PROSPECTUS
TIAA REAL ESTATE ACCOUNT
A Variable Annuity Offered Through
Individual, Group and Tax-Deferred
Annuity Contracts
Issued By
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
This prospectus tells you about the TIAA Real Estate Account (the
"Real Estate Account" or the "Account"), a variable annuity investment option
being offered through individual, group and tax-deferred annuity contracts
issued by Teachers Insurance and Annuity Association of America ("TIAA"). Read
it carefully before investing and keep it for future reference.
The Real Estate Account is a segregated investment account of TIAA
that provides variable individual and group annuities for retirement and
tax-deferred savings plans at tax-exempt or publicly supported colleges,
universities, and other educational and research institutions. The Account's
main purpose is to accumulate, invest, and then disburse funds for your
retirement, in the form of lifetime income or other payment options, by
investing mainly in real estate and real estate-related investments.
The contracts also offer a traditional (guaranteed) annuity option
through TIAA's general account.
As with all variable annuities, your accumulation and retirement
income from the Account can increase or decrease, depending on how well the
underlying investments do over time. TIAA does not guarantee the investment
performance of the Account, and you bear the entire investment risk.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is May 1, 1996
(TIAA LOGO)
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TABLE OF CONTENTS
Page
DEFINITIONS................................................................ 4
SUMMARY.................................................................... 7
THE REAL ESTATE ACCOUNT AND TIAA........................................... 11
INVESTMENT PRACTICES OF THE ACCOUNT........................................ 12
GENERAL INVESTMENT AND OPERATING POLICIES.................................. 18
DESCRIPTION OF PROPERTIES.................................................. 19
RISK FACTORS............................................................... 19
ROLE OF TIAA............................................................... 26
CONFLICTS OF INTEREST...................................................... 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................ 30
VALUATION OF ASSETS........................................................ 32
MANAGEMENT AND INVESTMENT ADVISORY ARRANGEMENTS............................ 36
EXPENSE DEDUCTIONS......................................................... 37
THE ANNUITY CONTRACTS...................................................... 38
ANNUITY PAYMENTS........................................................... 53
FEDERAL INCOME TAXES....................................................... 55
GENERAL MATTERS............................................................ 59
DISTRIBUTION OF THE CONTRACTS.............................................. 61
PERIODIC REPORTS........................................................... 61
STATE REGULATION........................................................... 62
LEGAL MATTERS.............................................................. 62
EXPERTS.................................................................... 62
LEGAL PROCEEDINGS.......................................................... 62
ADDITIONAL INFORMATION..................................................... 62
FINANCIAL STATEMENTS....................................................... 63
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
APPENDIX A--DESCRIPTION OF PROPERTIES...................................... A-1
APPENDIX B--MANAGEMENT OF TIAA............................................. B-1
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The Account is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the Securities and Exchange Commission. All reports and
information filed on behalf of the Account can be inspected and copied at the
Public Reference Section of the Securities and Exchange Commission, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and at certain of its regional
offices: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7
World Trade Center, Suite 1300, New York, New York 10048.
Reports to Participants. TIAA will mail to each participant in the
Real Estate Account periodic reports relating to accumulations in the Account,
and such other information as may be required by applicable law or regulation.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER
PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
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DEFINITIONS
Throughout the prospectus, "TIAA," "we," and "our" refer to Teachers
Insurance and Annuity Association of America. "You" and "your" mean any
participant or any prospective participant.
Account - The TIAA Real Estate Account, a separate account of TIAA.
Accumulation - The total value of your accumulation units in the
Real Estate Account.
Accumulation Fund - The assets of the Real Estate Account not
dedicated to current retirement benefits or other liabilities.
Accumulation Period - The period that begins with your first premium
and continues until the entire accumulation has been applied to purchase annuity
income, transferred from the Account, or paid to you or a beneficiary.
Accumulation Unit - A share of participation in the Real Estate
Account for someone in the accumulation period.
Annuity Fund - The assets in the Account that fund current
retirement benefits.
Annuity Partner - Anyone you name under a survivor income option to
receive lifetime annuity income if you die. Your annuity partner can be your
spouse, child, or anyone else eligible under current TIAA practices, subject to
any limitations under the IRC and ERISA.
Annuity Payments - Payments under any income option or method of
payment.
Annuity Unit - A measure used to calculate the amount of annuity
payments due a participant.
Beneficiary - Any person or institution named to receive benefits if
you die during the accumulation period or if you (and your annuity partner, if
you have one) die before any guaranteed period of your income-paying annuity
ends. You don't have to name the same beneficiary for each of these two
situations.
Business Day - Any day the New York Stock Exchange ("NYSE") is open
for trading. A business day ends at 4 p.m. eastern time, or when trading closes
on the NYSE, if earlier.
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Calendar Day - Any day of the year. Calendar days end at the same
time as business days.
Cash Withdrawal - Taking some or all of an accumulation as a single
payment.
Commuted Value - The present value of annuity payments due under an
income option or method of payment not based on life contingencies. Present
value is calculated using the then-current value of the annuity unit, adjusted
for investment gains or losses since the annuity unit value was last calculated.
Contract - The document that sets forth the terms of your Real
Estate Account annuity. There are separate contracts for the accumulation period
and for the income-paying period for each annuity.
CREF - The College Retirement Equities Fund, TIAA's companion
organization.
Eligible Institution - A private or public institution in the United
States that is non-proprietary and non-profit. Private institutions have to be
ruled tax-exempt under IRC section 501(c)(3) or earlier versions of the section
and cannot be private foundations. The main purpose of any eligible institution
must be to offer instruction, conduct research, serve and support education or
research, or perform ancillary functions for such institutions.
Employer - An eligible institution that maintains an employee
retirement or tax-deferred annuity plan.
ERISA - The Employee Retirement Income Security Act of 1974, as
amended.
General Account - All of TIAA's assets other than those allocated to
the Real Estate Account or to other existing or future TIAA separate accounts.
Income Option - Any of the ways you can receive Real Estate Account
retirement income.
Independent Fiduciary - The firm appointed by TIAA to provide
independent fiduciary services to the Real Estate Account and which will be
responsible for reviewing, approving, and/or monitoring certain aspects of the
Account's operations.
Internal Revenue Code or IRC - The Internal Revenue Code of 1986, as
amended.
Method of Payment - Any type of Real Estate Account death benefit
available to a beneficiary.
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Participant - Any person who owns a Real Estate Account contract.
Under certain arrangements, an employer can be the owner of the contract.
Plan - An employer's retirement or tax-deferred annuity program.
Premium - The amount you or your employer sends to the Real Estate
Account to purchase retirement benefits.
Survivor Income Option - An option that continues lifetime annuity
payments to your annuity partner after you die.
TIAA - Teachers Insurance and Annuity Association of
America.
Valuation Day - Any day the NYSE is open for trading, as well as the
last calendar day of each month. Valuation days end as of the close of all U.S.
national exchanges where securities or other investments of the Account are
principally traded. Valuation days that aren't business days will end at 4 p.m.
eastern time.
Valuation Period - The time from the end of one valuation day to the
end of the next.
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SUMMARY
The following summary of prospectus information should be read
together with the detailed information contained elsewhere in this prospectus.
The TIAA Real Estate Account
This prospectus describes the TIAA Real Estate Account, a separate
investment account of TIAA. Its investment objective is a favorable rate of
return over the long term, primarily through rental income and capital
appreciation from real estate investments owned by the Account. The majority of
the Account's real estate investments will be ownership interests in
income-producing office, industrial, retail, and multi-family residential
properties. The Account can make other real estate-related investments,
including mortgage loans and purchasing shares of real estate investment trusts
and other entities engaged primarily in real estate-related activities. The
Account will also invest in publicly-traded securities and other instruments to
maintain liquidity to make distributions and cover capital expenditures and
expenses. TIAA intends to provide additional liquidity to the Account as needed,
according to its anticipated arrangement with the U.S. Department of Labor, as
described on page 27. As with any variable account, we cannot assure you that
the investment objective will be met. One factor critical to achieving the
objective is whether we can find enough suitable investments for the Account at
any particular time.
TIAA, a nonprofit New York insurance company, manages the investment
and reinvestment of the Real Estate Account's assets. For these services, TIAA
receives fees from the assets of the Account. You don't have the right to vote
on the management and operation of the Account. For more information, see
"Management and Investment Advisory Arrangements," on page 36.
Because the Account does not fall within the definition of
"investment company" under the Investment Company Act of 1940, as amended (the
"1940 Act"), it is neither registered as an investment company nor subject to
regulation under the 1940 Act.
Risk Factors
Investment in the Account involves significant risks, which are
fully described in "Risk Factors," page 19. These include fluctuations in real
estate values and the possibility that the Account won't receive the appraised
or estimated value of a real property investment when it is sold. The Account
may also sometimes have trouble selling some of its real estate
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investments on commercially acceptable terms, making it difficult to convert
those investments into cash quickly.
The Account's assets can be adversely affected by changes in local,
national, or foreign economic conditions. You should, therefore, view it as a
long-term investment. Also, since the Account has existed only for a short time,
there is little operating history to look to in assessing how the Account might
respond to different market conditions.
Because it invests in real estate, the Account is also exposed to
risks relating to environmental matters. For instance, if an investment property
does not comply with certain environmental protection regulations, the liability
for clean-up costs could exceed the Account's investment in the property (or the
principal amount loaned by the Account as a mortgage lender).
Conflicts of Interest
The Account is managed by TIAA employees. TIAA employees who manage
the Account's real estate-related investments may also manage real
estate-related investments of TIAA's general account. Similarly, the part of the
Account invested in securities and other instruments not related to real estate
is managed by employees who may also manage investments of TIAA's general
account and other accounts that are not related to real estate. These employees
could therefore face various conflicts of interest (see "Conflicts of Interest,"
page 29).
TIAA's guarantee to provide liquidity for the Account under certain
circumstances could also raise conflicts of interest (see "Liquidity Guarantee,"
page 26).
The Contracts
The Real Estate Account is available (subject to regulatory
approval) as a variable component to a number of different TIAA accumulating
annuity contracts. The annuity contracts are a Retirement Annuity ("RA"), a
Group Retirement Annuity ("GRA"), a Supplemental Retirement Annuity ("SRA"), a
Group Supplemental Retirement Annuity ("GSRA"), and a Rollover Individual
Retirement Annuity ("Rollover IRA"). Subject to regulatory approval, we expect
to offer a new individual retirement annuity that will accept both rollovers and
direct contributions ("New IRA") and a Keogh Plan Annuity ("Keogh"). (We refer
to the Rollover IRA and New IRA collectively as the "IRAs".) RAs, SRAs, IRAs and
Keoghs are issued to you directly. GRAs and GSRAs are issued under the terms of
a group contract.
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The Real Estate Account is also available through a variety of
income-paying annuity contracts. For details, see "Income Options," on page 48.
Subject to the conditions described in this prospectus, you can
allocate all or part of your premiums to the Real Estate Account under the
accumulating contracts, although your employer's plan may restrict your ability
to allocate premiums to the Real Estate Account under an RA, GRA, or GSRA
contract. The specific terms of your plan or relevant tax laws also may limit
the amount of premiums you are allowed to contribute or that may be contributed
on your behalf. See "Remitting Premiums," page 40, "Possible Restrictions on
Acceptance of Premiums or Transfers," page 41, "Allocation of Premiums," page
42, and "Federal Income Taxes," page 55.
Expense Deductions. We make daily deductions from the net assets of
the Real Estate Account to pay the Account's operating and investment management
expenses. The Account also pays TIAA for bearing mortality and expense risks,
and providing liquidity guarantees. The current annual expense deductions from
the net assets of the Account total 0.70%: 0.40% for investment management
services, 0.23% for administrative and distribution expenses, 0.05% for
mortality and expense risks, and 0.02% for liquidity guarantees. We guarantee
that these deductions, together, will never exceed 2.50% of the Account's
average net assets annually. See "Expense Deductions," page 37.
Transfers and Withdrawals. You can transfer your accumulation in the
Account to TIAA's traditional annuity or to CREF at any time. We permit
withdrawals from SRAs, GSRAs, and IRAs at any time. However, your employer's
plan can restrict your ability to withdraw funds from RA and GRA contracts.
Federal income tax law may also restrict your ability to transfer or withdraw
funds. You may have to pay a tax penalty if you want to make a cash withdrawal
before age 59-1/2. (See "Federal Income Taxes," page 55.)
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Selected Financial Data
The following selected financial data should be considered in
conjunction with the financial statements and notes thereto for the Account
provided herein.
July 3, 1995
(commencement
of operations) to
December 31, 1995
Investment income:
Real estate income, net:
Rental income................................... $165,762
----------
Real estate property level
expenses and taxes:
Operating expenses.............................. 29,173
Real estate taxes............................... 14,659
----------
Total real estate property level expenses
and taxes .................................... 43,832
----------
Real estate income, net 121,930
Dividends and interest..................................... 2,828,900
----------
Total investment income $2,950,830
==========
Net realized and unrealized
gain on investments...................................... $35,603
=======
Net increase in net assets
resulting from operations............................... $2,676,000
==========
Net increase in net assets
resulting from participant transactions..................$117,582,345
============
Net increase in net assets.................................. $120,258,345
===========
December 31, 1995
Total assets.................................................$143,177,421
============
Total liabilities............................................ $22,919,076
============
Total net assets.............................................$120,258,345
============
Accumulation units outstanding............................... 1,172,498
=========
Accumulation unit value...................................... $102.57
=======
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THE REAL ESTATE ACCOUNT AND TIAA
On February 22, 1995, the Real Estate Account was established by
resolution of TIAA's Board of Trustees as a separate investment account of TIAA
under New York law. As part of TIAA, the Account is subject to regulation by the
State of New York Insurance Department ("NYID") and the insurance departments of
some other jurisdictions in which the contracts are offered (see "State
Regulation," page 62).
Although TIAA owns the assets of the Real Estate Account, the
Account's income, investment gains, and investment losses are credited to or
charged against the assets of the Account without regard to TIAA's other income,
gains, or losses. Under New York law, we cannot charge the Account with
liabilities incurred by any other TIAA separate account or other business
activity TIAA may undertake.
TIAA is a nonprofit stock life insurance company organized under the
laws of New York State. It was founded on March 4, 1918, by the Carnegie
Foundation for the Advancement of Teaching. All of the stock of TIAA is held by
the TIAA Board of Overseers, a nonprofit New York membership corporation whose
main purpose is to hold TIAA's stock. TIAA's headquarters are at 730 Third
Avenue, New York, New York 10017-3206; there are also regional offices in
Atlanta, Boston, Chicago, Dallas, Denver, Detroit, New York, Philadelphia, San
Francisco, and Washington, D.C., and a service center in Denver. TIAA offers
both traditional annuities, which guarantee principal and a specified interest
rate while providing the opportunity for additional dividends, and variable
annuities, whose return depends upon the performance of certain specified
investments. TIAA also offers life, long-term disability, and long-term care
insurance.
TIAA manages the investment of the Account's assets. TIAA has been
making mortgage loans for over 50 years. We are currently one of the largest and
most experienced investors in mortgages and real estate equity interests in the
nation. As of December 31, 1995, TIAA employees managed for TIAA's general
account a mortgage portfolio of $21.0 billion. The vast majority of the
portfolio is secured by investment-grade properties located throughout the U.S.
Almost three-quarters of the TIAA general account's mortgage portfolio consists
of mortgage loans made on office buildings and retail properties (i.e., shopping
centers, including malls).
As of December 31, 1995, TIAA employees oversaw for TIAA's general
account a real estate equity portfolio of $7.0 billion, with properties located
across the U.S. Office buildings and shopping centers comprise more than
three-quarters of the real estate equity portfolio of the general account.
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TIAA is the companion organization of the College Retirement
Equities Fund ("CREF"), the first company in the United States to issue a
variable annuity. CREF is a nonprofit membership corporation established in New
York State in 1952. Together, TIAA and CREF form the principal retirement system
for the nation's education and research communities and the largest retirement
system in the U.S., based on assets under management. TIAA-CREF serves
approximately 1.8 million people at about 5,800 institutions. As of December 31,
1995, TIAA's assets were approximately $79.8 billion; the combined assets for
TIAA and CREF totalled approximately $160.6 billion (although CREF doesn't stand
behind TIAA's guarantees).
TIAA currently has one other separate account. TIAA may offer new
investment accounts with different investment objectives in the future, as
permitted by law.
INVESTMENT PRACTICES OF THE ACCOUNT
General
The investment objective of the Real Estate Account is a favorable
rate of return over the long term, primarily through rental income and capital
appreciation from real estate investments owned by the Account. The Account will
also invest in publicly-traded securities and other instruments to maintain
liquidity needed for capital expenditures and expenses and to make
distributions. As with any variable account, we cannot assure you that its
investment objective will be met. One critical factor to achieving the objective
is whether we can find enough suitable investments for the Account at any
particular time.
Usually, between 70% and 80% of the Account's assets will be
invested directly in real estate or in real estate-related investments.
We expect the majority of the Account's real estate investments to
be direct ownership interests in income-producing real estate, such as office,
industrial, retail, and multi-family residential properties. The Account can
also invest to a limited extent in other real estate-related investments, such
as conventional mortgage loans, participating mortgage loans, and real estate
partnerships. To a limited extent, the Account can also invest in real estate
investment trusts, common or preferred stock of companies whose operations
involve real estate (i.e., that own or manage real estate primarily), and
collateralized mortgage obligations.
Normally, between 20% and 30% of the Account will be invested in
government and corporate debt securities, short-term money market instruments or
cash equivalents, and, to some extent, common or preferred stock of companies
that don't primarily own or
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manage real estate. In some circumstances, the Account can increase temporarily
the portion of its assets invested in debt securities or money market
instruments. This could happen because of a rapid influx of participants' funds,
lack of suitable real estate investments, or a need for more liquidity.
We do not expect that the Account will invest in foreign real estate
or other types of foreign real estate-related investments initially, but it may
do so as it grows. The percentage of the Account's assets in foreign investments
will vary, but we expect that foreign investments will not be more than 25% of
the Account's portfolio.
In order not to be considered an "investment company" under the 1940
Act, the Account will limit its holdings of investment securities (as defined
under the 1940 Act) to less than 40% of its total assets (not including U.S.
Government securities and cash items). However, during its first year, the
Account may keep a much larger part of its assets in short-term and other debt
instruments or in equity securities.
TIAA can, in its discretion, decide to change the operating policies
of the Account or wind it down. This could happen if, for instance, the Account
is smaller than expected. If the Account is wound down, you may be required to
transfer your accumulations to TIAA's traditional annuity or any CREF account
available under your employer's plan. You will be notified in advance if we
decide to change or wind down the Account.
Investments in Direct Ownership Interests in Real Estate
Acquisition. The Account's main investment policy is to acquire
direct ownership interests in existing or newly-constructed income-producing
real estate, including office buildings, multi-family residential properties,
and retail and industrial properties. TIAA will invest a substantial part of the
Account's assets in established properties that have existing rent and expense
schedules or in new properties with predictable cash flows. The Account will
usually acquire real estate that's ready for occupancy by tenants, which
eliminates the development or construction risks inherent in buying unimproved
real estate. However, from time to time the Account can, consistent with its
objective, invest in a real estate development project. The Account can also buy
recently-constructed properties that are subject to agreements with sellers that
provide for certain minimum levels of income.
Purchase-Leaseback Transactions. Some of the Account's investments
can be real property purchase-leaseback transactions ("leasebacks"). In these
transactions, the Account typically will buy land and income-producing
improvements on the land, and simultaneously lease the land and improvements.
Leasebacks can be
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for very long terms and may provide for increasing payments from the lessee.
Usually, under a leaseback, the lessee will operate, or arrange for
someone else to operate, the property. The lessee is responsible generally for
all operating costs, including taxes, mortgage debt service, maintenance and
repair of the improvements, and insurance. The Account can also give the lessee
an option to buy the land and improvements after a period of years. The option
exercise price may be based on factors such as the fair market value of the
property, as encumbered by the lease, the increase in the gross revenues from
the property, or other objective criteria.
In some leasebacks, the Account may purchase only the land under an
income-producing building and lease the land to the building owner. In those
cases, the Account will often seek to share (or "participate") in any increase
in property value from building improvements or in the lessee's gross revenues
from the building above a base amount (which may be adjusted if real estate
taxes or similar operating expenses increase or upon other events). The Account
can invest in leasebacks that are subordinated to other interests in the land,
buildings, and improvements. These interests include a first mortgage, other
mortgage, or lien. In that case, the leaseback interest will be subject to
greater risks.
Investments in Mortgages
The Account can make mortgage loans or hold interests in mortgage
loans made by it or others, generally on the same types of properties it would
otherwise purchase. These will include commercial mortgage loans that may pay
fixed or variable rates of interest or have "participating" features (as defined
below). The Account's mortgage loans usually will be secured by properties that
have income-producing potential based on historical or projected data. Mortgage
loans usually will be non-recourse, which means they won't be the borrower's
personal obligations. They usually will not be insured or guaranteed by
government agencies or anyone else. We expect most of the Account's mortgage
loans to be secured by first mortgages on existing income-producing property.
First mortgage loans are secured by mortgages which have first-priority liens on
the real property. These loans may be amortized, or may provide for
interest-only payments, with a balloon payment at maturity.
Participating Mortgage Loans. The Account may also seek to make
mortgage loans which, in addition to charging interest, permit the Account to
share (have a "participation") in the income from or appreciation of the
underlying property. These participations let the Account receive additional
interest, calculated as a percentage of the revenues the borrower receives from
(i) operating the property and/or (ii) selling or refinancing the property or
otherwise. Participations can also involve
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granting the Account an option to buy the property securing the loan or an
option to buy an undivided interest in the property securing the loan.
Managing Mortgage Loan Investments. When advisable and consistent
with its investment objective, the Account can sell its mortgage loans, or
portions of them, before maturity. TIAA can also extend the maturity of any
mortgage loan made by the Account, consent to a sale of the property subject to
a mortgage loan, finance the purchase of a property by making a new mortgage
loan in connection with the sale of a property (either with or without requiring
the repayment of the existing mortgage loan), renegotiate and restructure the
terms of a mortgage loan, and otherwise manage the Account's mortgage loans.
Standards for Direct Ownership and Mortgage Loan Investments
In making direct ownership investments and mortgage loan
investments, TIAA will consider relevant real property and financial factors.
These include the location, condition, and use of the underlying property, its
operating history, its future income-producing capacity, and the quality,
operating experience, and creditworthiness of the unaffiliated borrower.
Before the Account acquires any direct ownership interest or makes a
mortgage loan, TIAA will analyze the fair market value of the underlying real
estate, taking into account the property's operating cash flow (derived from the
historical and expected levels of rental and occupancy rates, and the historical
and projected expenses of the property), supplemented by the general economic
conditions in the area where the property is located. Ordinarily, each mortgage
loan made by the Account will not exceed, when added to the amount of any
existing debt, 85% of the appraised value of the mortgaged property, unless the
Account is compensated for taking such additional risk.
Foreign Real Estate and Other Foreign Investments
We don't expect that the Account will buy foreign real estate or
make real estate-related investments in foreign countries initially, but it
might do so as it grows. It might also invest in securities or other instruments
of foreign governmental or private issuers that are consistent with its
investment objective and policies. Often, different factors affect foreign and
domestic investment decisions. For example, foreign real estate markets have
different liquidity and volatility attributes than U.S. markets. Changes in
currency rates, currency exchange control regulations, possible expropriation or
confiscatory taxation, political, social, and economic developments, and foreign
regulations can also affect foreign real estate investments. It may be more
difficult to obtain and collect a judgment on foreign investments than on
domestic ones.
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The value of investments that aren't denominated in U.S. dollars can
go up or down as currency rates change. Rental income from those properties
could be similarly affected by currency movements. Changes in currency exchange
controls can also affect the value of the Account's foreign investments. The
Account may seek to hedge its exposure to changes in currency rates and exchange
control regulations, which could involve extra costs.
We will consider the above factors and others before investing in
foreign real estate, and won't invest unless our standards and objectives are
met. Depending on investment opportunities, the Account's foreign investments
could at times be concentrated in one or two foreign countries. The percentage
of the Account's foreign investments will vary. However, we expect that foreign
investments will be no more than 25% of the Account's portfolio.
Other Real Estate-Related Investments
The Account can make other real estate-related investments,
including holding shares of real estate investment trusts, common or preferred
stock of companies whose business involves real estate, and collateralized
mortgage obligations.
Real Estate Investment Trusts. Real estate investment trusts
("REITs") are publicly-owned entities that lease, manage, acquire, hold
mortgages on, and develop real estate. REITs attempt to optimize share value by
acquiring and developing new projects. They also refurbish, upgrade, and
renovate existing properties to increase rental rates and occupancy levels.
REITs seek higher cash flows by negotiating for rental increases on existing
leases, replacing expiring leases with new ones at higher rates, and improving
occupancy rates.
REITs must distribute 95% of their net earnings to shareholders in
order to benefit from a special tax structure, which means they may pay high
dividends. While a REIT's yield is relatively stable, its price fluctuates with
interest rates. Other factors can also affect a REIT's price. For example, a
REIT can be affected by such factors as cash flow dependency, the skill of its
management team and defaults by lessees or borrowers. In the event of a default
by a lessee or borrower, a REIT may experience delays in enforcing its rights as
a lessor or mortgagee and may incur substantial costs associated with protecting
its investments.
REITs invest in real property and mortgages, and therefore are
subject to many of the same risks as the Real Estate Account. See "Risk
Factors," page 19 and "Risks of REIT Investments," page 25.
Stock of Companies Involved in Real Estate Activities. The Account
can invest in common or preferred stock of companies
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whose business involves real estate. These stocks can be listed on one or more
U.S. or foreign stock exchanges or traded over-the-counter in the U.S. or
abroad. Like other equity securities, these stocks are subject to market risk --
their price can go up or down in response to changes in the financial markets.
They are also subject to financial risk, which comes from the possibility that
current earnings will fall or that overall financial soundness will decline,
reducing the security's value.
Collateralized Mortgage Obligations. The Account can invest in
collateralized mortgage obligations ("CMOs") that are fully collateralized by a
portfolio of mortgages or mortgage-related securities. CMO issuers distribute
principal and interest payments on the mortgages to holders of the CMOs
according to the distribution schedules of each CMO. Some classes of CMOs may be
entitled to receive mortgage prepayments before other classes do. Therefore, the
prepayment risk for a particular CMO may be more or less than for other
mortgage-related securities. CMOs may also be less marketable than other
securities.
CMO interest rates can be fixed or variable. Variable-rate CMOs may
be structured to adjust inversely with and more rapidly than short-term interest
rates. As a result, their market value tends to be more volatile than other
CMOs.
Other Investments
The Account can invest in securities issued or guaranteed by the
U.S. Government or one of its agencies and instrumentalities, and debt
securities of foreign governments or multinational organizations. The Account
can also invest in corporate debt securities, asset-backed securities, and money
market instruments or cash equivalents issued by domestic or foreign entities.
It can also buy limited amounts of common or preferred stock of domestic or
foreign companies that aren't involved primarily in real estate.
The Account will buy only investment-grade debt securities that are
rated, at the time of purchase, within the top four categories by a nationally
recognized rating organization or, if not rated, that are deemed to be of
equivalent quality by TIAA.
The Account's money market instruments or cash equivalents will
usually be high-quality short-term debt obligations. These investments include,
but are not limited to, securities issued or guaranteed by the U.S. Government
or one of its agencies and instrumentalities, commercial paper, certificates of
deposit, bankers' acceptances, repurchase agreements, interest-bearing time
deposits, and corporate debt securities.
From time to time, particularly during the Account's first year, a
significant percentage of the Account may be invested
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in liquid assets while we look for suitable real property investments. Liquid
assets don't have to be real estate-related. The Account also can temporarily
increase the percentage of its liquid assets under particular circumstances.
These include the rapid influx of participants' funds, lack of suitable real
estate investments, or a need for greater liquidity.
GENERAL INVESTMENT AND OPERATING POLICIES
The Account doesn't intend to buy and sell any direct ownership
interests in properties, mortgage loans, leasebacks, or other real estate
investments simply to make short-term profits by their sale. However, the
Account may sell investments to raise cash, if market conditions dictate, or
otherwise. The Account will reinvest any proceeds from sales of assets (and any
cash flow from operations) that it doesn't need to pay operating expenses or to
meet redemption requests (e.g., cash withdrawals or transfers).
Appraisals. When acquiring properties, leasebacks, or other real
estate investments, the Account will rely on TIAA's analysis of the investment
and usually won't receive an independent appraisal before an acquisition.
However, the Account will get an independent appraisal when it makes mortgage
loans. We expect that the Account's properties and participating mortgage loans
will be appraised or valued annually by an independent state-certified appraiser
who is a member of a professional appraisal organization.
Borrowing. Usually, the Account won't borrow money to purchase
direct ownership interests in real properties -- i.e., these investments will be
unleveraged. However, the Account may use a line of credit to meet short-term
cash needs. While the properties the Account acquires ordinarily will be free
and clear of mortgage indebtedness immediately after their acquisition, it is
possible that the terms of a short-term line of credit may require the Account
to secure a loan with one or more of its properties or other assets.
Joint Investments. While the Account will often own the entire fee
interest in a property, it can also hold other ownership interests. The Account
can hold property jointly through general or limited partnerships, joint
ventures, leaseholds, tenancies-in-common, or other legal arrangements. The
Account cannot hold real property jointly with TIAA or its affiliates.
Diversification. We have not placed percentage limitations on the
type and location of properties that the Account can buy. However, the Account
plans to diversify its investments by type of property and geographic location.
How much the Account diversifies will depend upon the availability of suitable
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investments and how much the Account has available for investment at any given
time.
Discretion to Evict or Foreclose. TIAA can decide when it is in the
best interests of the Account to evict defaulting tenants or to foreclose on
defaulting borrowers. When deciding to evict or foreclose, TIAA will take a
course of action that it concludes is in the best interests of the Account in
order to maintain the value of an investment.
Property Management and Leasing Services. We usually will hire a
management company to perform local property management services for properties
the Account owns and operates. The local management company will be responsible
for day-to-day management of the property, supervising any on-site personnel,
negotiating maintenance and service contracts, and providing advice on major
repairs, replacements, and capital improvements. The local manager will also
review market conditions in order to recommend changes in rent schedules and
create marketing and advertising programs to attain and maintain good occupancy
rates by responsible tenants. The Account may also hire one or more leasing
companies to perform leasing services for any property with actual or projected
vacancies, if the property management company doesn't already provide those
services. The leasing companies will coordinate with the property management
company to provide marketing and leasing services. The fees paid to the local
management company, along with any leasing commissions and expenses, will reduce
the Account's cash flow from a property.
We won't usually need a management services company for mortgage
loans (except for mortgage servicing), but we might decide that those services
are desirable when we are foreclosing on a mortgage loan.
DESCRIPTION OF PROPERTIES
As of the date of this prospectus, the Account has purchased eight
properties for its portfolio, consisting of two multi-family residential
complexes, three neighborhood shopping centers, one office building and two
industrial properties. These properties are described in detail in Appendix A.
Real estate investments made on behalf of the Account after the date of this
prospectus will be described in supplements to the prospectus, as appropriate.
RISK FACTORS
Participants should consider various risks before investing in the
Account. These include valuation risks (see "Valuation of Assets," page 32),
conflicts of interest (see "Conflicts of Interest," page 29), and the
following:
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Risks of Real Property Ownership
General Risks of Real Property Ownership. The Account will be
subject to the risks inherent in owning real property. They include fluctuations
in occupancy rates and operating expenses, unanticipated repairs and renovations
(particularly in older structures), and variations in rental rates and property
values. Many factors can adversely affect rental rates and property values.
These include the state of the economy (local, national or global), changing
supply and demand for the type of properties the Account invests in, natural
disasters or man-made events, zoning laws, real property tax rates, and other
governmental rates and fiscal policies.
Operating the Account's real property mainly involves renting to
tenants. There are risks associated with rentals. For example if a lease is
terminated because the tenant is unable to pay the rent (including when a
bankruptcy court has rejected the tenant's lease), the Account's cash flow will
be reduced. If we terminate a lease, we might not be able to find a new tenant
without incurring a loss.
The inability to attract and retain tenants, which means that rental
income declines, is another risk for the Account. Third parties in
purchase-leaseback transactions may renege or default on rental agreements or
rent guarantees. We also can't assure that operating a property will produce a
satisfactory profit because operating costs can increase in relation to a
property's gross rental income. In particular, property taxes and utility,
maintenance, and insurance costs may go up. The Account may have to advance
funds to third parties to protect its investment, or sell properties on
disadvantageous terms in order to raise needed funds.
While the Account intends to reinvest cash flow from investments, we
can't guarantee that those investments will generate enough income to pay the
Account's operating and other expenses.
Resale of Real Property. Because the Account invests in real
property, its investments may be illiquid compared to the readily-marketable
securities held by other variable annuity accounts. A poor market for real
estate can make it harder to sell any particular investment for its full value.
This could lead to losses or reduced profits for the Account. The risk that
resale will be difficult will vary with the size, location, and type of
investment. The Account might not be able to sell a property at a particular
time or price. Although the Account ordinarily would sell real property for
cash, the Account may at times find it necessary to provide financing to
purchasers.
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Risks with Purchase-Leaseback Transactions. Risks under
purchase-leaseback transactions relate to the ability of the lessee to make
required payments to the Account. Because subleases are usually for shorter
terms than the leaseback, the lessee's ability to make payments to the Account
may depend on successfully renewing any subleases or finding new subtenants. If
the leaseback interest is subordinate to other interests in the real property,
such as a first mortgage or other lien, the risk to the Account increases
because the lessee may have to pay the senior lienholder to prevent foreclosure
before it pays the Account. If the lessee defaults or the leaseback is
terminated prematurely, the Account might not recover its investment unless the
property is sold or leased on favorable terms.
Properties Acquired Prior to Completion of Development and
Construction and Recently-Constructed Properties. If the Account chooses to
develop a real property, it faces the risk of delays or unexpected increases in
the cost of property development and construction. These risks can come from
over-building, which lowers demand for rentals. They can also be the result of
slower growth in local economies, poor performance of local industries, higher
interest rates, strikes, bad weather, material shortages, or increases in
material and labor costs. We can't guarantee that once a property is developed
it will operate at the income and expense levels we projected before developing
it. We also can't guarantee that a property will be developed the same way we
originally planned.
The Account may buy recently-constructed properties that are subject
to agreements with sellers that provide for certain minimum levels of income. We
can't guarantee that the sellers or other parties will be able to carry out
their obligations under those agreements. We also can't assure you that when
these agreements expire or the seller defaults, the operating income from the
properties will be enough to produce as good a return as the Account was getting
from those properties before the expiration or default.
Risks of Joint Ownership
Investing in joint venture partnerships or other forms of joint
property ownership sometimes involves risks that don't apply when properties are
owned directly. These risks include the co-venturer's bankruptcy or the
co-venturer's having interests or goals inconsistent with those of the Account.
If a co-venturer doesn't follow the Account's instructions or adhere to the
Account's policies, the jointly-owned properties, and consequently the Account,
might be exposed to greater liabilities than expected. A co-venturer also can
make it harder for the Account to transfer its interest in the joint form of
ownership. A co-venturer could have the right to decide whether and when to sell
the property. As
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a result, it could be hard for the Account to sell joint ownership investments.
Risks of Mortgage Loan Investments
General Risks of Mortgage Loans. The main risk of a mortgage loan
investment is that the borrower defaults. If that happens, the Account would
have to foreclose on the underlying property to protect the value of its
mortgage loan, or pursue other remedies. Since the Account will usually make
non-recourse mortgage loans, it will usually rely solely on the value of the
underlying property for its security. Mechanics', materialmen's, governmental,
and other liens on the property may have or obtain priority over the Account's
security interest.
The unamortized principal amount due under a mortgage loan will be
payable in a lump sum payment at the end of the loan term. Unless the borrower
has large cash reserves, it may not be able to make this payment unless it can
refinance the mortgage loan with another lender.
If interest rates are volatile during the investment period, the
Account's variable-rate mortgage loans could have lower yields.
Prepayment Risks. The Account's mortgage loan investments will
usually be subject to the risk that the borrower decides to prepay the loan.
Prepayments can change the Account's return because we may be unable to reinvest
the prepaid proceeds at as good an interest rate as the original mortgage loan
rate.
Loan-to-Value Ratio. The larger the mortgage loan compared to the
fair market value of the property securing it, the greater the loan's risk. The
Account therefore usually won't make mortgage loans of more than 85% of the
appraised value of the property. (It will make larger loans only if it's
compensated for the extra risk.) However, we can't guarantee that if a borrower
defaults, the Account will be able to sell the property for its estimated or
appraised value.
Interest Limitations. Because state laws could change during the
term of a loan or for other reasons, we might not always be able to determine
with certainty whether the interest rate we are charging on mortgage loans
complies with state usury laws that limit rates. If we inadvertently violate
those laws, we could incur such penalties as restitution of excess interest,
unenforceability of debt, and treble damages.
Risks of Participations. A participating mortgage loan could have a
relatively low fixed interest rate and provide for payment of a percentage of
revenues from the property or sale proceeds. In that case, if the property
doesn't generate revenues
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or appreciate in value, the Account will have given up a potentially greater
fixed return without receiving the benefit of appreciation. It's also possible
that in very limited circumstances, a court could characterize the Account's
participation interest as a partnership or joint venture with the borrower. The
Account would then lose the priority its security interest would otherwise have
been given, or be liable for the borrower's debts.
General Risks of All Types of Real Estate-Related Investments
Appraisal Risks. We may rely on appraisals from real estate
professionals to value properties. However, appraisals are only estimates based
on the professional's opinion and may not be the amount the Account receives if
it sells the property. If appraisals are too high, participants sending in
premiums will be credited with fewer accumulation units than if the value were
lower. Participants withdrawing funds or receiving income when appraisals are
too high will receive more money than they would otherwise be entitled to, which
hurts other participants. If appraisals are too low, participants sending in
premiums would be credited with too many accumulation units, which hurts other
participants. Payments to participants making cash withdrawals or receiving
income would be lower when appraisals are too low than they would have been if
the appraisals were higher.
Inaccurate appraisals can also affect the fees the Account pays to
TIAA, since TIAA's fees are based on the Account's value (see "Conflicts of
Interest," page 29).
Investment Opportunities; Size of Account. We can't guarantee that
good investment opportunities will come up at the same time funds are available
for investment. In addition, the Account may have to forego investment
opportunities if it does not have sufficient money to invest.
It will be more difficult to diversify the Account's investments
when the Account is small. Returns from the Account would, in that case, be more
dependent on the performance of any one investment than if the Account were
larger and more diversified.
Casualty Losses. We will try to arrange for, or require proof of,
comprehensive insurance, including liability, fire, and extended coverage, for
the Account's real property and properties securing mortgage loans or subject to
purchase-leaseback transactions. However, some types of catastrophic losses are
uninsurable or so expensive to insure against that it doesn't make sense to buy
insurance for them. These may include losses from earthquakes, wars, nuclear
accidents, floods, or environmental or industrial hazards or accidents. If a
disaster that we haven't
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insured against occurs, the Account could lose both invested principal and any
future profits from the property affected.
Some leases may permit a tenant to terminate its obligations in
certain catastrophic situations, regardless of whether those events are fully
covered by insurance. In that case, the Account would not receive rental income
from the property while that tenant's space is vacant.
Regulatory and Environmental Risks. The imposition of restrictive
zoning regulations and land use controls, strict air and water quality
standards, and noise pollution regulations by local, state, federal, and foreign
governmental authorities could limit the availability of suitable investments
for the Account and could increase any construction and operating costs of the
Account.
In addition, changes in local, state, federal, or international
environmental regulations on the use or presence of hazardous or toxic materials
or waste could raise the cost of owning and maintaining properties. It could be
harder for the Account to maintain, sell, rent, finance, or refinance properties
or property interests affected by new environmental regulations because of the
increased costs associated with regulatory compliance. Under some federal
statutes, the Account's potential liability for environmental damage could
exceed the value of the Account's investment in a property.
Under various federal, state, and local environmental regulations, a
current or previous property owner or operator, and sometimes a mortgagee, may
be liable for the cost of removing or cleaning-up hazardous or toxic substances
on, in or released from a property. The Account could be liable for those costs
on its properties, even if we didn't know of, and weren't responsible for, the
presence or release of the hazardous or toxic substances. The presence of any
hazardous or toxic substances, or the failure to clean up those substances
properly, can limit an owner's ability to sell or rent a property. The Account
could also be liable for the cost of removal or clean up of those substances at
a disposal or treatment facility, even if we don't own the facility. Under
current environmental regulations, the cost of any required clean-up and the
liability of the owner, operator, or mortgagee is usually not limited and could
exceed the property's value or the aggregate assets of the owner or operator. In
an extreme case, the Account could be required to incur significant costs
because of a single real estate investment if it were legally required to pay
for cleaning up an environmental hazard.
Various environmental regulations also require property owners or
operators to monitor business activities on their premises that affect the
environment. Failure to comply with those requirements could make it difficult
to lease or sell any affected property or subject the Account to monetary
penalties.
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Risks of REIT Investments
REITs invest in real property and mortgages, and therefore are
subject to many of the same general risks associated with direct real property
ownership. In particular, equity REITs may be affected by changes in the value
of the underlying property owned by the trust, while mortgage REITs may be
affected by the quality of any credit extended. In addition to these risks,
because REIT investments are securities, they may be exposed to market risk --
price volatility due to changing conditions in the financial markets and, in
particular, changes in overall interest rates.
Risks of Liquid Investments
The Account's investments in securities and other instruments are
subject to several types of risks. One is financial risk, which for debt
securities and other fixed-income instruments comes from the possibility the
issuer won't be able to pay principal and interest when due. For common or
preferred stock, it comes from the possibility that the issuer's current
earnings will fall or that its overall financial soundness will decline. Another
kind of risk is market risk -- price volatility due to changing conditions in
the financial markets and, particularly for debt securities, changes in overall
interest rates. Finally, volatile interest rates may affect current income from
an investment.
Other Risks
Risk of Unspecified Investments. As of the date of this prospectus,
the Account has invested only a portion of its assets in real estate and we
can't tell you with certainty when and if the Account will be fully invested.
While we intend to supplement this prospectus periodically to describe the
Account's property investments, it is unlikely that supplements will be
available for your review prior to the completion of a property acquisition. As
a result, if you invest in the Account you won't have the opportunity to
evaluate for yourself the economic merit of any property investments that the
Account may make. You therefore must rely solely upon the judgment and ability
of TIAA to select investments consistent with the Account's investment objective
and policies.
Investment Company Act of 1940. We intend to operate the Account so
that it will not have to register as an "investment company" under the 1940 Act.
This will require monitoring the Account's portfolio so that it won't have more
than 40% of total assets (other than U.S. Government securities and cash items)
in investment securities (as defined under the 1940 Act). As a result, the
Account may be unable to make some potentially profitable investments.
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ROLE OF TIAA
TIAA plays a significant role in operating the Real Estate Account.
The Account is managed by TIAA. In addition, TIAA's general account supplied the
Account's initial capital, or "seed money." On an ongoing basis, TIAA's general
account provides a liquidity guarantee -- i.e., TIAA ensures that the Account
has funds available to meet transfer or cash withdrawal requests. (See
"Liquidity Guarantee," page 26.)
Seed Money
On July 3, 1995, TIAA contributed $100 million to the Account in
exchange for $100 million in accumulation units, to enable the Account to
purchase a diverse portfolio of properties without having to wait to receive
premiums.
TIAA will redeem a portion of its seed money investment monthly,
according to a five-year fixed repayment schedule approved by the New York
Insurance Department. This schedule requires TIAA to begin redeeming the seed
money investment (1) on October 2, 1997, or (2) on the date the Account's assets
first reach $200 million, whichever comes first.
TIAA's accumulation units will be redeemed at net asset value at the
time of redemption.
Because of its seed money investment, TIAA owned accumulation units
representing 85.3% of the Account's net assets, as of December 31, 1995.
Liquidity Guarantee
Subject to federal income tax considerations and, where applicable,
the terms of your plan, you can redeem accumulation units daily by making cash
withdrawals or transfers from the Account. If the Account's cash flow (from
premiums and investment income) and liquid investments are insufficient to fund
redemption requests, TIAA's general account intends to fund them by purchasing
accumulation units, subject to Department of Labor approval. When TIAA purchases
units to keep the Account liquid ("liquidity units") or TIAA sells liquidity
units back to the Account, the number of accumulation units TIAA holds will go
up or down. TIAA guarantees that you can redeem your accumulation units at their
then current daily net asset value. Of course, you can only make a cash
withdrawal consistent with the terms of your plan.
As TIAA buys liquidity units, it may end up owning more of the Real
Estate Account than anticipated. An independent fiduciary (see below) will
monitor whether liquidity units held by TIAA's general account have, together
with the accumulation units representing TIAA's seed money investment (if still
not redeemed),
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exceeded a specific percentage of the Account's total outstanding accumulation
units. If so, TIAA may be required to redeem some of its liquidity units. The
independent fiduciary may require the number of liquidity units TIAA holds to
be reduced when the Account has uninvested cash or liquid investments
available. The independent fiduciary may also select properties for the Account
to sell so that TIAA can redeem liquidity units. See "Role of the Independent
Fiduciary," below.
The Account pays TIAA for the liquidity guarantee through a daily
deduction from net assets. See "Liquidity Guarantee Deduction," page 37.
TIAA's ERISA Fiduciary Status
To the extent that assets of a plan subject to ERISA are allocated
to the Account, TIAA will be acting as an "investment manager" (as that term is
defined under ERISA) and a fiduciary under ERISA with respect to those assets.
Role of the Independent Fiduciary
TIAA's purchase and sale of liquidity units raises certain technical
issues under ERISA. TIAA therefore filed an application for a prohibited
transaction exemption with the U.S. Department of Labor ("DOL"). The exemption
was issued in proposed form on April 4, 1996. Although we currently anticipate
that the DOL will issue the requested exemption in final form, we can't assure
you that it will do so on the terms and conditions requested by TIAA. In
connection with the proposed exemption, TIAA has appointed an "independent
fiduciary" for the Real Estate Account.
Institutional Property Consultants, Inc., a registered investment
adviser in business since 1983, serves as the Account's independent fiduciary.
The independent fiduciary's responsibilities include: (1) reviewing and
approving the Account's investment guidelines and any changes to them; (2)
monitoring whether the properties the Account buys conform to the investment
guidelines; (3) reviewing and approving valuation procedures and any changes to
them; (4) approving adjustments to any property valuations that change the value
of the property or the Account as a whole above or below certain prescribed
levels, or that are made within three months of the annual independent
appraisal; (5) reviewing and approving how we value accumulation and annuity
units; (6) approving the appointment of all independent appraisers; (7)
reviewing the purchase and sale of units by TIAA to ensure that we use the
correct unit values; and (8) reviewing the seed money redemption schedule. If
the independent fiduciary believes that any of the properties have changed
materially, or
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that an additional appraisal is otherwise necessary to assure the Account has
correctly valued a property, it can require appraisals besides those normally
conducted.
After (and, if necessary, before) the period during which the
Account must repay TIAA's seed money investment, the independent fiduciary will
calculate the percentage of total accumulation units that TIAA's ownership
shouldn't exceed (the "trigger point"). The independent fiduciary will also
create a method for changing the trigger point. It must approve any adjustment
of TIAA's interest in the Account and can require an adjustment. If TIAA's
investment reaches the trigger point, the independent fiduciary may plan and
participate in any program for selling the Account's assets. This can include
selecting properties for sale, providing sales guidelines, and approving those
sales that, in the independent fiduciary's opinion, are desirable to reduce
TIAA's ownership in the Account or to facilitate winding down the Account.
The independent fiduciary will supervise the Account during any
winding down of operations. It will review any program for selling the assets of
the Account during that time. This review can include selecting the properties
to be sold, providing sales guidelines, and approving the sale of the properties
in the Account, if in the independent fiduciary's opinion, the sales would
facilitate winding down.
The independent fiduciary will also review any other transactions or
matters involving the Account that TIAA submits for review to determine whether
those transactions are fair and in the Account's best interest.
TIAA appointed the independent fiduciary for a five-year term, and
has established a special subcommittee of its Board of Trustees with authority
to renew the appointment or remove the independent fiduciary. When the term
ends, the independent fiduciary will not be reappointed unless more than 75% of
the subcommittee members approve. Before the term ends, the independent
fiduciary can be removed by the vote of the majority of subcommittee members
after at least 180 days' written notice. In addition, the independent fiduciary
can resign after at least 180 days' written notice. If the independent fiduciary
resigns or is removed, TIAA will appoint a successor.
TIAA pays the independent fiduciary directly. The investment
management charge deducted from the Account's assets and paid to TIAA includes
TIAA's costs for retaining the independent fiduciary. The independent fiduciary
will receive less than 5% of its annual income, including payment for services
to the Real Estate Account during its term as independent fiduciary, from TIAA.
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Your decision as a participant or plan fiduciary to invest in the
Account will constitute your approval and acceptance of Institutional Property
Consultants, Inc. or any successor to serve as the Account's independent
fiduciary, after full and fair disclosure has been made by TIAA, including the
disclosure in this prospectus.
CONFLICTS OF INTEREST
TIAA is a nonprofit company and will not accept acquisition or
placement fees for services provided to the Account. However, the same people
who oversee the Account's real estate and non-real estate investments may also
buy, sell, and manage the real estate-related and other investments of TIAA's
general account. This could create conflicts of interest.
The potential for conflicts of interest can arise because TIAA's
general account may sometimes compete with the Real Estate Account in the
purchase or sale of investments. However, we do not expect many conflicts to
arise because the Real Estate Account and TIAA's general account will normally
have different investment and sale objectives and will generally not be in the
market to purchase or sell the same types of properties at the same time.
Whenever the investment or sale objectives of the Real Estate Account and TIAA's
general account are similar, we will use the following procedures to eliminate
conflicts of interest: The decision, in the first instance, as to whether the
Real Estate Account or TIAA's general account will purchase or sell a property
will be determined by such factors as which account has cash available to make
the purchase, the effect the purchase or sale will have on the diversification
of each account's portfolio, the estimated future cash flow of the portfolios
with regard to both purchases or sales, and other relevant legal or investment
policy factors. If this analysis does not clearly determine which account should
participate in a transaction, a rotation system will be used.
Potential conflicts of interest could also arise because some
properties in TIAA's general account may compete for tenants with properties the
Account owns or has an interest in.
The decision as to whether properties owned by the Account or TIAA's
general account will lease space to a tenant will be determined by such factors
as the tenant's preference between the two properties, how much the tenant is
willing to pay for rent, and which property can best afford to pay any required
costs associated with such leasing.
Many of the personnel of TIAA involved in performing services to the
Real Estate Account will have competing demands on their time. The personnel
will devote such time to the affairs of the Account as TIAA's management
determines, in its sole discretion exercising good faith, is necessary to
properly service the
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Account. TIAA believes that it has sufficient personnel to discharge its
responsibility to both the general account and the Account and to avoid
conflicts of interest.
Indemnification
The Account has agreed to indemnify TIAA and its affiliates,
including its officers and directors, against certain liabilities, including
liabilities under the Securities Act of 1933. The Account may make such
indemnification out of its assets.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Account began operating on July 3, 1995 and interests in the
Account began being offered to participants on October 2, 1995.
The Account's first real estate acquisition closed on November 22,
1995. Through December 31, 1995, the Account acquired a total of five real
estate properties, including two industrial properties, one neighborhood
shopping center, and two apartment complexes. Since December 31, 1995, the
Account has purchased an office property and two neighborhood shopping centers.
The Account is in various stages of negotiations with a number of prospective
sellers for additional real estate purchases.
Results of Operations
From July 3 to December 31, 1995, the Account's net investment
income, after deduction of all expenses, was $2,640,397. In addition, the
Account had net realized and unrealized gains on investments of $35,603. This
resulted in a cumulative total return of 2.57% for that six month period. Much
of the Account's investment income received during 1995 was generated by
short-term investments. However, as the Account approaches its objective of
being approximately 70% to 80% invested in real estate, the Account's future
investment income will be affected to a greater degree by its real estate
holdings. Assuming little change in underlying economic conditions, this
increase in real estate holdings should have a positive impact on the Account's
total return.
Interest income on the Account's short-term investments totaled
$2,820,229 and its dividend income totaled $8,671 through December 31, 1995.
Gross real estate income through this same date was $165,762. Total
property-level expenses through December 31, 1995 were $43,832 and were
comprised of real estate taxes and other operating expenses. Through December
31, 1995, the Account also incurred expenses of $228,136 for investment
management services provided by TIAA, $66,320 for administrative and
distribution
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services provided by TIAA-CREF Individual and Institutional Services, Inc., and
$16,582 for the mortality and expense risks and liquidity guarantee provided by
TIAA. Because the Account began accepting contributions from participants on
October 2, 1995, the charges for administrative and distribution services, as
well as for mortality and expense risks and the liquidity guarantee only began
as of that date.
Liquidity and Capital Resources
In addition to TIAA's initial $100 million seed money investment,
through December 31, 1995 the Account has received over $17.5 million in
premiums and net participant transfers from accumulations in other TIAA and CREF
accounts and has earned $2,640,397 in net investment income. Real estate
properties totaling $43,989,665 were purchased during November and December
1995. At December 31, 1995, the Account's liquid assets (cash and short-term
investments) were $73,948,731. Much of this amount will be used by the Account
to purchase additional suitable real estate properties. The remaining assets
will continue to be invested in short-term instruments to meet expense needs and
redemption requests (e.g., cash withdrawals or transfers).
If the Account's cash flow from operations (e.g., premiums and
investment income) and from available liquid assets is not enough to meet its
cash needs including redemption requests, the Account will fund redemptions by
having TIAA's general account purchase liquidity units, in accordance with the
liquidity guarantee.
TIAA will begin redeeming the accumulation units related to its seed
money investment on October 2, 1997, or the date the Account's assets first
reach $200 million, whichever comes first. After that, TIAA will redeem a
portion of the accumulation units related to its seed money investment monthly,
according to a five-year repayment schedule approved by the New York Insurance
Department.
No major capital expenditures for any of the five properties
purchased during 1995 were made in 1995 or are expected to be made in 1996.
There are no leases expiring in the industrial or office properties in 1996 and
only a small portion of the leased space in the neighborhood shopping centers is
due to expire in 1996. We do not expect to incur any major construction costs or
leasing commissions in order to re-lease that space. For the apartment
complexes, we expect to incur only routine recurring costs to re-lease
apartments that become vacant, i.e. painting and carpet cleaning or replacement.
Effects of Inflation
In recent years, inflation has been modest. To the extent that
inflation may increase property operating expenses in the future, such increases
can generally be billed to tenants
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either through contractual lease provisions in office, industrial, and retail
properties or through rent increases in apartment complexes. However, to the
extent there is unrented space in a property, the Account may not be able to
recover the full amount of such increases in operating expenses.
VALUATION OF ASSETS
We value the Account's assets as of the close of each valuation day.
The Account's net asset value at the end of any valuation day is equal to the
sum of: (i) the value of the Account's cash, cash equivalents, and short-term
and other debt instruments; (ii) the value of any of the Account's other
securities investments; (iii) the value of the individual real properties and
other real estate-related investments owned by the Account, determined as
described below; and (iv) an estimate of the accrued net operating income earned
by the Account from real properties and certain other real estate-related
investments, reduced by the Account's liabilities, including the daily
investment management fee and certain other expenses attributable to operating
the Account (see "Expense Deductions," page 37).
Your premiums purchase accumulation units. The Account calculates
accumulation unit values daily. Accumulation unit value depends on the Account's
net investment income and any realized and unrealized capital gains or losses
from its investments. Your retirement income is based on annuity units. We
calculate annuity unit values for each year on March 31, but each month we also
calculate interim annuity unit values that remain in effect until the next March
31 (for more, see "Annuity Payments," page 53).
Our valuation procedures are described below. The independent
fiduciary approves these procedures and any changes to them (see page 27).
Valuing Real Estate-Related Investments
Valuation Methods for Real Property. Individual real properties
including purchase-leasebacks and joint ventures will initially be valued at
their purchase prices. (Prices include all expenses related to purchase, such as
acquisition fees, legal fees and expenses, and other closing costs.) However, we
could use a different value in appropriate circumstances.
After this initial valuation, an independent appraiser will value
properties at least once a year. The independent fiduciary must approve all
independent appraisers that the Account hires. The independent fiduciary can
require additional appraisals
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if it believes that a property has changed materially or otherwise to assure
that the Account is valued correctly.
Quarterly, we will conduct an internal review of each of the
Account's properties. We'll adjust a valuation if we believe that the value of
the property has changed since the previous valuation. We'll continue to use the
revised value to calculate the Account's net asset value until the next review
or appraisal. However, we can adjust the value of a property in the interim to
reflect what we believe are actual changes in property value.
The Account's net asset value will include the current value of any
note receivable (an amount that someone else owes the Account) from selling a
real estate-related investment. We'll estimate the value of the note by applying
a discount rate appropriate to then-current market conditions.
Valuation Methods for Conventional Mortgages. Individual mortgages
will initially be valued at their face amount. Thereafter, quarterly, we'll
value the Account's fixed interest mortgage loans by discounting payments of
principal and interest to their present value (using a rate at which commercial
lenders would make similar mortgage loans of comparable maturity). We'll also
use this method for foreign mortgages with conventional terms.
We'll adjust mortgage values quarterly using this formula, unless we
believe that it's necessary to adjust them more frequently. We'll get
information about commercial lenders by surveying typical lending institutions
and from other sources.
Valuation Methods for Participating Mortgages. Individual mortgages
will initially be valued at their face amount. Thereafter, quarterly, we'll
calculate the values of the Account's mortgage loans with participation
features. To do so we'll make various assumptions about occupancy rates, rental
rates, expense levels, capitalization rates upon sale, and other things. We'll
use these assumptions to project the cash flow from each investment over the
term of the loan, or sometimes over a shorter period. For these purposes, cash
flow includes fixed interest, the participation feature, and any anticipated
share in sale proceeds. To calculate asset value, we'll assume that the real
property underlying each investment will be sold at the end of the period used
in the valuation at a price based on market assumptions for the time of the
projected sale. Although we use this time period to calculate asset values, it
doesn't mean that the Account will actually hold the investment for that period.
We chose it simply as a frame of reference for estimating asset values.
After we calculate estimated cash flows and sale proceeds, we
discount them to their present value (using rates appropriate to then-current
market conditions). We can then estimate the value of the mortgage.
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Net Operating Income. The Account usually receives operating income
from its real properties and other real estate-related investments
intermittently, not daily. We believe it is fairer to participants to estimate
the Account's net operating income rather than applying it when we actually
receive it. Therefore, we assume that the Account has earned (accrued) a
proportionate amount of that estimated amount daily. However, because these
estimates might not turn out to be accurate, you bear the risk that, until we
adjust the estimates, we could be under- or overvaluing the Account.
The Account's estimated net operating income from real estate assets
will be based on estimates of revenues and expenses for each property. Every
year, we'll prepare a month-by-month estimate of the revenues and expenses
("estimated net operating income") for each of the Account's properties. Each
day, we'll add the appropriate fraction of the estimated net operating income
for the month to the Account's net asset value, as determined above. In effect,
the Account will have a daily accrued receivable equal to the estimated net
operating income from each of its properties.
Every month, the Account will receive a report of actual operating
results for each property ("actual net operating income"). We will then
recognize the actual net operating income on the accounting records of the
Account. We will also adjust accordingly the daily accrued receivable that is
then outstanding. As the Account actually receives cash from a property, we'll
adjust the daily accrued receivable and other accounts appropriately.
Appraisals and Realizable Value of Investments
The Account's net asset value won't necessarily reflect the true or
realizable value of the Account's assets (i.e., what the Account would get if it
sold them). We believe that we use reasonable assumptions, estimates, and
formulas to calculate the values of the Account's investments. However, we can't
guarantee the Account will receive that amount when it sells a property. We also
expect that the Account will sell some of its real properties for cash and notes
(i.e., promises to pay in the future), rather than cash alone. In the future,
the amount of the note could be greater or less than the amount of the cash.
TIAA will use annual independent appraisals of the real properties
in calculating asset values. However, appraisals are only estimates and don't
necessarily reflect an investment's true or realizable value. If necessary, TIAA
will have properties appraised more frequently than currently planned.
Adjustments. We can adjust the values of an investment if we believe
events or market conditions have increased or decreased the realizable value of
that investment. We might do so, for example, if an event directly affects a
property or its
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surrounding area. We could also make adjustments for events that affect a
borrower's or lessee's ability to make payments on a mortgage loan or
leaseback. We can't assure that we will always become aware of each event that
might require a valuation adjustment. Also, because our evaluation is based on
subjective factors and interpretations, we cannot assure you that we will make
adjustments in all cases where changing conditions could affect the value of
the real property investments, mortgage loans, or leasebacks.
The independent fiduciary will approve any adjustments to any
valuation of one or more properties which results in an increase or decrease of:
(1) more than 6% of the value of any of the Account's properties since the last
independent annual appraisal; (2) more than 2% in the value of the Account since
the prior month; or (3) more than 4% in the value of the Account within any
quarter. The independent fiduciary will also approve adjustments to any property
valuation that are made within three months of the annual independent appraisal.
Right to Change Valuation Methods. If we decide that a different
valuation method would reflect the value of an investment more accurately, we
may use that method if the independent fiduciary consents. Changes in TIAA's
valuation methods could change the Account's net asset value. This, in turn,
could change the values at which participants purchase Account interests.
Valuing Liquid Investments
Debt Securities and Money Market Instruments. We value fixed-income
securities (including money market instruments) for which market quotations are
readily available at the most recent bid price or the equivalent quoted yield
for those securities (or those of comparable maturity, quality, and type). We
obtain values for money market instruments with maturities of one year or less
either from one or more of the major market makers for those securities or from
one or more financial information services. We use an independent pricing
service to value securities with maturities longer than one year except when we
believe prices do not accurately reflect the fair value of these securities.
Equity Securities. We value equity securities listed or traded on
the New York Stock Exchange or the American Stock Exchange at their last sale
price on the valuation day. If no sale is reported that day, we use the mean of
the closing bid and asked prices. Equity securities listed or traded on any
other exchange are valued in a comparable manner on the principal exchange where
traded.
We value equity securities traded on the NASDAQ Stock Market's
National Market at their last sale price on the valuation day. If no sale is
reported that day, we use the mean of the
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closing bid and asked prices. Other U.S. over-the-counter equity securities are
valued at the mean of the closing bid and asked prices.
Foreign Securities. To value investments traded on a foreign
exchange or in foreign markets, we use their closing values under the generally
accepted valuation method in the country where traded, as of the valuation date.
We convert this to U.S. dollars at the exchange rate in effect on the valuation
day.
Investments Lacking Current Market Quotations. We value securities
or other assets for which market quotations are not readily available at fair
value as determined in good faith under the direction of the Mortgage Committee
of TIAA's Board of Trustees and in accordance with the responsibilities of
TIAA's Board as a whole.
MANAGEMENT AND INVESTMENT ADVISORY ARRANGEMENTS
The Account doesn't have its own management or board of directors.
Rather, TIAA employees, under the direction and control of TIAA's Board of
Trustees and Mortgage Committee, manage the investment and reinvestment of the
Account's assets pursuant to investment management procedures adopted by TIAA
for the Account. You don't have the right to vote on the management and
operation of the Account directly; however, you may send ballots to advise the
TIAA Board of Overseers about voting for nominees for the TIAA Board of
Trustees.
TIAA's investment management responsibilities include research and
recommending and placing orders for securities, real estate-related investments,
and other investments. TIAA's investment management decisions for the Account
may be subject to review and approval by the Account's independent fiduciary
(see page 27).
TIAA also provides all portfolio accounting, custodial, and related
services for the Account. In performing these services, TIAA employees will act
consistent with the Account's investment objective, policies, and restrictions
(see page 12).
TIAA provides all services to the Account at cost. For more about
the charge for investment management services, see "Investment Management
Expense Deduction," below.
For information about the Trustees and principal executive officers
of TIAA, see Appendix B to this prospectus.
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EXPENSE DEDUCTIONS
Deductions are made each valuation day from the net assets of the
Account for various services required to manage investments, administer the
Account and the contracts, and to cover certain risks borne by TIAA. Services
are performed at cost by TIAA and TIAA-CREF Individual & Institutional Services,
Inc. ("Services"), a non-profit subsidiary of TIAA. Because services are
provided at cost, we expect that expense deductions will be relatively low. TIAA
guarantees that in the aggregate, the expense charges will never be more than
2.50% of average net assets per year.
Investment Management Expense Deduction
This deduction is for TIAA's investment advice, portfolio
accounting, and custodial and similar services, including independent fiduciary
and appraisal services. The current daily deduction is equivalent to 0.40% of
net assets annually.
Administrative and Distribution Expense Deduction
This deduction is for Services' administrative expenses, such as
allocating premiums and paying annuity income, and for expenses related to the
distribution of the contracts. The current daily deduction for the Account is
equivalent to 0.23% of net assets annually, of which 0.20% is for administrative
services and 0.03% is for distribution services.
Mortality and Expense Risk Deduction
TIAA imposes a daily charge as compensation for bearing certain
mortality and expense risks. The current daily deduction is equal to 0.05% of
net assets annually. Accumulations and annuity payments aren't affected by
changes in actual mortality experience or by TIAA's actual expenses.
Liquidity Guarantee Deduction
This deduction is for TIAA's liquidity guarantees. The current daily
deduction for the Account is equivalent to 0.02% of net assets annually.
Quarterly Adjustment
Normally within 30 days after the end of every quarter, we reconcile
how much we deducted as discussed above with the expenses the Account actually
incurred. If there's a difference, we add it to or deduct it from the Account in
equal daily installments over the remaining days in the quarter. TIAA's board
can revise the deduction rates from time to time to keep deductions as close as
possible to actual expenses.
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No Deductions from Premiums or on Withdrawals
Currently there are no expense deductions from your premiums or
amounts you withdraw in cash, although TIAA reserves the right to deduct
expenses in the future.
Brokerage Fees and Related Transaction Expenses
Brokers' commissions, transfer taxes, and other portfolio fees are
charged directly to the Real Estate Account.
THE ANNUITY CONTRACTS
TIAA offers the Real Estate Account as a variable component of a
number of different accumulating annuity contracts: a Retirement Annuity ("RA");
a Group Retirement Annuity ("GRA"); a Supplemental Retirement Annuity ("SRA"); a
Group Supplemental Retirement Annuity ("GSRA"); and a Rollover Individual
Retirement Annuity ("Rollover IRA"). Subject to regulatory approval, we plan to
offer an Individual Retirement Annuity that accepts both direct contributions
and rollovers (the "New IRA") and a Keogh Plan Annuity ("Keogh"). (We refer to
the Rollover IRA and New IRA collectively as the "IRAs".) The availability of
the Account under the contracts also may be subject to state regulatory
approval.
RAs, SRAs, IRAs, and Keoghs are issued to you directly. GRAs and
GSRAs are issued under the terms of a group contract. Neither you nor your
beneficiaries can assign your ownership of a TIAA contract to anyone else,
except as a result of a qualified domestic relations order as defined by the
IRC. Currently TIAA makes no deductions from your premiums, but we reserve the
right to do so in the future.
TIAA also offers the Real Estate Account through various types of
income-paying contracts. These are described beginning on page 38. In addition,
the Account may be available under certain unallocated TIAA group annuity
contracts issued to employers.
Right to Cancel Contract
You can cancel any TIAA RA, SRA, GSRA, IRA or Keogh contract up to
30 days after you first receive it, unless it's one under which annuity payments
have begun. This right to cancel applies only if you don't have an existing TIAA
contract, not simply if you're receiving a Real Estate Account contract rider
for the first time. To cancel a contract, mail or deliver it and a signed Notice
of Cancellation to TIAA's home office. If asked to cancel the contract, TIAA
will do so as of its date of issue, then send the entire current accumulation,
including premiums, deductions (if any), and investment gains or losses, back to
the
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premium remitter (although in some states we are required to send back your
entire premium and any deductions, without accounting for any interim investment
results). If you're considering canceling a TIAA contract, consult your
employer.
RA and GRA Contracts
RA and GRA contracts are used mainly for employer-sponsored
retirement plans set up under sections 401(a), 403(a), and 403(b) of the IRC.
Your rights under these contracts may be subject to vesting requirements under
your employer's plan. Occasionally we issue RA or GRA contracts to employers to
meet deferred compensation obligations. If you have a deferred compensation
agreement, ask your employer about your rights and obligations.
Depending on the terms of your plan, RA premiums can be paid by your
employer, you, or both. If your RA premiums include contributions by both you
and your employer, the employer usually remits them in a single combined
payment. If you're paying some or all of the periodic premium, your
contributions can be in either pre-tax dollars, by salary reduction (i.e., your
employer periodically reduces your taxable compensation by a specified sum, and
sends an equal amount to TIAA); or after-tax dollars, by payroll deduction -- in
either case, subject to your employer's plan. For RAs only, you can make single,
non-recurring contributions in any amount directly to TIAA.
GRA premiums can also include contributions from your employer or
both you and your employer. Like an RA, the GRA lets you make pre-tax
contributions by salary reduction and after-tax contributions by payroll
deduction -- again subject to your employer's plan. You can't make payments
directly; your employer has to send them for you. You can also transfer
accumulations from another investment choice under your employer's retirement
plan to your RA or GRA contract (see page 45).
SRA and GSRA Contracts
SRA and GSRA contracts are used mainly for voluntary tax-deferred
annuity ("TDA") plans set up under section 403(b) of the IRC. The SRA contract
is issued directly to you, while the GSRA contract is issued through an
agreement between TIAA and your employer. For both SRAs and GSRAs, you pay all
premiums in pre-tax dollars via salary reduction. You can't pay premiums
directly, though you can transfer amounts from another TDA plan (see below).
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Rollover IRA Contracts
TIAA's Rollover Individual Retirement Annuity ("IRA") is issued
under IRC section 408(b). You currently can use it only for tax-deferred funds
previously held in an eligible institution's retirement plan or in individual
retirement accounts that were themselves set up with amounts originally in an
eligible institution-sponsored plan. Subject to regulatory approval, we expect
to expand eligibility, so that you or your spouse can also set up a Rollover IRA
with funds rolled over from any retirement plan or individual retirement
account, as long as such a rollover is permitted by the IRC and as long as you
are currently employed by or retired from an eligible institution.
New IRA Contracts
We plan to issue, subject to regulatory approval, a New IRA contract
that accepts the same type of funds that the Rollover IRA currently accepts, the
funds it would accept under the expanded eligibility just described, as well as
other types of funds. These are:
(1) Direct payments from anyone employed by an eligible institution
or married to an employee. The IRC limits the amount you can contribute, usually
to $2,000. See Federal Income Taxes, page 56.
(2) Contributions to a Simplified Employee Pension (SEP) plan. You
can use the New IRA to fund your SEP plan if you have income from
self-employment and you're currently employed by or retired from an eligible
institution. If you open your IRA when you are retired, or if you have a SEP
plan, your contributions must be from "qualified income." Qualified income is
income from a work related to your primary academic or research career. You can
also use the IRA to accept contributions from an eligible institution's SEP
plan. For more information, please contact TIAA.
Keogh Plan Contracts
Subject to regulatory approval, we expect to offer Keogh
certificates. They will be issued under IRC sections 401(a) and 403(a). If you
own an unincorporated business, you can use them to fund your Keogh plan if you
are currently employed by or retired from an eligible institution. The IRC
limits the amount you can contribute each year, and contributions must be from
qualified income (see above). See Federal Income Taxes, page 55.
Remitting Premiums
We'll issue you a TIAA contract as soon as we receive your completed
application or enrollment form. If you already have a TIAA contract, you will
receive a rider permitting you to allocate premiums to the Real Estate Account.
You may remit
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premiums to the Account under RAs, GRAs, or GSRAs only if permitted under your
employer's plan. Your premiums will be credited to the Real Estate Account as of
the business day we receive them.
If we receive premiums from your employer before your application or
enrollment form, we'll credit the premiums to the CREF Money Market Account
until we receive your form. We'll transfer and credit the amount you've
specified to the Real Estate Account as of the business day we receive your
completed application or enrollment form.
If the allocation instructions on your application or enrollment
form are incomplete, violate plan restrictions, or don't total 100%, we'll
credit your premiums to the CREF Money Market Account until we do receive
complete instructions. Any amounts that we credited to the CREF Money Market
Account before we received correct instructions will be transferred to the Real
Estate Account only on request, and will be credited as of the business day we
receive that request.
TIAA doesn't restrict the amount or frequency of premiums to your
RA, GRA, and IRA contracts, although we reserve the right to impose restrictions
in the future. Your employer's retirement plan may limit your premium amounts,
while the IRC limits the total annual premiums to plans qualified for favorable
tax treatment (see page 55).
Ordinarily (subject to any temporary restriction on acceptance of
premiums, described below), TIAA will accept premiums to an accumulating
contract at any time. Once your first premium has been paid, your TIAA contract
can't lapse or be forfeited for nonpayment of premiums. However, TIAA can stop
accepting future payments to both the GRA and GSRA contract at any time.
Employees or retirees of eligible institutions can also purchase at
any time a contract to begin receiving annuity income starting the first day of
the following month.
Possible Restrictions on Acceptance of Premiums or Transfers
TIAA may, from time to time, temporarily stop accepting premiums for
or transfers to the Real Estate Account (e.g., if sufficient opportunities are
not presented for real estate-related investments at that time). If a decision
is made to stop accepting premiums or transfers, all participants in the Real
Estate Account will be provided with advance notice and requested to inform us
whether they wish to change their allocation instructions. Absent directions to
the contrary, amounts that would otherwise be allocated to the Account will be
allocated
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to the CREF Money Market Account. When restrictions on the Real Estate Account
have been removed, amounts arising from premiums allocated to the CREF Money
Market Account will remain in that account unless we receive instructions to
transfer them to the Real Estate Account (or other permissible TIAA-CREF or
unaffiliated funding vehicles). Allocations to the Account will resume as of the
date restrictions are removed.
Allocation of Premiums
You can allocate all or part (whole percentages) of your premiums to
the Real Estate Account. Allocations are subject to the terms of your employer's
plan. TIAA reserves the right to refuse to allocate premiums where the
allocation is not consistent with an employer's plan. Amounts can also be
allocated to TIAA's traditional annuity or one or more of the investment
accounts offered under the companion variable annuity certificates issued by
CREF.
You can change your allocation for future premiums at any time by
writing to our home office or calling 1 800 842-2252; however, we reserve the
right to suspend or terminate your right to change your allocation by telephone.
Accumulation Units
Your premiums purchase accumulation units. When you pay premiums or
make transfers into the Account, the number of your units will increase; when
you take a cash withdrawal, transfer from the Account, or apply funds to begin
annuity income, the number of your units will decrease. We calculate how many
accumulation units to credit by dividing the amount allocated to the Account by
its accumulation unit value for the business day when we received your premium.
To determine how many accumulation units to subtract for cash withdrawals and
transfers, we use the unit value for the business day when we receive your
completed transaction request and all required information and documents (unless
you ask for a later date). For amounts applied to begin annuity income or death
benefits, the accumulation unit value will be the one for the valuation period
that ends on the last day of the month that contains the business day when we
receive all required information and documentation, unless you or your
beneficiary ask for a later date. See "The Annuity Period," page 47, and "Death
Benefits," page 50.
The value of the accumulation units reflects the Account's
investment experience (i.e., its accrued real estate net operating income,
dividends, interest and other income accrued), realized and unrealized capital
gains and losses, as well as expense charges against the Account's assets (see
page 37). We
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calculate the accumulation unit values at the end of each valuation day. To do
that, we multiply the previous day's values by the net investment factor for
the Account. The net investment factor is calculated as A divided by B, where A
and B are defined as:
A. The value of the Account's net assets at the end of the current
valuation period, less premiums received during the current
valuation period.
B. The value of the Account's net assets at the end of the previous
valuation period, plus the net effect of transactions made at the
start of the current valuation period.
The valuation of accumulation units will be reviewed and approved by
the independent fiduciary (see page 27).
The General Account and TIAA's Traditional Annuity
This prospectus provides information mainly about the Real Estate
Account, your TIAA contract's variable component. Premiums remitted under your
TIAA contract to TIAA's traditional annuity become part of the general account
of TIAA, which includes all TIAA assets, except those in the Real Estate Account
or any other TIAA separate investment account. Unlike an investment in the Real
Estate Account, in which you bear the investment risk, TIAA bears the full
investment risk for all accumulations in TIAA's traditional annuity. For more
about TIAA's traditional annuity, see the contract itself.
Transfers Between the Real Estate Account and TIAA's Traditional Annuity or
CREF
Subject to the conditions below, you can transfer some or all of
your accumulation in the Real Estate Account to TIAA's traditional annuity or to
a CREF certificate. Transfers generally must be for at least $1,000 at a time
(or the entire part of your accumulation permitted to be withdrawn, if less).
(This minimum doesn't apply to transfers to the TIAA Retirement Loan Contract.)
Under RAs, GRAs, and GSRAs, transfers to certain CREF accounts may be restricted
by your plan. For more information, contact TIAA (see page 60).
Similarly, you can transfer some or all of your accumulation in
TIAA's traditional annuity or in your CREF certificate to the Real Estate
Account (although your employer's plan may restrict your right to transfer any
accumulations to the Real Estate Account under RA, GRA, and GSRA contracts).
These transfers generally must be for at least $1,000 per account at a time.
Transfers from TIAA's traditional annuity to the Real Estate Account under RA
and GRA contracts take place in roughly equal installments over a ten-year
period via a TIAA transfer payout
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annuity, or "TPA". There are no similar restrictions on transfers from TIAA's
traditional annuity under SRA, GSRA, or IRA contracts, as long as you are
transferring at least $1,000 at a time.
Currently, you can authorize a transfer at any time during your
accumulation period, although we reserve the right to limit transfer frequency
in the future. You can also transfer on a limited basis during the annuity
period (see page 48). Currently, we don't charge you for transfers to CREF or to
TIAA's traditional annuity.
Transfers to Other Companies and Cash Withdrawals from the Real
Estate Account
If you have a TIAA RA, GRA, or GSRA contract, your ability to move
funds from the Real Estate Account to a company other than TIAA or CREF will
depend upon the terms of your employer's plan. If the plan permits, you can move
some or all of your accumulation to any company approved by your employer. Under
a TIAA SRA or IRA contract, however, you may transfer funds from the Real Estate
Account to any company without similar plan limitations. If you do transfer some
or all of your accumulation to another company, you bear the risk of the
investment and tax consequences of your decision.
Cash withdrawals from your SRA, GSRA, or IRA Real Estate Account
accumulation may be made at any time during the accumulation period, subject to
any tax law restrictions. Cash withdrawals from your RA or GRA Real Estate
Account accumulation may be limited by the terms of your employer's plan. Cash
withdrawals usually must be for at least $1,000 (or the entire part of your
accumulation permitted to be withdrawn, if less). For more information, see
"General Considerations for all Cash Withdrawals and Transfers," below, "Tax
Issues," page 46 and "Federal Income Taxes," page 55.
Currently, TIAA does not charge you for transfers to other companies
or for cash withdrawals.
Rules on transfers and cash withdrawals vary depending on an
institution's plan, so consult your past, current and potential future
employer(s) for more detailed information.
Systematic Withdrawals and Transfers
You can arrange to have TIAA execute withdrawals and transfers for
you automatically. At your request, we will withdraw from your accumulation as
cash, or transfer to TIAA's traditional annuity, a CREF certificate, or another
company, any fixed number of accumulation units or dollar amount or percentage
of
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accumulation that you specify until you tell us to stop or until your
accumulation is exhausted. Currently, the initial amount must be at least $100.
The availability of the service is subject to any restrictions in your
employer's retirement plan.
Transfers to TIAA from Other Plans
Ordinarily you can make single-sum transfers from another 403(b)
retirement plan to a TIAA contract. Likewise, if your TIAA contract is part of a
401(a) or 403(a) arrangement, you can make single-sum transfers to it from other
401(a) or 403(a) plans if the plan using TIAA and the other 401(a) or 403(a)
plan so provide. Amounts transferred from another company to TIAA may still be
subject to provisions of the original retirement plan. Under current federal tax
law, you can also transfer funds from certain 401(a), 403(a), and 403(b) plans,
or from an IRA containing funds originally contributed to such plans, to a TIAA
IRA.
General Considerations for All Cash Withdrawals and Transfers
Current federal tax law restricts the availability of cash
withdrawals from any part of your accumulation under voluntary salary reduction
agreements (including investment earnings). Such withdrawals are available only
if you reach age 59-1/2, leave your job, become disabled, or die. If permitted
by your employer's plan, you may also be able to take a cash withdrawal if you
encounter hardship, as defined by the IRS, but hardship withdrawals can be from
contributions only, not investment earnings. These restrictions don't apply to
withdrawals from any IRA. For more about tax consequences, see "Tax Issues"
below and page 55.
You can tell us how much you want to transfer or withdraw in
dollars, accumulation units, or as a percentage of the accumulation in the Real
Estate Account. Ordinarily, you can't transfer or withdraw any part of an
accumulation from which you've already begun receiving annuity income.
Cash withdrawals and transfers are effective at the end of the
business day we receive your withdrawal or transfer request and any required
information and documentation. You can instead choose to have transfers and
withdrawals take effect at the close of any future business day or the last
calendar day of the current or any future month, even if it's not a business
day. You can request a transfer to CREF or TIAA's traditional annuity by
telephone, or a cash withdrawal of less than $3,500 by telephone or fax. If you
do that at any time other than during a business day, it will be effective at
the close of the next business day. Transfers to TIAA's traditional annuity
begin participating on the next day.
To request a transfer, write to TIAA's home office or call us at
1 800 842-2252. We reserve the right to suspend or terminate your right to make
transfers by telephone. For more about telephone transfers, see page 59.
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Tax Issues
Make sure you understand the possible federal and other income tax
consequences of transfers and cash distributions. Transfers between retirement
plans set up under the same section of the IRC aren't ordinarily considered
taxable distributions; nor are transfers from 401(a), 403(a), and 403(b) plans
to any TIAA IRA. Cash withdrawals are usually taxed at the rates for ordinary
income. In addition, cash withdrawals also may subject you to early distribution
taxes if made prior to age 59 1/2, as well as excess distribution taxes for
distributions in excess of $155,000 in one year. For details, see "Federal
Income Taxes," page 55.
Texas ORP Restrictions
If you're in the Texas Optional Retirement Program, section 36.15 of
the Texas Education Code says you (or your beneficiary) can redeem some or all
of your accumulation only if you retire, die, or leave your job in the state's
public institutions of higher education. You're also subject to other
distribution restrictions outlined elsewhere in this prospectus.
Spousal Rights
If you're married, the Retirement Equity Act of 1984 ("REACT") or
your employer's plan may require you to get advance written consent from your
spouse before certain transactions. They include (1) a cash withdrawal (except
from most IRAs); (2) a payment of a retirement transition benefit (see page 50);
(3) a transfer to a retirement plan not covered by ERISA; and (4) a rollover
directly from a plan to another plan or an IRA (you don't receive a check). In
addition, if you're married at your annuity starting date, REACT or your
employer's plan may require that you choose an income option that provides
survivor annuity income to your spouse, unless he or she waives that right in
writing (see "The Annuity Period," page 47). There are limited exceptions to the
waiver requirement -- contact TIAA for more information.
For more on spousal rights, see "Death Benefits," page 50.
Portability of Benefits
Once you're fully vested under your employer's RA or GRA plan, you
can't lose the benefits you've earned. Length-of-service and other rules vary
considerably from plan to plan, so check with your employer to find out your
vesting status. Benefits under SRAs, GSRAs, and IRAs are immediately vested and
can't be forfeited under any circumstances.
Under RA contracts, you may also be able to continue paying premiums
on your own, subject to federal income tax limits
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(see page 55). Whether or not we're receiving premiums to your contract(s), your
accumulation will go on participating in the Real Estate Account. You'll retain
all rights under your contract until you apply your entire accumulation to
begin annuity (or survivor) benefits, transfer it to another company, or take
it as a cash withdrawal.
The Annuity Period
The Real Estate Account is available through a variety of income
options. See "Income Options," on page 48. Subject to certain federal tax law
restrictions, you can receive income from all or just a part (but not less than
$10,000) of your accumulation, so it's possible for you to be both accumulating
and receiving retirement benefits at the same time. You can also pick a
different income option for different portions of your accumulation, but
currently once you've started payments you can't change your income option
(except if you picked the Minimum Distribution Option annuity) or annuity
partner (if you named one) for that payment stream.
Usually income payments are monthly. You can choose quarterly,
semi-annual, and annual payments as well. TIAA has the right to not make
payments at any interval that would cause the initial payment to be less than
$25.
The value of the accumulation upon which payments are based will be
set at the end of the last calendar day of the month before your annuity
starting date. Your payments will vary each year according to the investment
results of the Account. For the formulas used to calculate the amount of TIAA
annuity payments, see page 55. The total value of your annuity payments may be
more or less than your total premiums.
We'll send your payments by mail to your home address or (on your
request) by mail or electronic funds transfer to your bank. If the address or
bank where you want your payments sent changes, it's your responsibility to let
us know.
Annuity Starting Date
Generally you pick an annuity starting date (it has to be the first
day of a month) when you first apply for a TIAA contract. If you don't, we'll
tentatively assume your annuity starting date will be the first day of the month
after your 65th birthday. You can change your annuity starting date at any time
before annuity payments begin (see page 59). Ordinarily your annuity starting
date can't be later than April 1 of the calendar year following the calendar
year when you reach age 70-1/2, even if you expect to work
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beyond then, although there are exceptions if you're in a public institution's
plan or certain church plans.
Ordinarily, annuity payments begin when your annuity starting date
arrives; however, the terms of your employer's plan can restrict when you can
begin retirement income. For payments to begin on the annuity starting date, we
must have received all premiums due under your plan, as well as all information
and documentation necessary for the income option you've picked. (For more
information, contact TIAA -- see page 60.) If we haven't received all your
premiums and the necessary information, we'll defer your annuity starting date
until the first day of the month after the premiums and information have reached
us. Your first annuity check may be delayed while we process your choice of
income options and calculate the amount of your initial payment.
Allocation and Transfer for Annuity Payments
Before starting payments from your accumulation, you can transfer
(at least $1,000 or the entire accumulation, if less) to TIAA's traditional
annuity or to CREF on either an accumulating or income-paying basis. Under RA,
GSRA, and GRA contracts, you can transfer to investment vehicles offered by
other companies approved for your employer's plan. Under the SRA and IRA
contracts, there are no restrictions on transfers to other companies, but be
sure to consider the federal and other income tax consequences of the
transaction.
Transfers During the Annuity Period
Once a year after you begin receiving annuity income, you can
transfer all or part of the future annuity income payable (i) from the Real
Estate Account into a "comparable annuity" (see below) payable from a CREF
account or TIAA's traditional annuity, or (ii) from a CREF account into a
comparable annuity payable from the Real Estate Account. Comparable annuities
are those which have the same income option, first and second annuitant (if
any), remaining guaranteed period (if any), and payment mode.
All transfers during the annuity period will take place on March 31.
We must receive your transfer request before the end of the last business day in
March in the year you want the transfer to occur. A transfer from a CREF account
to the Real Estate Account or vice versa will affect your annuity payments
beginning May 1 following the effective date of the transfer. Transfers into
TIAA's traditional annuity will be effective on the current April 1. For the
formula used to calculate the increase in the number of annuity units in the
account you transfer to, see "Calculation of the Number of Annuity Units
Payable," page 53.
Income Options
Both the number of annuity units you purchase and the amount of your
income payments will depend on which income option(s) you pick. Your employer's
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plan, the IRC and ERISA may limit which income options you can use to receive
income from an RA or GRA. Ordinarily you'll choose your income option(s) just
before you want payments to begin; however, you can make or change your
choice(s) at any time before your annuity starting date. Once annuity payments
start, you can't change the income option (except in the case of the Minimum
Distribution Option annuity, see below) for the accumulation or fraction of
accumulation on which they're based.
If you haven't picked an income option when the annuity starting
date arrives for your RA, GRA, SRA, or GSRA, TIAA will assume you want the
One-Life Annuity with 10-Year Guaranteed Period if you're unmarried, paid from
TIAA's traditional annuity. If you're married, we may assume for you a Survivor
Annuity with Half-Benefit to Annuity Partner and 10-Year Guaranteed Period, with
your spouse as your annuity partner, paid from TIAA's traditional annuity. See
below and "Spousal Rights," page 46.
If you haven't picked an income option when the annuity starting
date arrives for your IRA, we may assume you want the Minimum Distribution
Option annuity.
All Real Estate Account income options are variable, and the amount
of income you receive will depend in part on the number and value of your
accumulation units being converted.
The current options are:
One-Life Annuity with or without Guaranteed Period (a One-Life
Annuity). Pays income as long as you live. If you opt for a guaranteed period
and you die before it's over, income payments will continue to your beneficiary
until the end of the period. If you don't opt for a guaranteed period, all
payments end at your death -- so that it would be possible, for example, for you
to receive only one payment if you died less than a month after your income
started.
Survivor Annuity Options. Pays income to you as long as you live,
then continues at either the same or a reduced level for the life of your
annuity partner. There are three types of survivor annuities, all available with
or without a guaranteed period -- Full Benefit to Survivor (a Last Survivor Life
Annuity), Two-Thirds Benefit to Survivor (a Joint and Survivor Life Annuity),
and a Half-Benefit to Annuity Partner (a Last Survivor Life Annuity).
Minimum Distribution Option ("MDO") Annuity. Generally available
only if you must begin annuity payments under the IRC minimum distribution
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requirements (see page 58). The option pays an amount designed to fulfill the
distribution requirements under federal tax law. You must apply your entire
accumulation under a contract if you want to use the MDO annuity. Some employer
plans allow you to elect this option earlier -- contact TIAA for more
information. See "Contacting TIAA," page 60.
Under the MDO annuity, it's possible you won't receive income for
life. Up to age 90, you can apply any remaining part of an accumulation applied
to the MDO annuity to any other income option for which you're eligible. Using
the option won't affect your right to take a cash withdrawal of any remaining
accumulation not yet distributed.
With respect to any of the income options described above, current
federal tax law says that your guaranteed period can't exceed the joint life
expectancy of you and your beneficiary or annuity partner (if you have one).
Other income options may become available in the future, subject to
the terms of your retirement plan and relevant federal and state laws. For more
information about any annuity option, please contact TIAA. See "Contacting
TIAA," page 60.
Retirement Transition Benefit. Under TIAA's current practice, you
may be able to get a "transition benefit" of up to 10% of the value of any part
of an RA or GRA accumulation being converted to annuity income. The benefit is
paid in a single sum on the annuity starting date. Of course, if your employer
allows cash withdrawals, you can take a larger amount (up to 100%) of your
accumulation as a cash payment (see page 44).
Keep in mind that the retirement transition benefit will be subject
to current federal income tax requirements and possible early-distribution
penalties. See "Federal Income Taxes," page 55, as well as "Spousal Rights,"
page 46.
Death Benefits
You can add, remove, or change a beneficiary at any time before you
die, although under certain circumstances you may need your spouse's written
consent. Under a survivor annuity, your annuity partner can change the
beneficiary after you die, unless you've stipulated otherwise.
You can choose in advance the method by which death benefits should
be paid, or you can leave it up to your beneficiaries. You can later change the
method of payment you've chosen, and you can stipulate that your beneficiary not
change the method you've specified in advance. (To choose, change, or
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restrict the method by which death benefits are to be paid, you or your
beneficiary has to notify us in writing.) We can require that any death benefit
be paid under a method that provides an initial monthly payment of at least
$25. (We'll calculate the actual amount using formulas you can find on page
55.) You or your beneficiary can use more than one method of payment, but each
has to meet the same $25 minimum payment requirement. Once death benefits start
under a lifetime annuity (see above), the method of payment can't be changed.
Ordinarily a beneficiary has to request that death benefits begin
within a year of your death. Otherwise we'll start them automatically on the
first day of the month in which the first anniversary of your death occurs,
making payments over five years unless a beneficiary opts otherwise.
If you're married at the time of your death, even if you name a
beneficiary who isn't your spouse, federal law or your plan may require that
your spouse receive an amount actuarially equivalent to one-half the value of
any part of your accumulation subject to REACT. Your spouse may, however,
consent in writing to waive the right to death benefits. For more on spousal
beneficiary rights, contact us or consult your employer's benefits office.
Unless your employer's plan provides otherwise, if you die before
converting your entire accumulation to annuity income and without naming a
beneficiary, your surviving spouse (if any) will receive a death benefit,
available under any method of payment (see below), actuarially equivalent to
half the value of your accumulation. The other half will go to your estate in a
single sum. If there is no surviving spouse, the entire death benefit will go in
one sum to your estate.
If you and your annuity partner, if any, die with payments still due
under a lifetime annuity with a guaranteed period, your beneficiary(ies) can
take the remaining payments as scheduled or as a single-sum payment equal to
their commuted value. If you name an estate as your beneficiary, if you haven't
named a beneficiary, or if your beneficiary has died, TIAA will pay the commuted
value of your payments to your estate in a single sum. Under a survivor annuity,
such benefits go to the estate of you or your annuity partner, whoever lives
longer. If your beneficiary dies before receiving all payments due, we'll pay
the commuted value of the remaining payments to anyone else named to receive it.
If no one has been named, the commuted value will be paid to the estate of the
last person to receive payments.
To pay a death benefit, TIAA must have received all necessary forms
and documentation. For more information, contact TIAA (see page 60). Your
accumulation will continue participating in the investment experience of your
account up to
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and including the day when your beneficiary's chosen method of payment becomes
effective. Single-sum payments are effective at the end of the business day
when TIAA has received all the required information and documentation from your
beneficiary -- or if he or she chooses, at the end of the last calendar day of
the current or any future month. Death benefits under any other method of
payment will be calculated on the last day of the calendar month when we
receive all required information and documentation -- or if your beneficiary
prefers, the last day of a future month. Payments will actually begin on the
first day of the month after they've been calculated. (Your first check could
be delayed while we process your choice of method of payment.)
Methods of Payment
TIAA limits the methods of payment for death benefits to those
suitable under federal income tax law for annuity contracts. (For more
information, see "Taxation of Annuity Benefits," page 56.) With methods offering
periodic payments, benefits are usually monthly, but your beneficiary can
request to receive them quarterly, semi-annually, or annually instead. Federal
law may restrict the availability of certain methods to your beneficiary. At
present, the available methods of payment for TIAA death benefits are:
Single-Sum Payment, in which the entire death benefit is paid to your
beneficiary at once; One-Life Annuity with or without Guaranteed Period, in
which the death benefit is paid monthly for the life of the beneficiary or
through the guaranteed period; Accumulation-Unit Deposit Option (described
below); and the Minimum Distribution Option (described below).
Accumulation-Unit Deposit Option ("AUDO"). Pays your beneficiary a
lump sum at the end of a fixed period, ordinarily two to five years, during
which period the accumulation units deposited participate in investment
experience of the Real Estate Account. To use the AUDO method, the value of the
death benefit must be at least $5,000 at the time it takes effect. Special rules
apply if your spouse is the beneficiary. Contact TIAA for more information about
this option and other methods of payment. See "Contacting TIAA," page 60.
Minimum Distribution Option ("MDO"). Available only to beneficiaries
who must receive income under the IRC's minimum distribution requirements. The
MDO death benefit is governed generally by the same rule as the Real Estate
Account's MDO annuity (see page 49), but there are additional restrictions under
federal income tax law. Under the MDO death benefit, it's possible that your
beneficiary won't receive income for life.
Transfers by a Beneficiary. At the time death benefits begin, or
during the AUDO period, your beneficiary can transfer some (at least $1,000, or
the entire accumulation if less) or all
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of the assets in the Real Estate Account to TIAA's traditional annuity or to
CREF.
The beneficiary of an employee at an eligible institution who used
another company for his retirement plan savings also may transfer death benefits
from the other company to the Real Estate Account for payout under any of the
available methods of payment for death benefits.
Transfers are effective on the last calendar day of the month when
we receive all required information and documentation; however, your beneficiary
can have us make the transfer effective on the last day of any future month
instead. (With the AUDO method, it can be any day of the month.) Currently
beneficiaries can make transfers at no charge. We also reserve the right to
limit how often a beneficiary can transfer Real Estate Account units and to
decline any transfer that would reduce the value of the units still on deposit
to less than $5,000.
For tax issues concerning death benefits, especially those paid as
single sums, see "Taxation of Annuity Benefits," page 56.
ANNUITY PAYMENTS
The amount of annuity payments paid to you or your beneficiary
("annuitant") will depend upon the number and the basic value of the annuity
units payable. The number of annuity units is initially determined prior to the
start of annuity payments. The basic value of an annuity unit is redetermined on
March 31 each year, with the resulting changes in annuity payments beginning May
1. These changes reflect the net investment experience of the Real Estate
Account. Annuitants bear no mortality risk under their contracts. The net
investment experience for the twelve months following each March 31
redetermination of the Account's basic annuity unit value will be reflected in
the following year's value.
The formulas for calculating the number and value of annuity units
payable are set forth below.
Calculation of the Number of Annuity Units Payable
When a participant or a beneficiary converts the value of all or a
portion of his or her accumulation into an income-paying contract, the number of
annuity units payable from the Real Estate Account is determined by dividing the
value of the accumulation in the Account to be applied to provide the annuity
payments by the product of the annuity unit value and an annuity factor. The
annuity factor at the end of any month is the value of an annuity in the amount
of $1.00 per month beginning on the first day of the following month and
continuing for as long as such annuity units are payable.
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The annuity factor will reflect interest assumed at the effective
annual rate of 4%, and the mortality assumptions for the person(s) on whose life
(lives) the annuity payments will be based. Mortality assumptions will be based
on the then-current settlement mortality schedules for this Account. TIAA
guarantees that actual mortality experience will not reduce annuity payments
after they have started. TIAA does, however, reserve the right to change, from
time to time, the mortality assumptions used to determine the number of annuity
units payable for any future conversions of accumulations to provide annuity
payments.
Any transfer during the annuity period from a CREF account to the
Real Estate Account or from the Real Estate Account to a CREF account, as
described under "Transfers During the Annuity Period," page 48, reduces the
number of annuity units in the account you transfer from by the number of
annuity units transferred, and increases the number of annuity units in the
account you transfer to. The number of annuity units added to the account you
transfer to will be based on the formula below.
When you or any beneficiary receiving annuity income transfers
annuity units from a CREF account to the Real Estate Account or vice versa as of
any March 31, the number of annuity units added to the account to which units
are being transferred will be determined by multiplying the number of annuity
units to be transferred by A and B and then dividing that result by the product
of C and D as follows:
A. the annuity unit value, determined on the transfer
date, for the account from which annuity units are
being transferred.
B. the value as of March 31, of an annuity in the amount
of $1.00 per month beginning on May 1 and continuing
for as long as such annuity units are payable. This
annuity factor will reflect the mortality assumptions
then in use in the Account from which the transfer is
being made.
C. the annuity unit value, determined on the transfer
date, for the account to which the annuity units are
being transferred.
D. an annuity factor calculated in the same manner as
that described in item B. above, except reflecting the
mortality assumptions then in use in the account to
which the transfer is being made.
The value of annuity units transferred from the Real Estate Account
to TIAA's traditional annuity as of any March 31 is equal to the number of
annuity units multiplied by the annuity unit value determined on the transfer
date and by an annuity factor. The annuity factor as of March 31 is the value of
an annuity in the
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amount of $1.00 per month beginning on May 1 and continuing for as long as such
annuity units are payable. The annuity factor will reflect the mortality
assumptions then in use for the Real Estate Account.
Value of Annuity Units
The value of the Real Estate Account's annuity units will be
determined as of the last calendar day of each month by multiplying the value of
the annuity unit as of the last calendar day of the previous month by the net
investment factor (as defined on page 43) for the current month and then
dividing by the value of $1.00 accumulated with interest at the effective annual
rate of 4% for the number of days in the current month. This result is then
multiplied by A and divided by B, where A and B are defined as follows:
A. the value of the annuity fund at the end of the day
minus the dollar amount of payments scheduled to be
made from the Account on the following day.
B. the value of the annuity fund at the end of the day
minus the product of the value of one annuity unit
just prior to this calculation and the number of
annuity units scheduled to be paid from the Account
on the following day.
The initial value of the annuity unit for a new annuitant is equal to the value
determined as of the day before annuity payments start. For participants who
have already begun receiving annuity payments as of any March 31, the basic
value of the annuity unit for payments due on and after the next succeeding May
1 is equal to the annuity unit value determined as of March 31.
Modification and Review
TIAA reserves the right, subject to approval by the Board of
Trustees, to modify the manner in which the number and/or value of annuity units
is calculated in the future. The valuation of annuity units will be reviewed and
approved by the independent fiduciary (see page 27).
FEDERAL INCOME TAXES
The contracts are designed as annuity contracts under sections 72
and 403 of the Internal Revenue Code ("IRC").
As a nonprofit educational institution, TIAA's pension business is
exempt from federal income tax under section 501(c)(3) of the IRC. Investment
income and gains from our pension business are tax-free unless they are
unrelated business income, and we conduct our operations to avoid realizing such
unrelated
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business income. If necessary to maintain our tax-exempt status, we can limit
the size of premiums paid to TIAA and the circumstances in which they're paid.
Any federal or other tax TIAA does incur with respect to the Real Estate
Account will affect the value of your accumulation and/or annuity units.
403(b) Plans
The contracts are tailored for retirement plans set up under section
403(b) of the IRC. Your total annual contributions to section 403(b) annuities
can't exceed certain limits. The annual limit for all of your contributions and
your employer's contributions on your behalf is the lower of (a) $30,000, (b)
25% of your compensation or (c) your "maximum exclusion allowance". Your maximum
exclusion allowance is generally 20% of your compensation multiplied by your
years of service, less certain prior tax deferred retirement plan contributions.
You can usually exclude salary reduction contributions of up to $9,500 from your
gross taxable income. There are exceptions to this -- contact your tax advisor
for more information.
401(a) and 403(a) Plans
RA and GRA contracts are also available for 401(a) and 403(a)
retirement plans. In a defined-contribution plan meeting certain IRC
requirements, the employer contributions to all current 401(a) and 403(a) plans
of that employer can't exceed an annual contribution limit: again, $30,000 or
25% of your compensation, whichever is less.
Individual Retirement Annuities
IRC Section 408 permits eligible individuals to contribute to an
individual retirement program known as an Individual Retirement Annuity or
Individual Retirement Account. The amount you can contribute annually is usually
limited to $2,000. The New IRA will be designed for these contributions. IRC
section 408 also allows money from certain qualified plans to be "rolled-over"
to an IRA without losing its tax-deferred status. The Rollover IRA is designed
for these rollovers. (The New IRA will also accept them.) There is no limit on
the amount that can be rolled over to a Rollover IRA. You can revoke any TIAA
IRA up to seven days after you establish it.
Taxation of Annuity Benefits
Once you take a cash withdrawal or begin annuity payments, the
amount you receive is usually included in your gross income for the year and
taxed at the rate for ordinary income. You can exclude from your gross income
any part of your payment(s) that represents the return of premiums paid in
after-tax dollars, but not the part that comes from the tax-deferred earnings of
after-tax premiums.
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Withholding on Distributions
We must withhold federal tax at the rate of 20% from the taxable
part of most plan distributions paid directly to you. If, however, you tell us
to "roll over" the distribution directly to an IRA (offered by TIAA or any other
company) or similar employer plan (i.e., to send a check directly to the other
company and not to you), we will not withhold any federal tax. The required 20%
withholding doesn't apply to payments from IRAs, lifetime annuity payments,
substantially equal periodic payments over your life expectancy or over ten or
more years, or minimum distribution payments ("noneligible payments").
For the taxable part of noneligible payments, we usually will
withhold federal taxes unless you tell us not to. Usually, you have the right to
tell us not to withhold federal taxes from your noneligible payments. However,
if you tell us not to withhold but we don't have your taxpayer identification
number on file, we still have to deduct taxes.
Non-resident aliens who pay U.S. taxes are subject to different
withholding rules. Contact TIAA for more information.
Early Distributions
If you want to withdraw funds or begin income from any 401(a),
403(a), or 403(b) retirement plan or an IRA before you reach age 59-1/2, you may
have to pay an extra 10% "early distribution" tax on the taxable amount.
However, you won't have to pay an early distribution tax on any part of a
withdrawal if:
(1) the distribution is because you are disabled;
(2) you separated from your job at or after age 55 and take your
withdrawal after that time (not applicable for IRAs);
(3) you begin annuity income after you leave your job (termination isn't
required for IRAs), as long as your annuity income consists of a
series of regular substantially equal payments at regular intervals
(at least annually) over your lifetime or life expectancy or the
joint lives or life expectancies of you and your beneficiary;
(4) the withdrawal is less than or equal to your medical expenses in
excess of 7-1/2% of your adjusted gross income (not applicable for
IRAs); or
(5) you are required to make a payment to someone besides yourself under
a Qualified Domestic Relations Order (e.g., a divorce settlement)
(not applicable for IRAs).
- 57 -
<PAGE>
If you die before age 59-1/2, your beneficiary(ies) won't have to
pay the early distribution penalty.
Current federal tax law restricts the availability of cash
withdrawals and annuity payments from any part of your accumulation under salary
reduction agreements (including earnings). These withdrawals and annuity
payments are available only if you reach age 59-1/2, leave your job, become
disabled, or die. If your employer's plan permits, you may also be able to take
a cash withdrawal if you encounter hardship, as defined by the IRS, but hardship
withdrawals can be from contributions only, not investment earnings. These
restrictions don't apply to withdrawals from an IRA. Any part of your
accumulation that has been transferred from a custodial account under section
403(b)(7) will be subject to additional restrictions.
"Excess" Distributions
If your combined withdrawals or payments from 401(a), 403(a), and
403(b) retirement plans, IRAs, and other tax-deferred savings programs are more
than $155,000 in one year, you may have to pay an "excess distribution" tax of
15% of the amount over $155,000.
Death Benefits
Ordinarily, death benefits are subject to federal estate tax (see
"Tax Advice," page 59). Under some retirement programs, an additional 15% estate
tax may be imposed on the portion of your accumulation above a certain amount at
the time of your death.
Minimum Distribution Requirements and Taxes
In most cases, payments have to begin from 401(a), 403(a), and
403(b) plans and IRAs by April 1 of the calendar year after the calendar year
when you reach age 70-1/2, even if you haven't yet retired. Under the terms of
certain retirement plans, the plan administrator may direct us to make the
minimum distributions required by law to you even if you don't elect to receive
them. In addition, if you don't begin distributions on time, you'll be subject
to a 50% excise tax on the amount you should have received but didn't. (See
"Minimum Distribution Option Annuity," page 49.)
Deferred Compensation Plans
TIAA RA contracts are also available for deferred compensation
plans. RAs issued under these plans are owned by your employer and subject to
the claims of its general creditors. Since special tax rules may apply to these
plans, consult with a qualified tax advisor for more information about them.
- 58 -
<PAGE>
Tax Advice
What we tell you here about federal and other taxes isn't
comprehensive and is for general information only. It doesn't cover every
situation. Taxation varies depending on the circumstances, and state and local
taxes may also be involved. For complete information on your personal tax
situation, check with a qualified tax advisor.
GENERAL MATTERS
Choices and Changes
As long as your contract permits, you (or your annuity partner,
beneficiary, or any other payee) can choose or change any of the following: (1)
an annuity starting date; (2) an income option; (3) a transfer; (4) a method of
payment for death benefits; (5) a date when the commuted value of an annuity
becomes payable; (6) an annuity partner, beneficiary, or other person named to
receive payments; (7) a cash withdrawal or other distribution; and (8) a
repurchase.
You have to make your choices or changes via a written notice
satisfactory to us and received at our home office (see below). Transfers to
TIAA's traditional annuity and CREF can currently be made by telephone (see
"Contacting TIAA," below). You can change the terms of a transfer, cash
withdrawal, repurchase, or other cash distribution only before they're scheduled
to take place. When we receive a notice of a change in beneficiary or other
person named to receive payments, we'll execute the change as of the date it was
signed, even if the signer dies in the meantime. We execute all other changes as
of the date received. As already mentioned, we will delay the effective date of
some transactions until we receive additional documentation (see page 48).
Telephone Transactions
You can use our Automated Telephone Service ("ATS") to check your
account balance, transfer to TIAA's traditional annuity or CREF, and/or allocate
future premiums among the Real Estate Account, TIAA's traditional annuity, and
CREF. (Beginning later in 1996, we expect that participants will be able to
execute these transactions over the Internet.) To use the ATS you need a
touch-tone phone. You will be asked to enter your Personal Identification Number
("PIN") and contract number. Please contact us if you have not received a PIN
and we will send you one (see "Contacting TIAA," below). The ATS will prompt you
through whatever transactions you select. We will use reasonable procedures to
confirm that instructions given by telephone are genuine. All calls to the ATS
are recorded as a routine part of verification.
- 59 -
<PAGE>
Contacting TIAA
We won't consider any notice, form, request, or payment to have been
received by TIAA until it reaches our home office: Teachers Insurance and
Annuity Association, 730 Third Avenue, New York, New York 10017-3206. You can
ask questions by calling toll- free 1 800 842-2776.
Electronic Prospectus
If you received this prospectus electronically and would like a
paper copy, please call 1 800 842-2733, extension 5509, and we will send it to
you.
Signature Requirements
For some transactions, we may require your signature to be notarized
or guaranteed by a commercial bank or a member of a national securities
exchange.
Overpayment of Premiums
If your employer mistakenly sends more premiums on your behalf than
you're entitled to under your employer's retirement plan or the IRC, we'll
refund them to your employer as long as we're requested to do so (in writing)
before you start receiving annuity income. Any time there's a question about
premium refunds, TIAA will rely on information from your employer. If you've
withdrawn or transferred the amounts involved from your accumulation, we won't
refund them.
Payment to an Estate, Guardian, Trustee, etc.
We reserve the right to pay in one sum the commuted value of any
benefits due an estate, corporation, partnership, trustee, or other entity not a
natural person. Neither TIAA nor the Account will be responsible for the conduct
of any executor, trustee, guardian, or other third party to whom payment is
made.
Benefits Based on Incorrect Information
If the amounts of benefits provided under a contract were based on
information that is incorrect, benefits will be recalculated on the basis of the
correct data. If any overpayments or underpayments have been made by the
Account, appropriate adjustments will be made.
- 60 -
<PAGE>
Proof of Survival
We reserve the right to require satisfactory proof that anyone named
to receive benefits under a contract is living on the date payment is due. If
this proof is not received after a request in writing, the Account will have the
right to make reduced payments or to withhold payments entirely until such proof
is received.
DISTRIBUTION OF THE CONTRACTS
The contracts are offered continuously by the personnel of TIAA-CREF
Individual & Institutional Services, Inc. ("Services"), which is registered with
the Securities and Exchange Commission (the "SEC") as a broker-dealer and is a
member of the National Association of Securities Dealers, Inc. ("NASD").
Teachers Personal Investors Services, Inc. ("TPIS"), which is also registered
with the SEC and is a member of the NASD, may also participate in the
distribution of the contracts on a limited basis. As already noted, distribution
costs are covered by a deduction from the assets of the Account; no commissions
are paid in connection with the distribution of the contracts. Anyone
distributing the contracts must be a registered representative of Services or
TPIS, whose main offices are both at 730 Third Avenue, New York, New York
10017-3206.
PERIODIC REPORTS
As long as you have an accumulation in the Account, you will be sent
a statement each quarter which sets forth the following:
(1) premiums paid during the quarter;
(2) the number and dollar value of accumulation units in the Real Estate
Account credited to you during the quarter and in total;
(3) cash withdrawals from the Account during the quarter;
(4) any transfers between the Account and TIAA's traditional annuity or
CREF during the quarter;
(5) any repurchase or transfer to a funding vehicle other than TIAA or
CREF during the quarter, if an amount remains in your accumulation
after those transactions; and
(6) the amount applied to begin annuity payments during the quarter.
- 61 -
<PAGE>
STATE REGULATION
TIAA, the Real Estate Account, and the contracts are subject to
regulation by the New York Insurance Department as well as by the insurance
regulatory authorities of certain other states and jurisdictions.
TIAA and the Real Estate Account must file with the NYID both
quarterly and annual statements. The Account's books and assets are subject to
review and examination by the NYID at all times, and a full examination into the
affairs of the Account is made at least every five years. In addition, a full
examination of the Real Estate Account operations is usually conducted
periodically by some other states.
LEGAL MATTERS
All matters involving the application of state law to the contracts,
including TIAA's right to issue the contracts, have been passed upon by Charles
H. Stamm, Executive Vice President and General Counsel of TIAA. Legal matters
relating to the federal securities laws have been passed upon by Sutherland,
Asbill & Brennan, Washington, D.C.
EXPERTS
The financial statements of the Real Estate Account and certain
properties purchased by the Account included in this prospectus, the schedule to
such financial statements and the financial statements of TIAA incorporated
herein by reference have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports which appear herein or are incorporated
herein by reference, and have been so included or incorporated in reliance upon
the reports of such firm, given upon their authority as experts in accounting
and auditing.
LEGAL PROCEEDINGS
The assets of the Real Estate Account are not subject to any
material legal actions. TIAA is not involved in any legal action that we
consider material to its obligations to the Real Estate Account.
ADDITIONAL INFORMATION
A registration statement under the Securities Act of 1933 has been
filed with the SEC by TIAA on behalf of the Real Estate Account related to the
offering described in this prospectus. This prospectus does not include all the
information set forth in the registration statement. The omitted information may
be obtained at the SEC's principal office in Washington, D.C., upon payment of
the prescribed fee.
- 62 -
<PAGE>
Further information may be obtained from TIAA at Teachers Insurance
and Annuity Association of America, 730 Third Avenue, New York, New York
10017-3206.
FINANCIAL STATEMENTS
Audited financial statements of the Real Estate Account and certain
properties purchased by the Account and condensed unaudited financial statements
of TIAA follow. The full audited financial statements of TIAA are available upon
request by calling 1 800 842-2733, extension 5509.
The financial statements of TIAA should be distinguished from the
financial statements of the Real Estate Account and should be considered only as
bearing on the ability of TIAA to meet its obligations under the contracts. They
should not be considered as bearing upon the assets held in the Real Estate
Account.
- 63 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
TIAA REAL ESTATE ACCOUNT
Audited Financial Statements:
Report of Management Responsibility.........................................F-2
Report of Independent Auditors..............................................F-3
Statement of Assets and Liabilities - December 31, 1995....................F-4
Statement of Operations (For Period
from July 3, 1995 (commencement of operations)
to December 31, 1995).....................................................F-5
Statement of Changes in Net Assets (For Period
from July 3, 1995 (commencement of operations)
to December 31, 1995).....................................................F-6
Statement of Cash Flows (For Period from
July 3, 1995 (commencement of operations)
to December 31, 1995).....................................................F-7
Notes to Financial Statements...............................................F-8
Statement of Investments - December 31, 1995................................F-14
Proforma Condensed Financial Statements:
Proforma Condensed Statement of Assets
and Liabilities -- December 31, 1995......................................F-16
Proforma Condensed Statement of Operations (For Period
from July 3, 1995 (commencement of operations)
to December 31, 1995).....................................................F-16
Notes to Proforma Condensed Financial Statements ...........................F-17
The Greens at Metrowest Apartments and
Brixworth-Atlanta Apartments:
Independent Auditors' Report................................................F-18
Combined Statement of Revenues and Certain Expenses
(For Year Ended December 15, 1994)........................................F-19
Notes to Combined Statement of Revenues
and Certain Expenses......................................................F-20
The Millbrook Collection and The
Lynnwood Collection Retail Centers:
Independent Auditors' Report................................................F-21
Combined Statement of Revenues and Certain Expenses
(For Year Ended December 15, 1995)........................................F-22
Notes to Combined Statement of Revenues
and Certain Expenses......................................................F-23
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
Condensed Unaudited Financial Statements....................................F-25
Supplemental Information to Condensed Unaudited Financial Statements........F-27
F - 1
<PAGE>
TIAA (logo)
- --------------------------------------------------------------------------------
REPORT OF MANAGEMENT RESPONSIBILITY
To the Participants of the
TIAA Real Estate Account:
The accompanying financial statements of the TIAA Real Estate Account
("Account") of Teachers Insurance and Annuity Association of America ("TIAA")
are the responsibility of TIAA's management. They have been prepared in
accordance with generally accepted accounting principles and have been presented
fairly and objectively in accordance with such principles.
TIAA has established and maintains a strong system of internal controls designed
to provide reasonable assurance that assets are properly safeguarded and
transactions are properly executed in accordance with management's
authorization, and to carry out the ongoing responsibilities of management for
reliable financial statements. In addition, TIAA's internal audit personnel
provide a continuing review of the internal controls and operations of TIAA,
including its separate account operations. The internal Auditor regularly
reports to the Audit Committee of the TIAA Board of Trustees.
The accompanying financial statements have been audited by the independent
auditing firm of Deloitte & Touche LLP. The independent auditors' report, which
appears on the following page, expresses an independent opinion on the fairness
of presentation of these financial statements.
The Audit Committee of the TIAA Board of Trustees, consisting of trustees who
are not officers of TIAA, meets regularly with management, representatives of
Deloitte & Touche LLP and internal auditing personnel to review matters relating
to financial reporting, internal controls and auditing.
(signature of John H. Biggs)
----------------------------------------------------------
Chairman and Chief Executive Officer
(signature of Thomas W. Jones)
----------------------------------------------------------
Vice Chairman, President and Chief Operating Officer
(signature of Richard L. Gibbs)
----------------------------------------------------------
Executive Vice President and Principal Accounting Officer
F - 2
<PAGE>
[letterhead]
Deloitte &
Touche LLP [LOGO) Two World Financial Center Telephone: (212) 436-2000
New York, New York 10281-1414 Facsimile: (212) 436-5000
REPORT OF INDEPENDENT AUDITORS
To the Participants of the
TIAA Real Estate Account
and the Board of Trustees of
Teachers Insurance and Annuity Association of America:
We have audited the accompanying statement of assets and liabilities of the TIAA
Real Estate Account ("Account") of Teachers Insurance and Annuity Association of
America ("TIAA"), including the statement of investments, as of December 31,
1995, and the related statements of operations, changes in net assets and cash
flows for the period July 3, 1995 (commencement of operations) to December 31,
1995. These financial statements are the responsibility of TIAA's management.
Our responsibility is to express an opinion on the financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1995, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Account as of December 31, 1995, the
results of its operations, the changes in its net assets and its cash flows for
the above-stated period, in conformity with generally accepted accounting
principles.
Investments in real estate properties are stated at fair value at December 31,
1995, as discussed in Note 2 to the financial statements. Determination of fair
value involves subjective judgment because the actual market value of real
estate can be determined only by negotiation between the parties in a sales
transaction.
DELOITTE & TOUCHE LLP
New York, New York
March 8, 1996
[logo]
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
F - 3
<PAGE>
TIAA REAL ESTATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Investments, at value:
Real estate properties (Cost: $43,989,665)...................................................... $ 43,989,665
Marketable securities
(Amortized cost: $73,972,831)................................................................... 73,992,569
Cash.............................................................................................. 396,787
Receivable from securities transactions........................................................... 23,150,000
Other............................................................................................. 1,648,400
------------
TOTAL ASSETS 143,177,421
------------
LIABILITIES
Payable for securities transactions............................................................... 22,788,035
Other............................................................................................. 131,041
------------
TOTAL LIABILITIES 22,919,076
------------
NET ASSETS - Accumulation Fund..................................................................... $120,258,345
============
NUMBER OF ACCUMULATION UNITS
OUTSTANDING--Notes 6 and 7.......................................................................... 1,172,498
=========
NET ASSET VALUE, PER ACCUMULATION UNIT--Note 6....................................................... $102.57
=======
</TABLE>
See notes to financial statements.
F - 4
<PAGE>
TIAA REAL ESTATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE PERIOD JULY 3, 1995 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME
Income:
Real estate income, net:
Rental income...................................................................................... $ 165,762
----------
Real estate property level expenses and taxes:
Operating expenses............................................................................... 29,173
Real estate taxes................................................................................ 14,659
----------
Total real estate property level expenses and taxes 43,832
----------
Real estate income, net 121,930
Interest............................................................................................. 2,820,229
Dividends............................................................................................ 8,671
----------
TOTAL INCOME 2,950,830
----------
Expenses--Note 3:
Investment advisory.................................................................................. 228,136
Administrative....................................................................................... 66,320
Mortality and expense risk charges................................................................... 8,291
Liquidity guarantee charges.......................................................................... 8,291
----------
TOTAL EXPENSES 311,038
Fees paid indirectly................................................................................. (605)
----------
NET EXPENSES 310,433
----------
INVESTMENT INCOME, NET 2,640,397
----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Net realized gain on investments..................................................................... 15,865
Net change in unrealized appreciation
on investments .................................................................................... 19,738
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 35,603
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,676,000
==========
</TABLE>
See notes to financial statements.
F - 5
<PAGE>
TIAA REAL ESTATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JULY 3, 1995 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1995
<TABLE>
<S> <C>
FROM OPERATIONS
Investment income, net................................................................................. $ 2,640,397
Net realized gain on investments....................................................................... 15,865
Net change in unrealized appreciation
on investments....................................................................................... 19,738
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 2,676,000
------------
FROM PARTICIPANT TRANSACTIONS
TIAA seed money contributed--Note 1.................................................................... 100,000,000
Premiums............................................................................................... 500,421
Disbursements and transfers:
Net transfers from TIAA.............................................................................. 2,901,675
Net transfers from CREF Accounts..................................................................... 14,204,597
Annuity and other periodic payments.................................................................. (718)
Withdrawals.......................................................................................... (23,630)
------------
INCREASE IN NET ASSETS RESULTING
FROM PARTICIPANT TRANSACTIONS 117,582,345
------------
NET INCREASE IN NET ASSETS 120,258,345
NET ASSETS
Beginning of period.................................................................................... -
------------
End of period.......................................................................................... $120,258,345
============
</TABLE>
See notes to financial statements.
F - 6
<PAGE>
TIAA REAL ESTATE ACCOUNT
STATEMENT OF CASH FLOWS
FOR THE PERIOD JULY 3, 1995 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1995
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets
resulting from operations............................................................................ $ 2,676,000
Adjustments to reconcile net increase
in net assets resulting from operations
to net cash used in operating activities:
Increase in investments............................................................................ (117,982,234)
Increase in receivable from securities transactions................................................ (23,150,000)
Increase in other assets........................................................................... (1,648,400)
Increase in payable for securities transactions.................................................... 22,788,035
Increase in other liabilities...................................................................... 131,041
------------
NET CASH USED IN OPERATING ACTIVITIES (117,185,558)
------------
CASH FLOWS FROM PARTICIPANT TRANSACTIONS
TIAA seed money contributed............................................................................ 100,000,000
Premiums............................................................................................... 500,421
Disbursements and transfers:
Net transfers from TIAA.............................................................................. 2,901,675
Net transfers from CREF Accounts..................................................................... 14,204,597
Annuity and other periodic payments.................................................................. (718)
Withdrawals.......................................................................................... (23,630)
------------
NET CASH PROVIDED BY PARTICIPANT TRANSACTIONS 117,582,345
------------
NET INCREASE IN CASH 396,787
CASH
Beginning of period.................................................................................... -
------------
End of period.......................................................................................... $ 396,787
============
</TABLE>
See notes to financial statements.
F - 7
<PAGE>
TIAA REAL ESTATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
Note 1--Organization
The TIAA Real Estate Account ("Account") is a segregated investment account of
Teachers Insurance and Annuity Association of America ("TIAA") and was
established by resolution of TIAA's Board of Trustees on February 22, 1995 under
the insurance laws of the State of New York for the purpose of funding variable
annuity contracts issued by TIAA.
The Account commenced operations on July 3, 1995 with a $100,000,000 seed money
investment by TIAA. TIAA purchased 1,000,000 Accumulation Units in the Account
and such Units share in the pro rata investment experience of the Account and
are subject to the same valuation procedures and expense deductions as all other
Accumulation Units of the Account. The initial registration statement of the
Account filed by TIAA with the Securities and Exchange Commission ("Commission")
under the Securities Act of 1933 became effective on October 2, 1995. The
Account began to offer Accumulation Units and Annuity Units to participants
other than TIAA starting October 2, and November 1, 1995, respectively. At
December 31, 1995, amounts retained by TIAA in the Account remained at 1,000,000
units with a total value of $102,565,900.
TIAA will redeem a portion of its seed money Accumulation Units monthly (at the
net asset value at the time of redemption), according to a five year repayment
schedule approved by the State of New York Insurance Department. This schedule
requires TIAA to begin redeeming the seed money Accumulation Units on October 2,
1997, or on the date the Account's assets first reach $200 million, whichever
comes first.
The investment objective of the Account is a favorable long-term rate of return
primarily through rental income and capital appreciation from real estate
investments owned by the Account. The Account will also invest in
publicly-traded securities and other instruments to maintain adequate liquidity
for operating expenses and capital expenditures and to make benefit payments.
TIAA employees, under the direction of TIAA's Board of Trustees and its Mortgage
Committee, manage the investment of the Account's assets pursuant to investment
management procedures adopted by TIAA for the Account. TIAA's investment
management decisions for the Account are subject to review by the Account's
independent fiduciary, Institutional Property Consultants, Inc. TIAA also
provides all portfolio accounting and related services for the Account.
TIAA-CREF Individual & Institutional Services, Inc. ("Services"), a subsidiary
of TIAA which is registered with the Commission as a broker-dealer and is a
member of the National
F - 8
<PAGE>
Association of Securities Dealers, Inc., provides administrative and
distribution services pursuant to a Distribution and Administrative Services
Agreement with the Account.
Note 2--Significant Accounting Policies
The following is a summary of the significant accounting policies followed by
the Account, which are in conformity with generally accepted accounting
principles.
Valuation of Real Estate Properties: Investments in real estate properties are
stated at fair value, as determined in accordance with procedures approved by
the Mortgage Committee of the Board of Trustees and in accordance with the
responsibilities of the Board as a whole; accordingly, the Account does not
record depreciation. Fair value for real estate properties is defined as the
most probable price for which a property will sell in a competitive market under
all conditions requisite to a fair sale. Determination of fair value involves
subjective judgement because the actual market value of real estate can be
determined only by negotiation between the parties in a sales transaction. Real
estate properties owned by the Account are initially valued at their respective
purchase prices (including acquisition costs). Subsequently, independent
appraisers will value each real estate property at least once a year. The
independent fiduciary must approve all independent appraisers that the Account
uses. The independent fiduciary can also require additional appraisals if it
believes that a property's value has changed materially or otherwise to assure
that the Account is valued correctly. TIAA will perform a valuation review of
each real estate property on a quarterly basis and will update the property
value if it believes that the value of the property has changed since the
previous valuation review or appraisal. The independent fiduciary will review
and approve any such valuation adjustments which exceed certain prescribed
limits. TIAA will continue to use the revised value to calculate the Account's
net asset value until the next valuation review or appraisal.
Valuation of Marketable Securities: Equity securities listed or traded on any
United States national securities exchange are valued at the last sales price as
of the close of the principal securities exchange on which such securities are
traded or, if there is no sale, at the mean of the last bid and asked prices.
Short-term money market instruments are stated at market value. Portfolio
securities for which market quotations are not readily available are valued at
fair value as determined in good faith under the direction of the Mortgage
Committee of the Board of Trustees and in accordance with the responsibilities
of the Board as a whole.
F - 9
<PAGE>
Accounting for Investments: Real estate transactions are accounted for as of the
date on which the purchase or sale transactions for the real estate properties
close (settlement date). Rent from real estate properties consists of all
amounts earned under tenant operating leases, including base rent, recoveries of
real estate taxes and other expenses and charges for miscellaneous services
provided to tenants. Rental income is recognized in accordance with the billing
terms of the lease agreements. The Account bears the direct expenses of the real
estate properties owned. These expenses include, but are not limited to, fees
paid to local property management companies, property taxes, utilities,
maintenance, repairs, insurance and other operating and administrative costs. An
estimate of the net operating income earned from each real estate property is
accrued by the Account on a daily basis and such estimates are adjusted as soon
as actual operating results are determined. Realized gains and losses on real
estate transactions are accounted for under the specific identification method.
Securities transactions are accounted for as of the date the securities are
purchased or sold (trade date). Interest income is recorded as earned and, for
short-term money market instruments, includes accrual of discount and
amortization of premium. Dividend income is recorded on the ex-dividend date.
Realized gains and losses on security transactions are accounted for on the
average cost basis.
Federal Income Taxes: Based on provisions of the Internal Revenue Code, no
federal income taxes are attributable to the net investment experience of the
Account.
Note 3--Management Agreements
All services necessary for the operation of the Account are provided, at cost,
by TIAA and Services. TIAA provides investment management services for the
Account, while distribution and administrative services are provided by Services
in accordance with a Distribution and Administrative Services Agreement between
the Account and Services. TIAA also provides a liquidity guarantee to the
Account, for a fee, to ensure that funds are available to meet participant
transfer and cash withdrawal requests in the event that the Account's cash flows
and liquid investments are insufficient to fund such requests. TIAA also
receives a fee for assuming certain mortality and expense risks.
Fee payments are made from the Account on a daily basis to TIAA and Services
according to formulas established each year with the objective of keeping the
fees as close as possible to the Account's actual expenses. Any differences
between actual expenses and daily charges are adjusted quarterly.
F - 10
<PAGE>
TIAA and Services generally pay directly for all third-party services provided
for the benefit of the Account. "Soft-dollar" arrangements for brokerage and
other services are generally not utilized by the Account. However, certain
custodial fees are reduced based on the level of average cash balances on
deposit with a custodian bank during the period. The amount by which custodial
fees were reduced under these expense offset agreements is reflected in the
accompanying Statement of Operations as "Fees paid indirectly".
Note 4--Real Estate Properties
Had the Account's real estate properties been acquired at the beginning of the
current period (July 3, 1995), rental income and real estate property level
expenses and taxes would have increased by approximately $2,538,000 and
$889,000, respectively. In addition, interest income would have decreased by
approximately $1,082,000. Accordingly, the total proforma effect on the
Account's net investment income would have been an increase of approximately
$567,000, if the real estate properties had been acquired at the beginning of
the period.
Note 5--Leases
The Account's real estate properties are leased to tenants under operating lease
agreements which expire on various dates through 2015. Aggregate minimum annual
rentals for the properties owned, excluding short-term residential leases, are
as follows:
Years Ending
December 31,
------------
1996 $ 1,653,336
1997 1,653,336
1998 1,638,541
1999 1,513,600
2000 1,461,217
Thereafter 7,673,670
-----------
Total $15,593,700
===========
Certain leases provide for additional rental amounts based upon the recovery of
actual operating expenses in excess of specified base amounts.
F - 11
<PAGE>
Note 6--Condensed Financial Information
Selected condensed financial information for an Accumulation Unit of the Account
is presented below.
<TABLE>
<CAPTION>
July 3, 1995
(Commencement
of Operations) to
December 31, 1995
------------------
<S> <C>
Per Accumulation Unit Data:
Rental income....................................................................................... $ 0.159
Real estate property level expenses and taxes....................................................... 0.042
--------
Real estate income, net 0.117
Dividends and interest.............................................................................. 2.716
--------
Total income 2.833
Expense charges (1)................................................................................. 0.298
--------
Investment income, net 2.535
Net realized and unrealized gain on investments..................................................... 0.031
--------
Net increase in Accumulation Unit Value............................................................... 2.566
Accumulation Unit Value:
Beginning of period.................................................................................. 100.000
--------
End of period........................................................................................ $102.566
========
Cumulative total return................................................................................ 2.57%
Ratios to Average Net Assets:
Expenses (1)......................................................................................... 0.30%
Investment income, net............................................................................... 2.51%
Portfolio turnover rate............................................................................... 0%
Thousands of Accumulation Units outstanding
at end of period..................................................................................... 1,172
</TABLE>
(1) Expense charges per Accumulation Unit and the expense ratio to Average Net
Assets exclude real estate property level operating expenses and taxes. If
included, the expense charge per Accumulation Unit would be $0.340 and the
expense ratio to Average Net Assets would be 0.34%.
F - 12
<PAGE>
Note 7--Accumulation Units
Changes in the number of Accumulation Units outstanding were as follows:
July 3, 1995
(Commencement
of Operations) to
December 31, 1995
-----------------
Accumulation Units:
Credited for premiums and TIAA seed money investment......... 1,004,905
Credited for net transfers and disbursements................. 167,593
Outstanding:
Beginning of period.......................................... -
---------
End of period................................................ 1,172,498
=========
Note 8--Commitments
During the normal course of business, the Account enters into discussions and
agreements to purchase or sell real estate properties. As of December 31, 1995,
the Account had outstanding commitments to purchase real estate properties
(subject to various closing conditions) of $23,550,000. Of that amount, a
purchase of real estate property totalling $10,050,000 was closed on February
27, 1996.
F - 13
<PAGE>
TIAA REAL ESTATE ACCOUNT
STATEMENT OF INVESTMENTS
DECEMBER 31, 1995
REAL ESTATE PROPERTIES--37.28%
Location Description Value
- -------- ----------- -----------
Fridley, Minnesota(1) Industrial building......................... $ 4,166,787
Orlando, Florida(1) Apartments.................................. 12,490,895
El Paso, Texas(2) Industrial building......................... 4,431,166
Atlanta, Georgia(1) Apartments.................................. 15,574,647
Ocoee, Florida(1) Shopping center............................. 7,326,170
-----------
TOTAL REAL ESTATE PROPERTIES
(Cost $43,989,665)........................................ 43,989,665
----------
(1) Fee interest
(2) Leasehold interest
MARKETABLE SECURITIES--62.72%
REAL ESTATE INVESTMENT TRUST--.37%:
Shares Issuer Value
- ------ ------ --------
15,000 Reckson Associates Realty................................ 440,625
--------
TOTAL REAL ESTATE INVESTMENT TRUST
(Cost $402,000).......................................... 440,625
--------
See notes to financial statements.
F - 14
<PAGE>
COMMERCIAL PAPER--18.17%:
Par Value Issuer Value
- --------- ------ ------------
14,360,000 AT&T Capital Corporation
5.64% 02/01/96................................... $ 14,285,025
7,150,000 Corporate Asset Funding Company, Inc.
5.80% 01/02/96................................... 7,148,022
------------
TOTAL COMMERCIAL PAPER
(Amortized cost $21,439,106)........................... 21,433,047
------------
GOVERNMENT AGENCIES--44.18%:
5,930,000 Federal Home Loan Bank
5.60% 01/08/96....................................... 5,922,505
15,700,000 Federal Home Loan Bank
5.48% 01/22/96....................................... 15,645,015
5,000,000 Federal Home Loan Bank
5.38% 02/22/96....................................... 4,958,793
25,670,000 Federal National Mortgage Association
5.67% 01/19/96....................................... 25,592,584
----------
TOTAL GOVERNMENT AGENCIES
(Amortized cost $52,131,725)........................... 52,118,897
----------
TOTAL MARKETABLE SECURITIES
(Amortized cost $73,972,831).................................... 73,992,569
------------
TOTAL INVESTMENTS
(Amortized cost $117,962,496)................................... $117,982,234
============
See notes to financial statements.
F - 15
<PAGE>
TIAA REAL ESTATE ACCOUNT
PROFORMA CONDENSED
STATEMENT OF ASSETS AND LIABILITIES (Unaudited)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Proforma
Historical Adjustments Proforma
---------- ----------- --------
<S> <C> <C> <C>
ASSETS
Investments, at value:
Real estate properties ....................$ 43,989,665 $23,520,946 (a) $ 67,510,611
Marketable securities ..................... 73,992,569 (23,520,946)(a) 50,471,623
Other ...................................... 25,195,187 25,195,187
------------ ----------- ------------
TOTAL ASSETS ................................ 143,177,421 - 143,177,421
LIABILITIES ................................. 22,919,076 - 22,919,076
------------ ----------- ------------
NET ASSETS - Accumulation Fund ..............$120,258,345 $ - $120,258,345
============ =========== ============
</TABLE>
TIAA REAL ESTATE ACCOUNT
PROFORMA CONDENSED
STATEMENT OF OPERATIONS (Unaudited)
FOR THE PERIOD JULY 3, 1995 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
Proforma
Historical Adjustments Proforma
---------- ----------- --------
<S> <C> <C> <C>
INVESTMENT INCOME
Income:
Real estate income, net:
Rental income .............................$ 165,762 $ 3,573,016 (b) $ 3,738,778
Real estate property level ----------- ----------- ------------
expenses and taxes:
Operating expenses ....................... 29,173 879,547 (b) 908,720
Real estate taxes ........................ 14,659 337,947 (b) 352,606
----------- ----------- ------------
Total real estate property
level expenses and taxes .................. 43,832 1,217,494 1,261,326
----------- ----------- ------------
Real estate income, net .................... 121,930 2,355,522 2,477,452
Interest and dividends ..................... 2,828,900 (1,702,630)(c) 1,126,270
----------- ----------- ------------
TOTAL INCOME ................................. 2,950,830 652,892 3,603,722
EXPENSES ..................................... 310,433 - 310,433
----------- ----------- ------------
INVESTMENT INCOME-NET ........................ 2,640,397 652,892 3,293,289
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS ......................... 35,603 - 35,603
----------- ----------- ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ...................$ 2,676,000 $ 652,892 $ 3,328,892
============ =========== ============
See notes to proforma condensed financial statements.
</TABLE>
F - 16
<PAGE>
TIAA REAL ESTATE ACCOUNT
NOTES TO PROFORMA CONDENSED FINANCIAL STATEMENTS
Note 1--Purpose
The proforma condensed statement of assets and liabilities has been prepared in
order to reflect the TIAA Real Estate Account ("Account") assuming that real
estate properties purchased during the period January 1, 1996 through the date
of this prospectus were purchased as of December 31, 1995. The proforma
condensed statement of operations has been prepared in order to reflect the
Account assuming that all real estate properties purchased during the period
July 3, 1995 (commencement of operations) to the date of this prospectus were
owned for the period July 3, 1995 through December 31, 1995.
Note 2--Management's Assumptions
The following assumptions were made in preparing the proforma adjustments to
reflect the purpose described in Note 1.
Proforma Condensed Statement of Assets and Liabilities
(a) To record the cost of the properties purchased during the period January 1,
1996 through the date of this prospectus assuming such properties were purchased
as of December 31, 1995.
Proforma Condensed Statement of Operations
(b) To record the rental income and real estate property level expenses of the
real estate properties purchased during the period July 3, 1995 through the date
of this prospectus assuming such properties were owned for the period July 3,
1995 through December 31, 1995.
(c) To record the decrease in the interest and dividend income resulting from
having less cash invested in marketable securities by assuming the real estate
properties purchased during the period July 3, 1995 to the date of this
prospectus had been purchased as of July 3, 1995.
F-17
<PAGE>
[letterhead]
Deloitte &
Touche LLP [LOGO] Two World Financial Center Telephone: (212) 436-2000
New York, New York 10281-1414 Facsimile: (212) 436-5000
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of
Teachers Insurance and Annuity Association of America:
We have audited the combined statement of revenues and certain expenses of the
properties known as The Greens at Metrowest Apartments ("Metrowest") and
Brixworth-Atlanta Apartments ("Brixworth") (collectively, the "Properties") for
the year ended December 15, 1994. This financial statement is the responsibility
of TIAA Real Estate Account's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying combined statement of revenues and certain expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in the registration statement
on Form S-1 of TIAA Real Estate Account) and as described in Note 2 is not
intended to be a complete presentation of the Properties' revenues and expenses.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the combined statement of revenues and certain expenses
of the Properties as described in Note 2 for the year ended December 15, 1994,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
March 8, 1996
[logo]
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
F-18
<PAGE>
THE GREENS AT METROWEST APARTMENTS AND
BRIXWORTH-ATLANTA APARTMENTS
Combined Statement of Revenues and Certain Expenses
Year Ended December 15, 1994
Revenues:
Rental income $3,673,718
Other 89,066
----------
Total revenues 3,762,784
----------
Certain expenses:
Building operating expenses 653,459
Real estate taxes 405,440
Management fees 303,801
----------
Total expenses 1,362,700
----------
Revenues in excess of certain expenses $2,400,084
==========
See notes to combined statement of revenues and certain expenses.
F-19
<PAGE>
THE GREENS AT METROWEST APARTMENTS AND
BRIXWORTH-ATLANTA APARTMENTS
Notes to Combined Statement of Revenues and Certain Expenses
Year Ended December 15, 1994
1. DESCRIPTION OF PROPERTIES
The combined statement of revenues and certain expenses relates to the
properties known as The Greens at Metrowest Apartments ("Metrowest") and
Brixworth-Atlanta Apartments ("Brixworth") (collectively, the "Properties").
Metrowest and Brixworth were acquired on December 15, 1995 and December 28,
1995, respectively, by TIAA Real Estate Account (the "Account").
2. BASIS OF PRESENTATION
The accompanying financial statement is presented in conformity with Rule
3-14 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, the financial statement is not representative of the actual
operations for the year ended December 15, 1994 as certain expenses, which
may not be comparable to the expenses expected to be incurred in the future
operations of the Properties have been excluded. Expenses excluded consist
of interest, depreciation and amortization and other costs not directly
related to the future operations of the Properties.
3. SIGNIFICANT ACCOUNTING POLICIES
Rental Income - Rental income is recognized when due in accordance with the
terms of the respective leases.
Income Taxes - Based on provisions of the Internal Revenue Code, no federal
income taxes are attributable to the net investment experience of the
Account.
. Building Operating Expenses - Expenses consist primarily of utilities,
insurance, security and safety, cleaning and other rental expenses of the
Properties.
F-20
<PAGE>
[letterhead]
Deloitte &
Touche LLP [LOGO] Two World Financial Center Telephone: (212) 436-2000
New York, New York 10281-1414 Facsimile: (212) 436-5000
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees
Teachers Insurance and Annuity Association of America:
We have audited the combined statement of revenues and certain expenses of the
properties known as The Millbrook Collection ("Millbrook") and The Lynnwood
Collection Retail Centers ("Lynnwood") (collectively, the "Properties") for the
year ended December 15, 1995. This financial statement is the responsibility of
TIAA Real Estate Account's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying combined statement of revenues and certain expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in the registration statement
on Form S-1 of TIAA Real Estate Account) and as described in Note 2 is not
intended to be a complete presentation of the Properties' revenues and expenses.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the combined statement of revenues and certain expenses
of the Properties as described in Note 2 for the year ended December 15, 1995 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
April 12, 1996
[logo]
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
F-21
<PAGE>
THE MILLBROOK COLLECTION AND
THE LYNNWOOD COLLECTION RETAIL CENTERS
Combined Statement of Revenues and Certain Expenses
Year Ended December 15, 1995
Revenues:
Rental income $1,403,947
Other 364,641
----------
Total revenues 1,768,588
----------
Certain expenses:
Building operating expenses 348,117
Real estate taxes 146,537
Management fees 79,539
----------
Total expenses 574,193
----------
Revenues in excess of certain expenses $1,194,395
==========
See notes to combined statement of revenues and certain expenses.
F-22
<PAGE>
THE MILLBROOK COLLECTION AND
THE LYNNWOOD COLLECTION RETAIL CENTERS
Notes to Combined Statement of Revenues and Certain Expenses
Year Ended December 15, 1995
1. DESCRIPTION OF PROPERTIES
The combined statement of revenues and certain expenses relates to the
properties known as The Millbrook Collection ("Millbrook") and The Lynnwood
Collection Retail Centers ("Lynnwood") (collectively, the "Properties").
Millbrook and Lynnwood, located in Raleigh, North Carolina, were acquired on
March 29, 1996 by TIAA Real Estate Account (the "Account").
2. BASIS OF PRESENTATION
The accompanying financial statement is presented in conformity with Rule
3-14 of Regulation S-X of the Securities and Exchange Commission.
Accordingly, the financial statement is not representative of the actual
operations for the year ended December 15, 1995 as certain expenses, which
may not be comparable to the expenses expected to be incurred in the future
operations of the Properties have been excluded. Expenses excluded consist
of depreciation, amortization, ground lease, and other costs not directly
related to the future operations of the Properties.
3. SIGNIFICANT ACCOUNTING POLICIES
Rental Income - Rental income is recognized when due in accordance with the
terms of the respective leases.
Income Taxes - Based on provisions of the Internal Revenue Code, no federal
income taxes are attributable to the net investment income of the Account.
Building Operating Expenses - Expenses consist primarily of utilities,
insurance, security and safety, cleaning and other rental expenses of the
Properties.
F-23
<PAGE>
4. LEASES
At December 15, 1995, future minimum base rentals to be received for fiscal
years ending 1996 through 2000, and the aggregate amount thereafter, under
noncancellable operating leases in effect are as follows:
1996 $ 1,285,984
1997 1,191,705
1998 1,054,190
1999 905,454
2000 820,880
Aggregate amount thereafter 8,300,455
-----------
$13,558,668
===========
Rental income from one tenant, which operates a supermarket in each
property, amounted to approximately 46% of the total rental income for the
year ended December 15, 1995.
5. MANAGEMENT FEES
In accordance with the terms of the management agreement, the Properties pay
a monthly management fee based on 5% of total monthly collections from the
Properties' tenants. These monthly collections include base rent, common
area maintenance, real estate taxes, insurance, and other miscellaneous
income.
F-24
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
CONDENSED UNAUDITED FINANCIAL STATEMENTS
(Condensed unaudited financial statements have been derived
from audited financial statements which are available upon request.)
TIAA Condensed Balance Sheets
as of December 31
(in thousands)
ASSETS 1995 1994
- -----------------------------------------------------------------------------
Bonds $48,835,831 $43,778,518
Mortgages 21,000,279 20,216,879
Real estate 7,013,053 7,075,385
Stocks 223,028 163,284
Other long-term investments 476,804 383,816
Cash and short-term investments 713,051 431,446
Investment income due and accrued 1,118,708 1,073,386
Separate Account assets 209,170 30,563
Other assets 204,689 194,557
----------- -----------
Total Assets $79,794,613 $73,347,834
=========== ===========
LIABILITIES
- -----------------------------------------------------------------------------
Policy and contract reserves $70,983,831 $65,656,735
Dividends declared for
the following year 1,493,744 1,382,681
Asset Valuation Reserve 1,860,868 1,664,696
Interest Maintenance Reserve 621,366 544,660
Separate Account liabilities 106,512 5,293
Other liabilities 672,112 655,945
----------- -----------
Total Liabilities $75,738,433 $69,910,010
----------- -----------
CAPITAL & CONTINGENCY RESERVES
- -----------------------------------------------------------------------------
Capital $ 2,500 $ 2,500
----------- -----------
Contingency reserves:
For group life insurance 7,762 6,822
For investment losses,
annuity and insurance
mortality, and other risks 4,045,918 3,428,502
----------- -----------
Total contingency reserves 4,053,680 3,435,324
----------- -----------
Total Capital and
Contingency Reserves 4,056,180 3,437,824
----------- -----------
Total Liabilities, Capital
and Contingency Reserves $79,794,613 $73,347,834
=========== ===========
F - 25
<PAGE>
TIAA Condensed Statements of Operations and
Changes in Contingency Reserves for the Years
Ended December 31 (in thousands)
INCOME 1995 1994
- ------------------------------------------------------------------------------
Insurance and annuity
premiums and deposits $2,854,600 $2,785,546
Transfers from CREF, net 351,869 191,583
Annuity dividend additions 1,943,614 1,844,417
Net investment income 6,108,497 5,486,071
Supplementary contract considerations 150,976 105,000
----------- -----------
Total Income $11,409,556 $10,412,617
=========== ===========
DISTRIBUTION OF INCOME
- ------------------------------------------------------------------------------
Policy and contract benefits $1,718,597 $1,538,302
Dividends 3,098,931 2,874,077
Increase in policy and contract reserves 5,329,040 5,043,786
Operating expenses 241,795 216,465
Net transfers to separate accounts 92,995 4,271
Federal income taxes 9,488 9,844
Other, net (4,380) (2,972)
Increase in contingency reserves 923,090 728,844
----------- -----------
Total Distribution of Income $11,409,556 $10,412,617
=========== ===========
CHANGES IN CONTINGENCY RESERVES
- ------------------------------------------------------------------------------
From operations $923,090 $728,844
Net realized capital loss on investments (56,265) (95,071)
Net unrealized capital gain on
investments 52,706 38,907
Transfer to Interest Maintenance Reserve (114,840) (170,430)
Transfers from (to) the
Asset Valuation Reserve:
Required formula contribution (302,387) (249,405)
Net capital losses absorbed 106,215 226,639
Voluntary contribution (193,508)
Increase in nonadmitted assets
other than investments (803) (22,195)
Change in valuation basis of
policy reserves 2,314
Other, net 10,640 1,522
---------- ----------
Net Change in Contingency Reserves 618,356 267,617
Contingency reserves at beginning of year 3,435,324 3,167,707
---------- ----------
Contingency Reserves at
End of Year $4,053,680 $3,435,324
========== ==========
F-26
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
SUPPLEMENTAL INFORMATION TO CONDENSED UNAUDITED FINANCIAL STATEMENTS
VALUATION OF INVESTMENTS: Bonds and short-term investments (debt securities with
maturities of one year or less at the time of acquisition) not in default are
generally stated at amortized cost; medium to highest quality preferred stocks
at cost; common stocks at market value; and all other bond, short-term and
preferred stock investments at the lower of cost or market value. Mortgages are
stated at amortized cost, and directly-owned real estate at depreciated cost
(net of encumbrances). Investments in wholly-owned real estate subsidiaries,
real estate limited partnerships and securities limited partnerships are stated
at TIAA's equity in the net assets of the underlying entities. Policy loans are
stated at outstanding principal amounts. All investments are stated net of any
permanent impairments, which are determined on an individual asset basis.
Depreciation is generally computed over a 40 year period on the constant yield
method for properties acquired prior to 1991, and on the straight-line method
for properties acquired thereafter.
ADDITIONAL INFORMATION:
1995 1994
---- ----
As a percentage of total bond investments:
Below investment grade bonds 5% 6%
As a percentage of total mortgage investments:
Below investment grade mortgage loans 4% 5%
Total mortgage investments in California 24% 26%
Total mortgage investments in office buildings 41% 42%
Total mortgage investments in shopping centers 31% 31%
As a percentage of total real estate investments:
Total real estate investments in Minnesota 12% 12%
Total real estate investments in California 12% 12%
Total real estate investments in office buildings 62% 60%
ASSET SWAP AND INTEREST RATE SWAP CONTRACTS: TIAA enters into asset swap and
interest rate swap contracts with counterparties. TIAA is exposed to the risk of
default of such counterparties, although TIAA does not anticipate
non-performance by the counterparties. At December 31, 1995 and 1994, TIAA had
interest rate swap contracts with commercial banks related to $110,000,000 and
$105,000,000, respectively, par value of variable interest rate notes, and asset
swap contracts outstanding related to $245,462,000 and $115,211,000,
respectively, of investments denominated in foreign currencies.
F-27
<PAGE>
APPENDIX A
DESCRIPTION OF PROPERTIES
MULTI-FAMILY RESIDENTIAL COMPLEXES
Brixworth Apartments -- Atlanta, Georgia
On December 28, 1995, the Account purchased the fee interest (i.e.,
ownership of underlying land and all buildings and other improvements on the
land) in Brixworth Apartments, a first class garden apartment complex located in
Atlanta, Georgia, for a purchase price of approximately $15.6 million. The
property is not subject to a mortgage.
Brixworth Apartments was built in 1989 and is located on
approximately 10.8 acres of land. The complex contains 271 one- and two- bedroom
apartment units in 11 three story buildings, with each unit containing such
amenities as a washer and dryer and a patio or balcony. Building exteriors are
brick and wood. There are 420 parking spaces in the complex. Residents have use
of an on-site clubhouse, which includes a fitness center and swimming pool.
Brixworth Apartments is currently 97% occupied, and according to the Seller, has
experienced between 93% and 97% occupancy over the prior five year period.
Average monthly rents are $699 per unit. Rents are comparable with competitive
communities and are not subject to rent regulation. The Account will be
responsible for the expenses of operating the property.
Brixworth Apartments is located in northeast Atlanta in DeKalb
County, near several shopping facilities and employment centers. Atlanta has
experienced positive population and employment growth over the last 15 years and
serves as the financial and administrative center for the southeastern United
States.
The Greens at Metrowest Apartments -- Orlando, Florida
On December 15, 1995, the Account purchased the fee interest in The
Greens at Metrowest, a luxury garden apartment complex located in Orlando,
Florida, for a purchase price of approximately $12.5 million. The property is
not subject to a mortgage.
The Greens at Metrowest Apartments was built in 1990, and is located
on approximately 16.7 acres of land. The complex consists of 200 one- and two-
bedroom units in 27 two story buildings, with each unit containing such
amenities as a washer and dryer, a screened porch, and, in many of the units, a
fireplace and vaulted ceilings. Building exteriors are stucco with concrete
tiled roofs. There are 402 parking spaces in the complex. Residents have use of
an on-site clubhouse, which includes an exercise facility and swimming pool. The
complex is currently 93% occupied, with monthly
A - 1
<PAGE>
rents averaging $778 per unit. Rents are comparable with competitive complexes
and are not subject to rent regulation. The Account will be responsible for the
expenses of operating the property.
The complex is located in the 1,800 acre master planned development
of Metrowest which contains an 18 hole golf course. Its proximity to several
major highways gives residents easy access to Orlando's major employment
centers. Orlando has experienced strong population and employment growth during
the last decade. While tourism and entertainment account for 40% of local jobs,
the region's economy is diversifying by attracting "high-tech" industries and is
growing in importance as a warehouse and distribution location.
OFFICE BUILDINGS
Southbank Business Park - Phoenix, Arizona
On February 27, 1996, the Account purchased the fee interest in a
122,609 square foot office/service building in Phoenix, Arizona, for a purchase
price of approximately $10.05 million. The property is not subject to a
mortgage.
The building, completed in 1995, is located on approximately 9.9
acres of land with 638 parking spaces. It is currently 100% occupied by four
tenants in the service industry, with rents averaging $8.77 per square foot.
None of the leases expire until the year 2000, when leases on 65% of the space
expire; those leases together represent total annual rent payments of
approximately $684,907. Although the terms vary under each lease, most of the
expenses for operating the property are either borne or reimbursed by the
tenants.
The building is located within the Southbank Business Park adjacent
to the Phoenix Airport and is easily accessible from either side of the Phoenix
metropolitan area. Phoenix has experienced positive population and employment
growth over the last 15 years. Over 29% of its employment base is comprised of
employees in the service industry.
A - 2
<PAGE>
NEIGHBORHOOD SHOPPING CENTERS
The Lynnwood Collection -- Raleigh, North Carolina
On March 29, 1996, the Real Estate Account purchased the fee interest
in The Lynnwood Collection, an 86,362 square foot neighborhood shopping center
located in Raleigh, North Carolina, for a purchase price of approximately $6.5
million. The property is not subject to a mortgage.
The center, which was built in 1988, is located on approximately 10.3
acres of land and has space for 426 cars. It is currently 98% occupied, and is
anchored by a 52,337 square foot Kroger supermarket, a national supermarket
chain. Rents average $12.72 per square foot. Although the terms vary under each
lease, most of the expenses for operating the property are either borne or
reimbursed by the tenants. Over the next five years, leases on 35% of the
center's space expire; those leases together represent total annual rent
payments of $362,749 in the year of their expiration. The Kroger lease expires
in the year 2015.
The center is located in north Raleigh, the city's primary growth
corridor. Raleigh is the capital of North Carolina and has experienced strong
population growth. As part of what is referred to as the "Research Triangle," it
has attracted major business and industries and has a large pool of highly
educated workers.
The Millbrook Collection -- Raleigh, North Carolina
On March 29, 1996, the Account purchased the fee interest in The
Millbrook Collection, a 102,221 square foot neighborhood shopping center located
in Raleigh, North Carolina, for a purchase price of approximately $6.7 million.
The property is not subject to a mortgage.
The center, which was built in 1988, is located on approximately 14.4
acres of land with space for 670 cars. The center is currently 93% occupied and
is anchored by a 52,337 square foot Kroger supermarket. Rents average $10.84 per
square foot. Although the terms vary under each lease, most of the expenses for
operating the property are either borne or reimbursed by the tenants. Over the
next five years, leases on 30% of the center's space expire; those leases
together represent total annual rent payments of $310,249 in the year of their
expiration. The Kroger lease expires in the year 2015.
The center is located within the city limits of Raleigh, North Carolina
in a well-established neighborhood. The Raleigh area is discussed in the
description of the Lynnwood Collection set forth above.
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Plantation Grove Shopping Center -- Ocoee, Florida
On December 28, 1995, the Account purchased the fee interest in
Plantation Grove Shopping Center, a 73,655 square foot neighborhood shopping
center located near Orlando, Florida, for a purchase price of approximately $7.3
million. The property is not subject to a mortgage.
The center, built in 1995, is located on approximately 14 acres of
land with space for 401 cars. It is currently 88% occupied and is anchored by a
47,955 square foot Publix supermarket, a regional supermarket chain. Rents,
including a rent guarantee from the seller for the 12% of vacant space, average
$10.00 per square foot. Although the terms vary under each lease, most of the
expenses for operating the property are either borne or reimbursed by the
tenants. Over the next five years, leases on 16% of the center's space expire;
those leases together represent total annual rent payments of $162,900 in the
year of their expiration. The Publix lease expires in the year 2015.
The Orlando, Florida area is discussed in the description of The
Greens at Metrowest Apartments set forth immediately above.
INDUSTRIAL PROPERTIES
On November 22, 1995, the Account purchased the fee interest in a
warehouse property located near Minneapolis, Minnesota for a purchase price of
approximately $4.2 million. Rents on the property, including a rent guarantee
from the seller for the 20% of vacant space, average $3.80 per square foot. On
December 22, 1995, the Account purchased leasehold interests (i.e., interests in
the leases on the underlying land and ownership of the buildings and other
improvements on the land) in two warehouse properties located in El Paso, Texas
for an aggregate purchase price of approximately $4.4 million dollars. Rents on
the properties average $2.71 per square foot, after payment of the ground rent.
Although the terms vary under each lease, most of the expenses for operating
each of the properties are either borne or reimbursed by the tenants. None of
the properties are subject to a mortgage.
Set forth below are further details relating to each facility:
Lease
Building Year Current Major Expira-
Property Size Built Occupancy Tenants tion Date
(sq. ft.)
Fridley,
Minnesota
Industrial Blvd. 100,584 1995 80% Packaging 2005
Materials,
Inc.
El Paso, Texas
Butterfield warehouse 80,000 1980 100% Rockwell 2000
Zane Gray warehouse 103,600 1981 100% D.J. Inc. 2003
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APPENDIX B
MANAGEMENT OF TIAA
The Trustees and principal executive officers of TIAA, and their
principal occupations during the last five years, are as follows:
Trustees
David Alexander, 63.
American Secretary, Rhodes Scholarship Trust, and Trustees' Professor, Pomona
College. Formerly, President, Pomona College, until 1991.
Marcus Alexis, 64.
Board of Trustees, Professor of Economics and Professor of Management and
Strategy, Northwestern University.
A. Howard Amon, Jr., 68.
Retired Vice President and Director of Real Estate, J. C. Penney, Inc.
Jenne K. Britell, 53.
Executive Vice President, since June 1995, and Chief Lending Officer and General
Manager, Mortgage Banking, The Dime Savings Bank of New York, FSB, since 1993.
Formerly, Chairman and Chief Executive Officer, HomePower, Inc., from 1990 until
1993, and Chairman of the Management Board, Polish-American Mortgage Bank, Inc.
(Warsaw), from June 1992 until April 1993.
Willard T. Carleton, 61.
Karl L. Eller Professor of Finance, College of Business and Public
Administration, University of Arizona.
Robert C. Clark, 52.
Dean and Royall Professor of Law, Harvard Law School, Harvard University.
Flora Mancuso Edwards, 51.
Professor of English as a Second Language, Middlesex County College, since
October 1995. Formerly, President, Middlesex County College until October 1995.
Estelle A. Fishbein, 61.
General Counsel of The Johns Hopkins University since 1975. Elected Vice
President and General Counsel of the University, April 1991.
Frederick R. Ford, 60.
Executive Vice President and Treasurer, Purdue University.
Ruth Simms Hamilton, 58.
Professor, Department of Sociology and Urban Affairs Programs, and Director,
African Diaspora Research Project, Michigan State University.
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Dorothy Ann Kelly, O.S.U., 66.
President, College of New Rochelle.
Robert M. O'Neil, 61.
Professor of Law, University of Virginia and Director, The Thomas Jefferson
Center for the Protection of Free Expression.
Leonard S. Simon, 59.
Chairman, President and Chief Executive Officer, RCSB Financial, Inc., since
September 1995. Formerly, Chairman and Chief Executive Officer, The Rochester
Community Savings Bank, from 1984 until September 1995.
Ronald L. Thompson, 46.
Chairman of the Board and Chief Executive Officer, Midwest Stamping Co.
Formerly, Chairman of the Board and President, The GR Group, until 1993.
Paul R. Tregurtha, 60.
Chairman, Chief Executive, and Director, Mormac Marine Group, Inc.; Vice
Chairman and Director, The Interlake Steamship Company; Chairman and Director,
Moran Transportation Company; and Chairman, MAC Acquisitions, Inc.
Charles J. Urstadt, 67.
Chairman and President, HRE Properties (a real estate investment trust).
William H. Waltrip, 58.
Chairman and Chief Executive Officer, Bausch & Lomb Inc., since January 1996.
Chairman and Chief Executive Officer, Technology Solutions Company, since 1993.
Formerly, Chairman and Chief Executive Officer, Biggers Brothers, Inc., and Vice
Chairman, Unifax, from 1991 until 1993.
Officer-Trustees
John H. Biggs, 59.
Chairman and Chief Executive Officer, TIAA and CREF, since 1993. Formerly,
President and Chief Operating Officer, TIAA and CREF.
Thomas W. Jones, 46.
Vice Chairman, TIAA and CREF, since 1995. President and Chief Operating Officer,
TIAA and CREF, since 1993. Formerly, Executive Vice President, Finance and
Planning, TIAA and CREF.
Martin L. Leibowitz, 59.
Vice Chairman and Chief Investment Officer, TIAA and CREF, since November 1995.
Executive Vice President, TIAA and CREF, from June 1995 to November 1995.
Formerly, Managing Director -- Director of Research and member of the Executive
Committee, Salomon Brothers, Inc.
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Other Officers
Richard L. Gibbs, 49.
Executive Vice President, TIAA and CREF, since 1993, and Vice President,
TIAA-CREF Investment Management, Inc. ("Investment Management") and TIAA-CREF
Individual & Institutional Services, Inc. ("Services"), since 1992; Executive
Vice President, Teachers Advisors, ("Advisors") since 1995. Formerly, Vice
President, Finance, TIAA and CREF.
Albert J. Wilson, 63.
Vice President and Chief Counsel, Corporate Secretary, TIAA and CREF, since
1991. Formerly, Vice President, Secretary, and Associate General Counsel, TIAA
and CREF.
Richard J. Adamski, 53.
Vice President and Treasurer, TIAA and CREF, since March 1991; Vice President
and Treasurer, Investment Management and Services, since 1992; Vice President
and Treasurer, Teachers Personal Investors Services, Inc. and Advisors, since
1994. Formerly, Treasurer, TIAA and CREF.
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