at a specific property does not exceed one
percent of all of the amounts we receive, directly or indirectly, from that
property, then we can provide such services. The amount that we will be deemed
to have received for performing "impermissible services" will be the greater of
the actual amount 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 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. In order to maintain qualification as a REIT, we are
currently subject to certain tests relating to the composition of our assets. As
described below, as a result of the Work Incentives Improvement Act, for our
taxable years commencing after December 31, 2000, the third test listed below
will be modified, and we also will become subject to a new asset test.
Currently, at the close of each quarter of our taxable year, we must satisfy the
following 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.

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. We believe that our
share of the aggregate value of the securities of the property service
businesses together with all other assets that do not qualify for purposes of
the 75% test does not exceed 25% of the total value of our assets. We cannot
ensure, however, that the IRS will not contend that our share of the aggregate
value of these assets exceeds the 25% value limitation. In addition, we believe
that the value of our share of the securities of each of the property service
businesses individually does not exceed 5% of the total value

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of our assets. We cannot ensure, however, that the IRS will 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% value limitation.

Smith L.P. does not own more than 10% of the outstanding voting
securities of any of the property service businesses. Accordingly, we believe
that we meet the 10% voting securities test. We cannot ensure, however, that the
IRS will not contend that the nonvoting stock of one or more of the property
service businesses should be considered "voting securities" for purposes of the
10% voting securities test.

The 25% value test must be satisfied on the last day of each calendar
quarter in which we acquire any securities in the 25% asset class. The 5% value
test must be satisfied with respect to a property service business on the last
day of each calendar quarter in which we acquire securities of that business.
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 25% and 5% value tests 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.

As a result of the Work Incentives Improvement Act, for taxable years
beginning after December 31, 2000, the 5% value test and the 10% voting security
test will be modified in two respects. First, the 10% voting securities test
will be expanded so that we also will be prohibited from owning more than 10% of
the value of the outstanding securities of any one issuer. Second, an exception
to these tests will be created so that we will be permitted to own securities of
a subsidiary that exceed the 5% value test and the new 10% vote or value test if
the subsidiary elects to be a taxable REIT subsidiary. We currently own more
than 10% of the total value of the outstanding securities of each property
service business. The expanded 10% vote or value test, however, will not apply
to a property service business unless it engages in a substantial new line of
business or acquires any substantial asset or we acquire any securities in the
property service business after July 12, 1999. At least two of the property
service businesses will make the taxable REIT subsidiary election, but a final
decision has not been made regarding which of the other property service
businesses, if any, will elect to be treated as taxable REIT subsidiaries.
Pursuant to a new asset test, for taxable years beginning after December 31,
2000, not more than 20% of the value of our total assets will be permitted to be
represented by securities of taxable REIT subsidiaries.

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

1. the sum of (a) 95% (90% for taxable years beginning after
December 31, 2000) of our REIT taxable income, computed
without regard to the dividends paid deduction and our net
capital gain, and (b) 95% (90% for taxable years beginning
after December 31, 2000) 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

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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 these requirements. 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 THE 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:

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

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

3. the taking of actions by Smith L.P. or any of the subsidiary
partnerships that could adversely affect our qualification as
a REIT.

We believe that Smith L.P. and each of the subsidiary partnerships will
be treated for tax purposes as partnerships (and not as associations taxable as
corporations). 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.

TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Smith L.P. was formed
by way of contributions of appreciated property, including several 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 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 the 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 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 be allocated taxable gain in the event of a sale

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of contributed properties in excess of the economic or book income allocated to
us as a result of such sale.

PROPERTY SERVICE BUSINESSES. A significant 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 nonvoting 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. To the extent that they do so, the cash available for
distribution to shareholders is reduced accordingly.

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. Even if those measures are successful, future
increases in the income of the property service businesses inevitably will be
subject to income tax. Moreover, as described above in "--Requirements for
Qualification As a REIT--Gross Income Tests" and "--Asset Tests," two or more of
the property service businesses will elect to be treated as a taxable REIT
subsidiary for years commencing after December 31, 2000. The property service
businesses that make this election will be restrained in their ability to limit
their tax liability for two reasons. First, taxable REIT subsidiaries will be
limited signicantly in their ability to deduct interest payments made to an
affiliated REIT. Accordingly, if a property service businesses elects to be
treated as a taxable REIT subsidiary, it will be limited significantly in its
ability to deduct interest payments on notes issued to Smith L.P. Second, if a
taxable REIT subsidiary pays an amount to a REIT that exceeds the amount that
would be paid in an arm's length transaction, the REIT generally will be subject
to an excise tax equal to 100% of the excess. This rule generally will apply to
amounts paid to Smith L.P. by the property service businesses that elect to be
treated as taxable REIT subsidiaries.

Our ownership of the securities of the property service businesses
currently is subject to certain asset tests. Although, these tests will change
for our taxable years beginning after December 31, 2000, they will continue to
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.
increase at a commensurate rate. In addition, Smith L.P. currently is prohibited
from exercising control over any of the property service businesses. For our
taxable years beginning after December 31, 2000, Smith L.P. will continue to be
prohibited from exercising control over each property service business that does
not elect to be treated as taxable REIT subsidiary. For a more detailed
discussion of the ownership limitations relating to our ownership of the
property service businesses, see "--Requirements for Qualification As a
REIT--Asset Tests," above.

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 or common 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 capital 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."
The IRS has proposed regulations under this authority, but as proposed, the
regulations do not apply to the taxation of gain and loss realized on the
disposition of common stock. However, the proposed regulations could be revised
to apply to the disposition of common stock, and additional regulations that
would apply to the disposition of common stock could be promulgated.
Shareholders are urged to consult with their own tax advisors with respect to
the 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.

Notwithstanding the above, however, the Omnibus Budget Reconciliation
Act of 1993 provides that, effective for taxable years beginning in 1994, a
portion of the dividends paid by a "pension held REIT" shall be treated as UBTI
as to any trust which is described in Section 401(a) of the Internal Revenue
Code, is tax exempt under Section 501(a) of the Internal Revenue Code and holds
more than 10%, by value, of the interests in the REIT. Tax-exempt pension funds
that are described in Section 401(a) of the Internal Revenue Code are referred
to below as "qualified trusts." A REIT is a "pension held REIT" if it meets the
following two tests:

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1. it would not have qualified as a REIT but for the fact that
Section 856(h)(3) of the Internal Revenue Code, added by the
1993 Act, provides that stock owned by qualified trusts shall
be treated, for purposes of determining whether the REIT is
closely held, as owned by the beneficiaries of the trust
rather than by the trust itself; and

2. either at least one such qualified trust holds more than 25%
by value, of the interests in the REIT, or one or more such
qualified trusts, each of which owns more than 10%, by value,
of the interests in the REIT, hold in the aggregate more than
50%, by value, of the interests in the REIT.

The percentage of any REIT dividend treated as UBTI is equal to the
ratio of the UBTI earned by the REIT, treating the REIT as if it were a
qualified trust and therefore subject to tax on UBTI, to the total gross income
of the REIT. A DE MINIMIS exception applies where the percentage is less than 5%
for any year. The provisions requiring qualified trusts to treat a portion of
REIT distributions as UBTI will not apply if the REIT is able to satisfy the
"not closely held" requirement without relying upon the "look-through" exception
with respect to qualified trusts. Based on the current estimated ownership of
our common and preferred stock and as a result of certain limitations on
transfer and ownership of common and preferred stock contained in the our
charter, we believe that we should not be classified as a "pension held REIT."

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 description 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 or are not designated by us as capital
gain dividends will be treated as dividends of 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.

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.

Distributions to a foreign shareholder that are designated by us as a
capital gain dividend, other than those arising form the disposition of a U.S.
real property interest, generally should not be subject to U.S. federal income
taxation unless the investment in the common stock is effectively

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connected with a U.S. trade or business or the foreign shareholder is a
nonresident alien individual who is present in the U.S. for 183 days or more
during the taxable year and has a tax home in the US. We will be required to
withhold and remit to the IRS 35% of any distributions to foreign shareholders
that are designated as capital gain dividends, or, if greater, 35% of a
distribution that could have been designated as a capital gain dividend.

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 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 generally should be treated with respect to
foreign shareholders in the same manner as actual distributions by us of capital
gain dividends. 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
generally 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.

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 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 --

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1. is a United States person,

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

3. 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.

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.

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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 the Terrace
Apartments and Park West Apartments, if they request redemption of their units.
A redeeming unitholder (who is not otherwise one of our affiliates) 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> <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 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.

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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,
the quarter ended June 30, 1999 and the quarter ended September 30,
1999.

5. Current Reports on Form 8-K dated January 5, 1999 (amended on Form
8-K/A), January 27, 1999, July 2, 1999 (amended on Form 8-K/A),
September 8, 1999 (amended on Form 8-K/A) and December 21, 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

Our financial statements for the fiscal year ended December 31, 1998
and the related 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 relating to such financial statements, and are included in this
prospectus in reliance upon the authority of Arthur Andersen LLP as experts in
giving such report.

The consolidated balance sheets of Countryside Residential Partners,
Ltd. as of December 31, 1998, and the related consolidated statements of income,
changes in partners' capital and cash flows incorporated by reference in this
prospectus and elsewhere in the registration statement, have been audited by
Klayman & Korman LLC, independent public accountants, as indicated in their
report dated February 1, 1999, and are included in this prospectus in reliance
upon the authority of Klayman & Korman LLC as experts in giving such report.

The balance sheet of Somerset Limited Partnership as of December 31,
1998, and the related statements of income, changes in partners' capital and
cash flows incorporated by reference in this prospectus and elsewhere in the
registration statement, have been audited by Klayman & Korman LLC, independent
public accountants, as indicated in their report dated February 3, 1999, and are
included in this prospectus in reliance upon the authority of Klayman & Korman
LLC as experts in giving such report.

The balance sheet of 2900 Van Ness Associates as of December 31, 1998,
and the related statements of operations, partners' capital and cash flows
incorporated by reference in this prospectus and elsewhere in the registration
statement, have been audited by Ernst & Young LLP,

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independent public accountants, as indicated in their report dated May 25, 1999,
and are included in this prospectus in reliance upon the authority of Ernst &
Young LLP 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

Page
----

Prospectus Summary............................... 1

Risk Factors..................................... 3

Redemption of Units.............................. 8

Federal Income Tax Considerations................ 20

Plan of Distribution............................. 33

Where You Can Find More Information.............. 33

Incorporation of Certain Documents by Reference.. 33

Experts.......................................... 34

Legal Matters.................................... 35

[LOGO]

424,242 SHARES

CHARLES E. SMITH
RESIDENTIAL REALTY, INC.

COMMON STOCK

PROSPECTUS

FEBRUARY 3, 2000