As filed with the Securities and Exchange Commission
on October 4, 1996
Registration No. 333-_______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
TIAA REAL ESTATE ACCOUNT
------------------------
(Exact name of registrant as specified in its charter)
New York
--------
(State or other jurisdiction of incorporation or organization)
(Not applicable)
----------------
(Primary Standard Industrial Classification Code Number)
(Not applicable)
----------------
(I.R.S. Employer Identification No.)
c/o Teachers Insurance and Annuity Association of America
730 Third Avenue
New York, New York 10017-3206
(212) 490-9000
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(Address including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Peter C. Clapman, Esquire
Teachers Insurance and Annuity Association of America
730 Third Avenue
New York, New York 10017-3206
(212) 490-9000
----------------------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Paul J. Mason, Esquire
Sutherland, Asbill & Brennan, L.L.P.
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of the registration statement.
<PAGE>
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ] _______
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ] _______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
Pursuant to Rule 429 under the Securities Act, the prospectus contained herein
also relates to and constitutes a post-effective amendment to Securities Act
registration statement 33-92990.
<PAGE>
Calculation of Registration Fee
- --------------------------------------------------------------------------------
Title of each Amount Proposed Proposed Amount of
class of to be maximum maximum registration
securities to registered offering aggregate fee
be registered price offering price
per unit
- --------------------------------------------------------------------------------
Accumulation * * $1,000,000,000** $303,030.31**
units in the
TIAA REAL
ESTATE ACCOUNT
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* The securities are not issued in predetermined amounts or units, and the
maximum aggregate offering price is estimated solely for purposes of determining
the registration fee pursuant to Rule 457(o) under the Securities Act.
** The difference between the $300,000,000 of securities registered on
Securities Act registration statement No. 33-92990 (for which a registration fee
of $103,448.28 was paid therewith) and the dollar amount of securities sold
thereunder is being carried forward on this registration statement pursuant to
Rule 429 under the Securities Act.
- --------------------------------------------------------------------------------
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Item 501(B) of Regulation S-K
Showing Location of Information Required by Form S-1
in Part I (Prospectus) of the Registration Statement
Item of Form S-1 Caption or Location in Prospectus
- ---------------- ---------------------------------
1. Forepart of the Outside Front Cover Page
Registration Statement
and Outside Front Cover
Page of Prospectus
2. Inside Front Cover and Inside Front and Outside Back
Outside Back Cover Pages Cover Page
of Prospectus
3. Summary Information, Risk Summary; The Real Estate Account
Factors and Ratio of and TIAA; Risk Factors
Earnings to Fixed Charges
4. Use of Proceeds (Not Applicable)
5. Determination of Offering (Not Applicable)
Price
6. Dilution (Not Applicable)
7. Selling Security Holders (Not Applicable)
8. Plan of Distribution Distribution of the Contracts
9. Description of Securities Summary; The Annuity Contracts;
to Be Registered Annuity Payments
10. Interests of Named (Not Applicable)
Experts and Counsel
11. Information with Respect Summary; The Real Estate Account
to the Registrant and TIAA; Investment Practices of
the Account; General Investment
and Operating Policies;
Description of Properties; Risk
Factors; Role of TIAA; Conflicts
of Interest; Management's
Discussion and Analysis of
Financial Condition and Results
of Operations; Valuation of
Assets; Management and Investment
Advisory Arrangements; Federal
Income Taxes; State Regulation;
Legal Matters; Experts; Legal
Proceedings; Financial Statements
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<PAGE>
Item of Form S-1 Caption or Location in Prospectus
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12. Disclosure of Commission (Not Applicable)
Position on
Indemnification for
Securities Act
Liabilities
- iv -
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
<PAGE>
Subject to Completion: Dated October 4, 1996
Information contained herein is subject to completion or
amendment. A registration statement relating to these securities has been filed
with the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
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.
<PAGE>
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 , 1996
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<PAGE>
TABLE OF CONTENTS
Page
DEFINITIONS................................................................. 5
SUMMARY ................................................................... 8
THE REAL ESTATE ACCOUNT AND TIAA............................................ 12
INVESTMENT PRACTICES OF THE ACCOUNT......................................... 13
GENERAL INVESTMENT AND OPERATING POLICIES................................... 19
DESCRIPTION OF PROPERTIES................................................... 21
RISK FACTORS................................................................ 21
ROLE OF TIAA................................................................ 27
CONFLICTS OF INTEREST....................................................... 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................. 31
VALUATION OF ASSETS......................................................... 34
MANAGEMENT AND INVESTMENT ADVISORY ARRANGEMENTS............................. 39
EXPENSE DEDUCTIONS.......................................................... 39
THE ANNUITY CONTRACTS....................................................... 40
ANNUITY PAYMENTS............................................................ 56
FEDERAL INCOME TAXES........................................................ 58
GENERAL MATTERS............................................................. 62
DISTRIBUTION OF THE CONTRACTS............................................... 64
PERIODIC REPORTS............................................................ 64
STATE REGULATION............................................................ 65
LEGAL MATTERS............................................................... 65
EXPERTS ................................................................... 65
LEGAL PROCEEDINGS........................................................... 66
ADDITIONAL INFORMATION...................................................... 66
FINANCIAL STATEMENTS........................................................ 66
INDEX TO FINANCIAL STATEMENTS............................................... F-1
APPENDIX A--DESCRIPTION OF PROPERTIES....................................... A-1
APPENDIX B--MANAGEMENT OF TIAA.............................................. B-1
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<PAGE>
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 ("SEC"). 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.
This information can also be obtained through the SEC's Web site on the Internet
(http://www.sec.gov), as part of the SEC's Electronic Data Gathering, Analysis,
and Retrieval (EDGAR) system.
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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 29. 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 39.
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 21. 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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<PAGE>
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 30).
TIAA's guarantee to provide liquidity for the Account under
certain circumstances could also raise conflicts of interest (see "Liquidity
Guarantee," page 28).
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 will
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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<PAGE>
The Real Estate Account is also available through a variety of
income-paying annuity contracts. For details, see "Income Options," on page 51.
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 43, "Possible Restrictions on
Acceptance of Premiums and Transfers," page 44, "Allocation of Premiums," page
44, and "Federal Income Taxes," page 58.
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 39.
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 58.)
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<PAGE>
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.
<TABLE>
<CAPTION>
July 3, 1995
For the Six (commencement of
Months Ended operations) to
June 30, 1996 December 31, 1995
------------- -----------------
(unaudited)
Investment income:
<S> <C> <C>
Real estate income, net:
Rental income ................................... $ 3,933,580 $ 165,762
------------ ------------
Real estate property level expenses and taxes:
Operating expenses ............................ 828,888 29,173
Real estate taxes ............................. $ 405,405 $ 14,659
------------ ------------
Total real estate property
level expenses and taxes ................... 1,234,293 43,832
------------ ------------
Real estate income, net .................... 2,699,287 121,930
Dividends and interest ............................ 2,344,364 2,828,900
------------ ------------
Total investment income ....................... $ 5,043,651 $ 2,950,830
============ ============
Net realized and unrealized
gain on investments ................................. $ 688,885 $ 35,603
============ ============
Net increase in net assets
resulting from operations ........................... $ 5,409,740 $ 2,676,000
============ ============
Net increase in net assets
resulting from participant transactions ............. $ 43,400,243 $117,582,345
============ ============
Net increase in net assets ........................... $ 48,809,983 $120,258,345
============ ============
June 30, 1996 December 31, 1995
------------- -----------------
(unaudited)
Total assets ......................................... $182,242,966 $143,177,421
============ ============
Total liabilities .................................... $ 13,174,638 $ 22,919,076
============ ============
Total net assets ..................................... $169,068,328 $120,258,345
============ ============
Accumulation units outstanding ....................... 1,561,082 1,172,498
========= =========
Accumulation unit value .............................. $106.40 $102.57
======= =======
</TABLE>
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<PAGE>
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 65).
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 June 30, 1996, TIAA employees managed for TIAA's
general account a mortgage portfolio of $20.8 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 June 30, 1996, TIAA employees oversaw for TIAA's general
account a real estate equity portfolio of $7.1 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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<PAGE>
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 over 5,800 institutions. As of June 30,
1996, TIAA's assets were approximately $82.9 billion; the combined assets for
TIAA and CREF totalled approximately $171.8 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
and other cash equivalents, and, to some
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<PAGE>
extent, common or preferred stock of companies that don't primarily own or
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
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<PAGE>
("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 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
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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 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
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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.
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
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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 21 and "Risks of REIT Investments," page 26.
Stock of Companies Involved in Real Estate Activities. The
Account can invest in common or preferred stock of companies 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 and other 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
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organization or, if not rated, that are deemed to be of equivalent quality by
TIAA.
The Account's money market instruments and other 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 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
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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 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.
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DESCRIPTION OF PROPERTIES
As of the date of this prospectus, the Account has purchased
ten properties for its portfolio, consisting of four neighborhood shopping
centers, three multi-family residential complexes, 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 34),
conflicts of interest (see "Conflicts of Interest," page 30), and the
following:
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. Any disputes with tenants could also involve costly
litigation.
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
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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.
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.
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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 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
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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 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.
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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 30).
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 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
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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.
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
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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.
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 28.)
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.
On September 16, 1996, in accordance with a five-year fixed
repayment schedule approved by the New York Insurance Department, TIAA began to
redeem the accumulation units related to its seed money investment. TIAA will
redeem a pro rata
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portion of the accumulation units monthly over a 60-month period (16,666.667
units per month).
TIAA's accumulation units are being redeemed by the Account at
net asset value at the time of redemption.
Because of its seed money investment, TIAA owned accumulation
units representing 62.9% of the Account's net assets, as of June 30, 1996.
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), 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 40.
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.
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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 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
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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 the Mortgage Committee 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 60% of the subcommittee members approve. Before the
term ends, the independent fiduciary can be removed for cause by the vote of the
majority of subcommittee members. In addition, the independent fiduciary can
resign after at least 180 days' written notice. If the independent fiduciary
resigns or is removed, the special subcommittee 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.
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
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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 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.
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The Account's first real estate acquisition closed on November
22, 1995. Through June 30, 1996, the Account acquired a total of nine real
estate properties, representing 50.90% of the Account's total investment
portfolio. These included two industrial properties, three neighborhood shopping
centers, one office property and three apartment complexes. The Account
purchased an additional shopping center property in early July, 1996. The
Account continues to pursue suitable property acquisitions, and is currently in
various stages of negotiations with a number of prospective sellers. While
attractive acquisition prospects are available in the current market, there is
significant competition for the desirable properties.
As of June 30 1996, 49.10% of the Account's portfolio was
invested in marketable securities. These investments consisted of eight real
estate investment trusts (REITs), representing 2.93% of the portfolio, and
various short-term instruments, representing 46.17% of the portfolio.
Results of Operations
- ---------------------
The Account's net investment income, after deduction of all
expenses, was $2,640,397 for the period from July 3 (the Account's inception) to
December 31, 1995 and $4,720,855 for the six months ended June 30, 1996. In
addition, the Account had net realized and unrealized gains on investments of
$35,603 for the period from July 3 to December 31, 1995 and $688,885 for the six
month period ended June 30, 1996. While the Account's gains in 1995 were
generated solely by short-term investments, net unrealized gains on real estate
properties accounted for approximately 88% of the net change in unrealized
appreciation for the six month period ended June 30, 1996. Such gains resulted
from the periodic revaluations of the Account's properties. These gains were
based, in part, on the fact that our experience operating the properties
provided us with better estimates of future income and expenses, and, in part,
on increasing prices for certain property types held by the Account. The
Account's total return was 3.74% for the six month period ended June 30, 1996
and its cumulative total return was 5.11% for the period from October 2, 1995
(the effective date of the Account's initial registration statement) to June 30,
1996.
While much of the Account's investment income received during
1995 was generated by short-term investments, approximately 53.5% of the
Account's total investment income received during the six-month period ended
June 30, 1996 was generated by the Account's real estate holdings, with the
remainder generated by marketable securities investments. As the Account
approaches its goal of being approximately 70% to 80% invested in real estate,
the Account's future investment income will be affected to an even greater
degree by its real estate holdings. Assuming little change in current economic
conditions,
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this anticipated increase in real estate holdings should have a positive impact
on the Account's total return.
The Account's gross real estate income was $165,762 through
December 31, 1995 and $3,933,580 for the six months ended June 30, 1996.
Interest income on the Account's short-term investments totalled $2,820,229
through December 31, 1995 and $2,283,539 for the six month period ended June 30,
1996. Dividend income on the Account's investments in REITs totalled $8,671 and
$60,825, respectively, for the same periods. Total property-level expenses
through December 31, 1995 were $43,832 and were comprised of real estate taxes
and other operating expenses. Total property-level expenses for the six months
ended June 30, 1996 were $1,234,293 of which $405,405 were attributable to real
estate taxes and $828,888 to other operating expenses. The Account also incurred
expenses through December 31, 1995 and for the six month period ended June 30,
1996 of $228,136 and $180,588, respectively, for investment advisory services
provided by TIAA, $66,320 and $123,311, respectively, for administrative and
distribution services provided by TIAA-CREF Individual and Institutional
Services, Inc. and $16,582 and $18,897, respectively, for the mortality and
expense risks assumed and the 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, the Account has received over $61.2 million in premiums and net
participant transfers from accumulations in other TIAA and CREF accounts since
it began operating through June 30, 1996. It earned $7,361,252 in net investment
income in that period. The Account purchased real estate properties costing
$85,317,574 million through June 30, 1996. At June 30, 1996, the Account's
liquid assets (i.e., its short-term investments, REIT investments and cash) had
a value of $83,200,719. We expect that much of this amount will be used by the
Account to purchase additional suitable real estate properties, as opportunities
become available. The remaining assets will continue to be invested in
marketable securities to meet expense needs and redemption requests (e.g., cash
withdrawals or transfers).
If the Account's cash flows from operating activities,
participant transactions and liquid investments aren't enough to meet its cash
needs including redemption requests, TIAA's general account will purchase
liquidity units in accordance with the liquidity guarantee.
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On September 16, 1996, in accordance with a five-year fixed
repayment schedule approved by the New York Insurance Department, TIAA began to
redeem the accumulation units related to its seed money investment. TIAA will
redeem a pro rata portion of the accumulation units monthly over a 60-month
period (16,666.667 units per month).
No major capital expenditures for any of the properties
purchased through June 30, 1996 have been made 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 the Account to incur any
major construction costs or leasing commissions in order to re-lease that space.
For the apartment complexes, we expect the Account 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 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 39).
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
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remain in effect until the next March 31 (for more, see "Annuity Payments," page
56).
Our valuation procedures are described below. The independent
fiduciary approves these procedures and any changes to them (see page 29).
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 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.
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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.
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
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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 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
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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 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.
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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 29).
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 13).
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.
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.
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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.
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 Rees 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
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<PAGE>
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 51. 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 already 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 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
(and, in limited cases, other types of employer-sponsored plans). 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.
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<PAGE>
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 47).
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).
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
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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 59.
(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 58.
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 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
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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 58).
Ordinarily (subject to any temporary restriction on acceptance
of premiums and transfers, 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 and Transfers
- -------------------------------------------------------------
From time to time we may stop accepting premiums for and/or
transfers into the Account. We might do so if, for example, we can't find enough
appropriate real estate-related investment opportunities at a particular time.
Whenever reasonably possible, we will notify you before we decide to restrict
premiums and/or transfers. However, because we may need to respond quickly to
changing market conditions, we reserve the right to stop accepting premiums
and/or transfers at any time without prior notice.
If we decide to stop accepting premiums into the Account,
amounts that would otherwise be allocated to the Account will be allocated to
the CREF Money Market Account instead, unless you give us other allocation
instructions. We will not transfer these amounts out of the CREF Money Market
Account when the restriction period is over, unless you request that we do so.
However, we will resume allocating premiums to the Account on the date we remove
the restrictions.
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
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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 50, and "Death Benefits," page 53.
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 39). We 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.
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<PAGE>
The valuation of accumulation units will be reviewed and
approved by the independent fiduciary (see page 29).
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 63).
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 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 (subject to any temporary restrictions on acceptance of
transfers, described above). However, because excessive transfer activity can
hurt Account performance and other participants, we reserve the right to limit
transfer frequency or otherwise modify the transfer privilege in the future. You
can also transfer on a limited basis during the annuity period (see page 51).
Currently, we don't charge you for transfers to CREF or to TIAA's traditional
annuity.
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<PAGE>
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 48 and "Federal Income Taxes," page 58.
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 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
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<PAGE>
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 58.
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. 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 63.
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
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<PAGE>
$155,000 in one year. Pursuant to recently enacted legislation, the excess
distribution taxes will not apply in 1997, 1998 and 1999. (Note that if you are
a resident of Puerto Rico, the tax rules that apply to your plan may differ.)
For details, see "Federal Income Taxes," page 58.
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 53);
(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 50). There are limited exceptions to the
waiver requirement -- contact TIAA for more information.
For more on spousal rights, see "Death Benefits," page 53.
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 (see page 58).
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.
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<PAGE>
The Annuity Period
- ------------------
The Real Estate Account is available (subject to regulatory
approval) through a variety of income options. See "Income Options," on page 51.
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 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 58. 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 62). Currently your annuity
starting date can't be later than April 1 of the year following the calendar
year when you reach age 70-1/2, even if you expect to work beyond then, although
there are exceptions if you're in a public institution's plan or certain church
plans. However, beginning in 1997, pursuant to recently enacted legislation,
your annuity starting date can be April 1 of the year following the calendar
year when you either reach age 70-1/2 or retire, whichever is later.
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
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<PAGE>
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 63.) 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 (subject to the terms of your retirement plan) 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 56.
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 plan, the IRC and ERISA may limit which income options you can use to
receive income from an
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<PAGE>
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 49.
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 requirements (see page 61). 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
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allow you to elect this option earlier -- contact TIAA for more information. See
"Contacting TIAA," page 63.
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 63.
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 47).
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 58, as well as
"Spousal Rights," page 49.
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 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 58.) You or your beneficiary can use more than one method of payment, but
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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 63). Your
accumulation will continue participating in the investment experience of your
account up to 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
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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 59.) 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 63.
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 52), 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 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
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<PAGE>
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 59.
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.
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
- 56 -
<PAGE>
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 51, 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 amount of $1.00 per month beginning on May 1 and continuing
for as long as such annuity units are payable. The
- 57 -
<PAGE>
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 45) 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 29).
FEDERAL INCOME TAXES
With limited exceptions, 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 business income. If necessary to maintain our tax-
- 58 -
<PAGE>
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 usually can 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.
- 59 -
<PAGE>
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 until
1997);
(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).
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<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. Pursuant to recently enacted legislation,
this excess distribution tax will not apply in 1997, 1998 and 1999.
Death Benefits
- --------------
Ordinarily, death benefits are subject to federal estate tax
(see "Tax Advice," page 62). 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. However, beginning
in 1997, pursuant to recently enacted legislation, payments under 401(a),
403(a), and 403(b) plans need not begin until April 1 of the year following the
calendar year when you either reach age 70-1/2 or retire, whichever is later.
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 52.)
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<PAGE>
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.
Puerto Rico Residents
- ---------------------
If you are a resident of Puerto Rico, special tax and
withholding rules may apply to your plans, since ordinarily your contracts are
issued under plans that qualify under the Puerto Rico tax code, which is not
identical to the IRC. For information on your tax situation, consult with your
employer or a qualified tax advisor.
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 51).
- 62 -
<PAGE>
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. (You can also execute these transactions over the Internet
through our new Inter/ACT system.) 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.
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.
- 63 -
<PAGE>
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.
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 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;
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<PAGE>
(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.
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
- 65 -
<PAGE>
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, or through the SEC's Web site on the Internet
(http://www.sec.gov).
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.
- 66 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
TIAA REAL ESTATE ACCOUNT
FINANCIAL STATEMENTS:
Report of Management Responsibility....................................... F-3
Report of Independent Auditors............................................ F-4
Statements of Assets and Liabilities...................................... F-5
Statements of Operations.................................................. F-6
Statements of Changes in Net Assets....................................... F-7
Statements of Cash Flows.................................................. F-8
Notes to Financial Statements............................................. F-9
Statements of Investments................................................. F-14
PROFORMA CONDENSED FINANCIAL STATEMENTS:
Proforma Condensed Statement of Assets
and Liabilities.......................................................... F-18
Proforma Condensed Statement of Operations................................. F-18
Notes to Proforma Condensed Financial Statements........................... F-19
THE GREENS AT METROWEST APARTMENTS AND
BRIXWORTH-ATLANTA APARTMENTS:
Independent Auditors' Report............................................... F-20
Combined Statement of Revenues and Certain Expenses........................ F-21
Notes to Combined Statement of Revenues
and Certain Expenses..................................................... F-22
THE MILLBROOK COLLECTION AND THE
LYNNWOOD COLLECTION RETAIL CENTERS:
Independent Auditors' Report............................................... F-23
Combined Statement of Revenues and Certain Expenses........................ F-24
Notes to Combined Statement of Revenues
and Certain Expenses..................................................... F-25
F - 1
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
Condensed Unaudited Financial Statements.................................. F-27
Supplemental Information to Condensed Unaudited Financial
Statements.............................................................. F-29
F - 2
<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 1995 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.
/s/ John H. Biggs
----------------------------
Chairman and
Chief Executive Officer
/s/ Thomas W. Jones
----------------------------
Vice Chairman, President and
Chief Operating Officer
/s/ Richard L. Gibbs
----------------------------
Executive Vice President and
Principal Accounting Officer
F-3
<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 these 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 as of 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
F-4
[logo]
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
<PAGE>
TIAA REAL ESTATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments, at value:
Real estate properties
(Cost:$85,317,574 and $43,989,665)................................... $ 85,885,380 $ 43,989,665
Marketable securities
(Amortized cost: $82,753,934 and $73,972,831)......................... 82,854,516 73,992,569
Cash.................................................................... 346,203 396,787
Receivable from securities transactions................................. 10,700,000 23,150,000
Other................................................................... 2,456,867 1,648,400
------------ ------------
TOTAL ASSETS 182,242,966 143,177,421
------------ ------------
LIABILITIES
Payable for securities transactions..................................... 10,832,809 22,788,035
Other................................................................... 2,341,829 131,041
------------ ------------
TOTAL LIABILITIES 13,174,638 22,919,076
------------ ------------
NET ASSETS
Accumulation Fund....................................................... 166,106,139 120,258,345
Annuity Fund............................................................ 2,962,189 --
------------ ------------
TOTAL NET ASSETS $169,068,328 $120,258,345
============ ============
NUMBER OF ACCUMULATION UNITS
OUTSTANDING--Notes 6 and 7............................................... 1,561,082 1,172,498
========= =========
NET ASSET VALUE, PER ACCUMULATION UNIT--Note 6............................ $106.40 $102.57
========= =========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
TIAA REAL ESTATE ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the For the Period
Six July 3, 1995
Months (Commencement
Ended of Operations)
June 30, to December 31,
1996 1995
---------- ---------------
(Unaudited)
<S> <C> <C>
INVESTMENT INCOME
Income:
Real estate income, net:
Rental income..................................................... $3,933,580 $ 165,762
--------- ----------
Real estate property level expenses and taxes:
Operating expenses.............................................. 828,888 29,173
Real estate taxes............................................... 405,405 14,659
---------- ----------
Total real estate property level
expenses and taxes 1,234,293 43,832
---------- ----------
Real estate income, net 2,699,287 121,930
Interest............................................................ 2,283,539 2,820,229
Dividends........................................................... 60,825 8,671
---------- ----------
TOTAL INCOME 5,043,651 2,950,830
---------- ----------
Expenses--Note 3:
Investment advisory................................................. 180,588 228,136
Administrative...................................................... 123,311 66,320
Mortality and expense risk charges.................................. 18,094 8,291
Liquidity guarantee charges......................................... 803 8,291
---------- ----------
TOTAL EXPENSES 322,796 311,038
Fees paid indirectly ............................................... -- (605)
---------- ----------
NET EXPENSES 322,796 310,433
---------- ----------
INVESTMENT INCOME, NET 4,720,855 2,640,397
---------- ----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Net realized gain on marketable securities.......................... 40,235 15,865
---------- ----------
Net change in unrealized appreciation on:
Real estate properties .......................................... 567,806 --
Marketable securities............................................. 80,844 19,738
---------- ----------
Net change in unrealized appreciation 648,650 19,738
---------- ----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 688,885 35,603
---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $5,409,740 $2,676,000
========== ==========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
TIAA REAL ESTATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the Period
Six July 3, 1995
Months (Commencement
Ended of Operations)
June 30, to December 31,
1996 1995
---------- ---------------
(Unaudited)
<S> <C> <C>
FROM OPERATIONS
Investment income, net............................................... $ 4,720,855 $ 2,640,397
Net realized gain on investments..................................... 40,235 15,865
Net change in unrealized appreciation
on investments..................................................... 648,650 19,738
------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 5,409,740 2,676,000
------------ ------------
FROM PARTICIPANT TRANSACTIONS
TIAA seed money contributed - Note 1................................. -- 100,000,000
Premiums............................................................. 3,052,001 500,421
Disbursements and transfers:
Net transfers from TIAA............................................ 4,335,446 2,901,675
Net transfers from CREF Accounts................................... 36,273,968 14,204,597
Annuity and other periodic payments................................ (42,370) (718)
Withdrawals........................................................ (192,124) (23,630)
Death benefits..................................................... (26,678) --
------------ ------------
INCREASE IN NET ASSETS RESULTING
FROM PARTICIPANT TRANSACTIONS 43,400,243 117,582,345
------------ ------------
NET INCREASE IN NET ASSETS 48,809,983 120,258,345
NET ASSETS
Beginning of period.................................................. 120,258,345 --
------------ ------------
End of period........................................................ $169,068,328 $120,258,345
============ ============
</TABLE>
See notes to financial statements.
F-7
<PAGE>
TIAA REAL ESTATE ACCOUNT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the For the Period
Six July 3, 1995
Months (Commencement
Ended of Operations)
June 30, to December 31,
1996 1995
---------- ---------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets
resulting from operations........................................... $ 5,409,740 $ 2,676,000
Adjustments to reconcile net increase
in net assets resulting from operations
to net cash used in operating activities:
Increase in investments........................................... (50,757,662) (117,982,234)
(Increase) Decrease in receivable from
securities transactions ....................................... 12,450,000 (23,150,000)
Increase in other assets.......................................... (808,467) (1,648,400)
Increase (Decrease) in payable for
securities transactions ...................................... (11,955,226) 22,788,035
Increase in other liabilities..................................... 2,210,788 131,041
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (43,450,827) (117,185,558)
------------ ------------
CASH FLOWS FROM PARTICIPANT TRANSACTIONS
TIAA seed money contributed.......................................... -- 100,000,000
Premiums............................................................. 3,052,001 500,421
Disbursements and transfers:
Net transfers from TIAA............................................ 4,335,446 2,901,675
Net transfers from CREF Accounts................................... 36,273,968 14,204,597
Annuity and other periodic payments................................ (42,370) (718)
Withdrawals........................................................ (192,124) (23,630)
Death benefit...................................................... (26,678) --
------------ ------------
NET CASH PROVIDED BY PARTICIPANT TRANSACTIONS 43,400,243 117,582,345
------------ ------------
NET INCREASE (DECREASE) IN CASH (50,584) 396,787
CASH
Beginning of period.................................................. 396,787 --
------------ ------------
End of period........................................................ $ 346,203 $ 396,787
============ ============
</TABLE>
See notes to financial statements.
F-8
<PAGE>
TIAA REAL ESTATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(Information relating to
June 30, 1996 and
the six months then ended
is unaudited.)
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 and June 30, 1996, amounts retained by TIAA in the Account
remained at 1,000,000, Accumulation Units with a total value of $102,565,900 and
$106,404,500, respectively.
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 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
F-9
<PAGE>
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 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 performs a valuation review of each real
estate property on a quarterly basis and updates the property value if it
believes that the value of the property has changed since the previous valuation
review or appraisal. The independent fiduciary reviews and approves any such
valuation adjustments which exceed certain prescribed limits. TIAA continues 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.
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
F-10
<PAGE>
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.
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 which were purchased during 1995 been
acquired at July 3, 1995 (Commencement of Operations), rental income and real
estate property level expenses and taxes for the period July 3, 1995 through
December 31, 1995 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 for the period July 3, 1995 through December 31, 1995 would
have been an increase of approximately $567,000, if the real estate properties
acquired during 1995 had been acquired at July 3, 1995. Had the Account's real
estate properties which were purchased during 1996 been acquired at January 1,
1996, rental income and real estate property level expenses and taxes for the
six months ended June 30, 1996 would have increased by approximately $1,532,000
and $615,000, respectively. In addition, interest income would have decreased by
approximately $746,000. Accordingly, the total pro forma effect on the Account's
net investment income for the six months ended June 30, 1996 would have been an
increase of approximately $171,000, if the real estate properties acquired
during 1996 had been acquired at January 1, 1996.
Note 5--Leases
The Account's real estate properties are leased to tenants under operating lease
agreements which expire on various dates through 2015. As of December 31, 1995,
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>
For the For the Period
Six July 3, 1995
Months (Commencement
Ended of Operations)
June 30, to December 31,
1996 1995
---------- ---------------
(Unaudited)
<S> <C> <C>
Per Accumulation Unit Data:
Rental income.............................................................. $ 2.819 $ 0.159
Real estate property level expenses and taxes.............................. 0.884 0.042
------- ---------
Real estate income, net 1.935 0.117
Dividends and interest..................................................... 1.680 2.716
------- ---------
Total income 3.615 2.833
Expense charges (1)........................................................ 0.231 0.298
------- ---------
Investment income, net 3.384 2.535
Net realized and unrealized gain on investments............................ 0.455 0.031
------- ---------
Net increase in Accumulation Unit Value...................................... 3.839 2.566
Accumulation Unit Value:
Beginning of period........................................................ 102.566 100.000
-------- ---------
End of period.............................................................. $106.405 $102.566
======== =========
Total return................................................................. 3.74% 2.57%
Ratios to Average Net Assets:
Expenses (1)............................................................... 0.22% 0.30%
Investment income, net..................................................... 3.26% 2.51%
Portfolio turnover rate:
Real estate properties.................................................... 0% 0%
Securities................................................................ 19.67% 0%
Thousands of Accumulation Units
outstanding at end of period................................................ 1,561 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 for the six months ended
June 30, 1996 would be $1.115 ($0.340 for the period July 3, 1995 through
December 31, 1995) and the Expenses Ratio to Average Net Assets for the six
months ended June 30, 1996 would be 1.07% (0.34% for the period July 3,
1995 through December 31, 1995).
F-12
<PAGE>
Note 7--Accumulation Units
Changes in the number of Accumulation Units outstanding were as follows:
<TABLE>
<CAPTION>
For the For the Period
Six July 3, 1995
Months (Commencement
Ended of Operations)
June 30, to December 31,
1996 1995
---------- ---------------
(Unaudited)
<S> <C> <C>
Accumulation Units:
Credited for premiums and TIAA seed
money investment......................................................... 29,214 1,004,905
Credited for net transfers
and disbursements......................................................... 359,370 167,593
Outstanding:
Beginning of period........................................................ 1,172,498 --
--------- ----------
End of period.............................................................. 1,561,082 1,172,498
========= ==========
</TABLE>
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 in February
1996. As of June 30, 1996, the Account had outstanding commitments to purchase
real estate properties (subject to various closing conditions) of approximately
$20.5 million. Of that amount, a purchase of real estate property totalling
approximately $13.0 million was closed in July 1996.
F-13
<PAGE>
TIAA REAL ESTATE ACCOUNT
STATEMENT OF INVESTMENTS (Unaudited)
JUNE 30, 1996
REAL ESTATE PROPERTIES--50.90%
<TABLE>
<CAPTION>
Location Description Value
-------- ----------- -----
<S> <C> <C>
Atlanta, Georgia (1) Apartments......................................... $15,705,000
El Paso, Texas (2) Industrial building................................ 4,500,000
Fridley, Minnesota (1) Industrial building................................ 4,150,000
Littleton, Colorado (1) Apartments......................................... 17,664,248
Ocoee, Florida (1) Shopping Center.................................... 7,365,000
Orlando, Florida (1) Apartments......................................... 12,529,106
Phoenix, Arizona (1) Office building.................................... 10,500,000
Raleigh, North Carolina (1) Shopping center.................................... 6,769,308
Raleigh, North Carolina (1) Shopping center.................................... 6,702,718
----------
TOTAL REAL ESTATE PROPERTIES
(Cost $85,317,574)................................................................... 85,885,380
----------
</TABLE>
(1) Fee interest
(2) Leasehold interest
MARKETABLE SECURITIES--49.10%
<TABLE>
<CAPTION>
Shares Issuer Value
------ ------ -----
REAL ESTATE INVESTMENT TRUSTS--2.93%:
<C> <S> <C>
30,000 Associated Estates Realty Corporation................................... 630,000
25,000 Avalon Properties, Inc.................................................. 543,750
25,000 Camden Property Trust................................................... 593,750
29,000 Cali Realty Corporation................................................. 703,250
29,000 CBL & Associates Properties, Inc........................................ 648,875
20,000 Colonial Properties Trust............................................... 485,000
25,000 Hospitality Properties Trust............................................ 668,750
26,000 Weeks Corporation....................................................... 676,000
--------
TOTAL REAL ESTATE INVESTMENT TRUSTS
(Cost $4,825,683)........................................................................ 4,949,375
---------
</TABLE>
See notes to financial statements.
F-14
<PAGE>
<TABLE>
<CAPTION>
Principal Issuer, Coupon and Maturity Date Value
- --------- -------------------------------- -----
COMMERCIAL PAPER--41.53%:
<C> <S> <C>
$ 6,279,000 Associates Corporation of North America
5.27% 07/03/96........................................................... $ 6,276,007
10,000,000 Coca-Cola Company
5.30% 07/29/96............................................................ 9,955,755
7,650,000 Conagra, Inc.
5.55% 07/29/96............................................................ 7,615,601
5,200,000 Dupont (E.I.) De Nemours & Co.
5.35% 07/24/96............................................................ 5,180,965
7,320,000 Goldman Sachs Group
5.33% 08/05/96............................................................ 7,279,826
4,860,000 Heinz Corporation
5.36% 07/11/96............................................................ 4,851,742
4,893,000 Phillip Morris Co.
5.28% 08/01/96............................................................ 4,869,111
9,120,000 Schering Corporation
5.27% 07/16/96............................................................ 9,097,681
5,000,000 UBS Finance, Inc.
5.58% 07/01/96............................................................ 4,999,234
10,000,000 Whirlpool Finance Corporation
5.38% 08/07/96............................................................ 9,941,545
-----------
TOTAL COMMERCIAL PAPER
(Amortized cost $70,085,407)......................................................... 70,067,467
-----------
GOVERNMENT AGENCIES--4.64%:
8,000,000 Federal National Mortgage Association
5.20% 11/14/96............................................................ 7,837,674
-----------
TOTAL GOVERNMENT AGENCIES
(Amortized cost $7,842,844).......................................................... 7,837,674
-----------
TOTAL MARKETABLE SECURITIES
(Amortized cost $82,753,934).................................................................. 82,854,516
-----------
TOTAL INVESTMENTS--100.00%
(Cost $168,071,508).......................................................................... $168,739,896
============
</TABLE>
See notes to financial statements.
F-15
<PAGE>
TIAA REAL ESTATE ACCOUNT
STATEMENT OF INVESTMENTS
DECEMBER 31, 1995
REAL ESTATE PROPERTIES--37.28%
<TABLE>
<CAPTION>
Location Description Value
-------- ----------- -----
<S> <C> <C>
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
------------
</TABLE>
(1) Fee interest
(2) Leasehold interest
MARKETABLE SECURITIES--62.72%
REAL ESTATE INVESTMENT TRUST--.37%:
<TABLE>
<CAPTION>
Shares Issuer Value
- ------ ------ -----
<C> <S> <C>
15,000 Reckson Associates Realty................................... 440,625
------------
TOTAL REAL ESTATE INVESTMENT TRUST
(Cost $402,000)......................................................... 440,625
------------
</TABLE>
See notes to financial statements.
F-16
<PAGE>
COMMERCIAL PAPER--18.17%:
<TABLE>
<CAPTION>
Principal Issuer, Coupon and Maturity Date Value
- --------- -------------------------------- -----
<C> <S> <C>
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)................................................... $117,982,234
============
</TABLE>
See notes to financial statements.
F-17
<PAGE>
TIAA REAL ESTATE ACCOUNT
PROFORMA CONDENSED
STATEMENT OF ASSETS AND LIABILITIES (Unaudited)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Proforma
Historical Adjustments Proforma
---------- ----------- --------
<S> <C> <C> <C>
ASSETS
Investments, at value:
Real estate properties ....................$ 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
============ =========== ============
</TABLE>
F - 18
<PAGE>
TIAA REAL ESTATE ACCOUNT
NOTES TO PROFORMA CONDENSED FINANCIAL STATEMENTS (Unaudited)
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 May 1,
1996 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 May 1, 1996 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 May 1, 1996 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 May 1,
1996 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 May 1, 1996 had been
purchased as of July 3, 1995.
F-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
Condensed Unaudited Financial Statements
(Condensed unaudited financial statements for 1995 and 1994 have
been derived from audited financial statements which
are available upon request.)
TIAA Condensed Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Bonds.......................................................... $51,788,660 $48,835,831 $43,778,518
Mortgages...................................................... 20,751,660 21,000,279 20,216,879
Real estate ................................................. 7,130,277 7,013,053 7,075,385
Stocks......................................................... 220,487 223,028 163,284
Other long-term investments.................................... 438,000 476,804 383,816
Cash and short-term investments................................ 774,132 713,051 431,446
Investment income due
and accrued................................................... 1,165,018 1,118,708 1,073,386
Separate Account assets........................................ 364,219 209,170 30,563
Other assets................................................... 274,140 204,689 194,557
----------- ----------- -----------
Total Assets................................................... $82,906,593 $79,794,613 $73,347,834
=========== =========== ===========
LIABILITIES
- ------------------------------------------------------------------------------------------------------------
Policy and contract reserves................................... $73,230,209 $70,983,831 $65,656,735
Dividends declared for the
following year................................................ 1,639,977 1,493,744 1,382,681
Asset Valuation Reserve........................................ 2,055,641 1,860,868 1,664,696
Interest Maintenance Reserve................................... 688,192 621,366 544,660
Separate Account liabilities................................... 257,814 106,512 5,293
Other liabilities.............................................. 649,537 672,112 655,945
----------- ----------- -----------
Total Liabilities.............................................. $78,521,370 $75,738,433 $69,910,010
----------- ----------- -----------
CAPITAL & CONTINGENCY RESERVES
- ------------------------------------------------------------------------------------------------------------
Capital........................................................ $ 2,500 $ 2,500 $ 2,500
----------- ----------- -----------
Contingency reserves:
For group life insurance..................................... 8,248 7,762 6,822
For investment losses,
annuity and insurance
mortality, and other risks.................................. 4,374,475 4,045,918 3,428,502
----------- ----------- -----------
Total contingency reserves..................................... 4,382,723 4,053,680 3,435,324
----------- ----------- -----------
Total Capital and
Contingency Reserves.......................................... 4,385,223 4,056,180 3,437,824
----------- ----------- -----------
Total Liabilities, Capital
and Contingency Reserves...................................... $82,906,593 $79,794,613 $73,347,834
=========== =========== ===========
</TABLE>
F-27
<PAGE>
TIAA Condensed Statements of Operations and
Changes in Contingency Reserves
(in thousands)
<TABLE>
<CAPTION>
For the Six For the Years Ended
Months Ended December 31,
INCOME June 30, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Insurance and annuity premiums
and deposits...................................................... $1,401,839 $2,854,600 $ 2,785,546
Transfers from CREF, net........................................... 39,666 351,869 191,583
Annuity dividend additions......................................... 1,000,682 1,943,614 1,844,417
Net investment income.............................................. 3,191,458 6,108,497 5,486,071
Supplementary contract
considerations.................................................... 99,409 150,976 105,000
---------- ---------- -----------
Total Income....................................................... $5,733,054 $11,409,556 $10,412,617
========== =========== ===========
DISTRIBUTION OF INCOME
- -----------------------------------------------------------------------------------------------------------
Policy and contract benefits....................................... $ 902,979 $1,718,597 $1,538,302
Dividends to policyholders and beneficiaries....................... 1,703,387 3,098,931 2,874,077
Increase in policy and
contract reserves................................................. 2,415,795 5,329,040 5,043,786
Operating expenses................................................. 120,581 241,795 216,465
Net transfers to
separate accounts................................................. 132,339 92,995 4,271
Federal income taxes............................................... 6,930 9,488 9,844
Other, net......................................................... 6,373 (4,380) (2,972)
Increase in contingency
reserves.......................................................... 444,670 923,090 728,844
---------- ---------- ----------
Total Distribution
of Income........................................................ $5,733,054 $11,409,556 $10,412,617
========== =========== ===========
CHANGES IN CONTINGENCY RESERVES
- -----------------------------------------------------------------------------------------------------------
From operations................................................... $ 444,670 $ 923,090 $ 728,844
Net realized capital gain (loss)
on investments................................................... 177,678 (56,265) (95,071)
Net unrealized capital gain
on investments................................................... 9,672 52,706 38,907
Transfer to Interest
Maintenance Reserve.............................................. (103,281) (114,840) (170,430)
Transfers from (to) the
Asset Valuation Reserve:
Required formula contribution................................... (111,748) (302,387) (249,405)
Net capital (gains) losses...................................... (83,025) 106,215 226,639
Voluntary contribution.......................................... -- -- (193,508)
Increase in nonadmitted assets
other than investments........................................... (8,762) (803) (22,195)
Change in valuation basis of
policy reserves.................................................. -- -- 2,314
Other, net........................................................ 3,839 10,640 1,522
---------- ----------- ----------
Net Change in Contingency
Reserves......................................................... 329,043 618,356 267,617
Contingency reserves at
beginning of year................................................ 4,053,680 3,435,324 3,167,707
---------- ----------- ----------
Contingency Reserves
at End of Period................................................. $4,382,723 $4,053,680 $3,435,324
========== ========== ==========
</TABLE>
F-28
<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:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995 1994
---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
As a percentage of total bond investments:
Below investment grade bonds ................................... 5% 5% 6%
As a percentage of total mortgage investments:
Below investment grade mortgage loans .......................... 5% 4% 5%
Total mortgage investments in California ....................... 24% 24% 26%
Total mortgage investments in office buildings ................. 41% 41% 42%
Total mortgage investments in shopping centers ................. 31% 31% 31%
As a percentage of total real estate investments:
Total real estate investments in Minnesota ..................... 11% 12% 12%
Total real estate investments in California .................... 12% 12% 12%
Total real estate investments in office buildings .............. 64% 62% 60%
</TABLE>
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 June 30, 1996, December 31, 1995 and
December 31, 1994, TIAA had interest rate swap contracts with commercial banks
related to $110,000,000, $110,000,000 and $105,000,000, respectively, par value
of variable interest rate notes, and asset swap contracts outstanding related to
$238,701,000, $245,462,000 and $115,211,000, respectively, of investments
denominated in foreign currencies.
F-29
<PAGE>
APPENDIX A
DESCRIPTION OF PROPERTIES
MULTI-FAMILY RESIDENTIAL COMPLEXES
Monte Vista Apartments -- Littleton, Colorado
- ---------------------------------------------
On June 21, 1996, the Account purchased the fee interest in Monte Vista
Apartments, a luxury garden apartment complex located in Littleton, Colorado,
for a purchase price of approximately $17.6 million. The property is not subject
to a mortgage.
Monte Vista Apartments was built in 1995, and is located on
approximately 15.1 acres of land. The complex consists of 219 one- and
two-bedroom units in 22 two-story buildings, with units containing such
amenities as 9 foot ceilings, a gas fireplace and an attached garage. Building
exteriors are brick and siding. There are 221 uncovered parking spaces in
addition to the garages. Residents have use of an on-site clubhouse, a fully
equipped exercise center and swimming pool. The complex is currently 95%
occupied with monthly rents averaging $916.00 per unit. Rents are comparable
with competitive complexes in the locality and are not subject to rent
regulation. The Account will be responsible for the expenses of operating the
property.
Littleton is located 10 miles southwest of downtown Denver. Denver, the
capital of Colorado, is the largest city in the seven-state Rocky Mountain
region. The population of the Denver metropolitan area, which includes
Littleton, has grown steadily during the past ten years and is expected to
continue to expand into the near future.
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
A - 1
<PAGE>
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 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.
A - 2
<PAGE>
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.
NEIGHBORHOOD SHOPPING CENTERS
River Oaks Shopping Center - Woodbridge, Virginia
- -------------------------------------------------
On July 12, 1996, the Account purchased, through a wholly-owned
subsidiary, the fee interest in River Oaks Shopping Center, a 90,885 square foot
neighborhood shopping center located in Woodbridge, Virginia, for a purchase
price of approximately $13.0 million. The property is not subject to a mortgage.
The center, built in 1995, is located on approximately 10.42 acres of
land with space for 402 cars. It is currently 94% occupied and is anchored by a
64,885 square foot Giant supermarket, a regional supermarket chain. Rents,
including a rent guarantee from the seller for the 6% of vacant space, average
$14.15 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 17% of the center's space expire;
those leases together represent total annual rent payments of $288,088 in the
year of their expiration. The Giant lease expires in the year 2021.
A - 3
<PAGE>
The center is located 25 miles south of Washington, D.C. in Prince
William County. The Washington, D.C. metropolitan area has grown significantly
since 1980, with a current population of approximately 4.5 million people.
Woodbridge has been developing as a bedroom community for workers commuting to
Washington, D.C. and to neighboring Fairfax County.
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
A - 4
<PAGE>
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.
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 $4.1 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.
A - 5
<PAGE>
Set forth below are further details relating to each facility:
<TABLE>
<CAPTION>
Lease
Building Year Current Major Expira-
Property Size Built Occupancy Tenants tion Date
(sq. ft.)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
A - 6
<PAGE>
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, 64.
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.
Willard T. Carleton, 62.
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.
Of Counsel to the law firm of Dublirer, Haydon, Straci & Victor. Professor of
English as a Second Language, Middlesex County College, since October 1995.
Formerly, President, Middlesex County College until October 1995.
Estelle A. Fishbein, 62.
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, 59.
Professor, Department of Sociology and Urban Affairs Programs, and Director,
African Diaspora Research Project, Michigan State University.
Dorothy Ann Kelly, O.S.U., 67.
President, College of New Rochelle.
Robert M. O'Neil, 62.
Professor of Law, University of Virginia and Director, The Thomas Jefferson
Center for the Protection of Free Expression.
B - 1
<PAGE>
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, 47.
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, 61.
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, 59.
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.
Rosalie J. Wolf, 55.
Treasurer and Chief Investment Officer, The Rockefeller Foundation. Formerly,
Managing Director, Bankers Trust Company, from 1989 to 1993.
Officer-Trustees
- ----------------
John H. Biggs, 60.
Chairman and Chief Executive Officer, TIAA and CREF, since 1993. Formerly,
President and Chief Operating Officer, TIAA and CREF.
Thomas W. Jones, 47.
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, 60.
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.
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;
B - 2
<PAGE>
Executive Vice President, Teachers Advisors, ("Advisors") since 1995. Formerly,
Vice President, Finance, TIAA and CREF.
Albert J. Wilson, 64.
Vice President and Chief Counsel, Corporate Secretary, TIAA and CREF, since
1991.
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.
B - 3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN A PROSPECTUS
<PAGE>
ITEM 13. Other Expenses Of Issuance And Distribution.
-------------------------------------------
SEC Registration Fees $ 303,030.31
Costs of printing and
engraving 400,000.00*
Legal fees 2,500.00*
Accounting fees 5,000.00*
TOTAL $ 710,530.31*
----------
* - Approximate
ITEM 14. Indemnification Of Directors And Officers.
------------------------------------------
Trustees, officers, and employees of TIAA may be indemnified
against liabilities and expenses incurred in such capacity pursuant to Article
Six of TIAA's bylaws (see Exhibit 3(B)). Article Six provides that, to the
extent permitted by law, TIAA will indemnify any person made or threatened to be
made a party to any action, suit or proceeding by reason of the fact that such
person is or was a trustee, officer, or employee of TIAA or, while a trustee,
officer, or employee of TIAA, served any other organization in any capacity at
TIAA's request. To the extent permitted by law, such indemnification could
include judgments, fines, amounts paid in settlement, and expenses, including
attorney's fees. TIAA has in effect an insurance policy that will indemnify its
trustees, officers, and employees for liabilities arising from certain forms of
conduct.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers, or employees of
TIAA, pursuant to the foregoing provision or otherwise, TIAA has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in that Act and is
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment of expenses incurred or paid by a
trustee, officer, or employee in the successful defense of any action, suit or
proceeding) is asserted by a trustee, officer, or employee in connection with
the securities being registered, TIAA will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in that Act and will be governed by the final
adjudication of such issue.
ITEM 15. Recent Sales Of Unregistered Securities.
----------------------------------------
On July 3, 1995, the Account issued 1,000,000 accumulation
units to TIAA, at $100 per unit, in consideration of TIAA's $100,000,000 seed
money investment. This transaction was exempt from registration under Section
4(2) of the Securities Act of 1933.
II - 1
<PAGE>
ITEM 16. Exhibits And Financial Statement Schedules.
-------------------------------------------
(a) Exhibits
--------
(1) Distribution and Administrative Services Agreement by and
between TIAA and TIAA-CREF Individual & Institutional
Services, Inc. (as amended)*
(3) (A) Charter of TIAA (as amended)*
(B) Bylaws of TIAA (as amended)**
(4) (A) Forms of RA, GRA, GSRA, SRA, and IRA Real Estate Account
Contract Endorsements*
(B) Forms of Income-Paying Contracts*
(5) Opinion and Consent of Charles H. Stamm, Esquire
(10) (A) Independent Fiduciary Agreement by and among TIAA, the
Registrant, and Institutional Property Consultants, Inc.
(as amended)
(B) Custodial Services Agreement by and between TIAA and
Morgan Guaranty Trust Company of New York with respect
to the Real Estate Account*
(23) (A) Opinion and Consent of Charles H. Stamm, Esquire (filed
as Exhibit 5)
(B) Consent of Sutherland, Asbill & Brennan, L.L.P.
(C) Consent of Deloitte & Touche LLP
(27) (A) Financial Data Schedule of the Account's Interim
Financial Statements for the period ended June 30, 1996
(B) Financial Data Schedule of the Account's Financial
Statements for the year ended December 31, 1995
- ----------
* - Previously filed and incorporated herein by reference to Post-Effective
Amendment No. 2 to the Account's previous Registration Statement on Form S-1
filed April 30, 1996 (File No. 33-92990).
** - Previously filed and incorporated herein by reference to the Account's Form
10-Q Quarterly Report for the quarter ended June 30, 1996 (File No. 33-92990).
(b) Financial Statement Schedules
-----------------------------
Schedule III -- Real Estate Owned
All other Schedules have been omitted because they are not
required under the related instructions or are inapplicable.
ITEM 17. Undertakings.
-------------
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
II - 2
<PAGE>
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) To provide the full financial statements of TIAA promptly
upon written or oral request.
Following are the full audited financial statements of TIAA.
II - 3
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
AUDITED FINANCIAL STATEMENTS - December 31, 1995:
Report of Management Responsibility ...................................... II-5
Report of Independent Auditors ........................................... II-6
Balance Sheets ........................................................... II-7
Statements of Operations ................................................. II-8
Statements of Changes in Contingency Reserves ............................ II-9
Statements of Cash Flows ................................................. II-10
Notes to Financial Statements ............................................ II-11
UNAUDITED INTERIM FINANCIAL STATEMENTS - June 30, 1996:
Balance Sheet ............................................................ II-29
Statement of Operations
and Changes in Contingency Reserves .................................... II-30
Statement of Cash Flows .................................................. II-31
Notes to Unaudited Interim Financial Statements .......................... II-32
II - 4
<PAGE>
[TIAA Logo]
- --------------------------------------------------------------------------------
REPORT OF MANAGEMENT RESPONSIBILITY
To the Policyholders of
Teachers Insurance and Annuity
Association of America:
The accompanying financial statements of Teachers Insurance and Annuity
Association of America ("TIAA") are the responsibility of management. They have
been prepared on the basis of statutory accounting policies prescribed or
permitted by the New York State Insurance Department. The financial statements
of TIAA have been presented fairly and objectively in accordance with such
policies.
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, and
the internal Auditor regularly reports to the Audit Committee of the TIAA Board
of Trustees.
The accompanying financial statements of TIAA 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. In addition to the
annual audit of the TIAA financial statements, the New York State Insurance
Department and other state insurance departments regularly examine the financial
statements of TIAA as part of their periodic corporate examinations.
/s/John H. Biggs
----------------------------
Chairman and
Chief Executive Officer
/s/Thomas W. Jones
------------------------------
Vice Chairman, President and
Chief Operating Officer
/s/Richard L. Gibbs
-------------------------------
Executive Vice President and
Principal Accounting Officer
II - 5
<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 Board of Trustees of
Teachers Insurance and Annuity
Association of America:
We have audited the accompanying balance sheets of Teachers Insurance and
Annuity Association of America ("TIAA") as of December 31, 1995 and 1994 and the
related statements of operations, changes in contingency reserves, and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of TIAA's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of TIAA at December 31, 1995 and 1994 and the
results of its operations, changes in its contingency reserves, and its cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with accounting policies prescribed or permitted by the New York
State Insurance Department, which practices, as to TIAA, also represent
generally accepted accounting principles.
/s/Deloitte Touche LLP
March 12, 1996
[logo]
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
II - 6
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1995 1994
--------------- ---------------
<S> <C> <C>
ASSETS
Bonds...................................................... $48,835,831,058 $43,778,517,616
Mortgages.................................................. 21,000,279,330 20,216,879,404
Real Estate................................................ 7,013,052,678 7,075,384,687
Stocks..................................................... 223,028,483 163,284,129
Other long-term investments................................ 476,803,951 383,815,668
Cash and short-term investments............................ 713,051,046 431,445,982
Investment income due and accrued.......................... 1,118,707,821 1,073,386,018
Separate Account assets.................................... 209,170,183 30,563,247
Other assets............................................... 204,688,878 194,557,100
--------------- ---------------
TOTAL ASSETS $79,794,613,428 $73,347,833,851
=============== ===============
LIABILITIES, CAPITAL AND CONTINGENCY RESERVES
Policy and contract reserves............................... $70,983,830,958 $65,656,734,942
Dividends declared for the following year.................. 1,493,744,768 1,382,680,655
Asset Valuation Reserve.................................... 1,860,867,891 1,664,695,698
Interest Maintenance Reserve............................... 621,365,961 544,660,224
Separate Account liabilities............................... 106,511,880 5,292,647
Other liabilities.......................................... 672,112,096 655,945,669
--------------- ---------------
Total Liabilities 75,738,433,554 69,910,009,835
--------------- ---------------
Capital: 2,500 shares of $1,000 par value common stock
issued and outstanding................................... 2,500,000 2,500,000
--------------- ---------------
Contingency reserves:
For group life insurance.................................. 7,761,722 6,821,939
For investment losses, annuity and insurance mortality,
and other risks......................................... 4,045,918,152 3,428,502,077
--------------- ---------------
Total Contingency Reserves 4,053,679,874 3,435,324,016
--------------- ---------------
Total Capital and Contingency Reserves 4,056,179,874 3,437,824,016
--------------- ---------------
TOTAL LIABILITIES, CAPITAL AND CONTINGENCY RESERVES $79,794,613,428 $73,347,833,851
=============== ===============
</TABLE>
See notes to financial statements.
II - 7
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
INCOME
Insurance and annuity premiums
and deposits......................... $ 2,854,599,816 $ 2,785,546,486 $ 2,677,251,204
Transfers from CREF, net............... 351,869,029 191,582,916 247,849,674
Annuity dividend additions............. 1,943,614,354 1,844,416,805 1,961,603,015
Net investment income.................. 6,108,496,984 5,486,071,238 5,164,006,195
Supplementary contract considerations.. 150,975,982 104,999,526 94,618,702
--------------- --------------- ---------------
TOTAL INCOME $11,409,556,165 $10,412,616,971 $10,145,328,790
=============== =============== ===============
DISTRIBUTION OF INCOME
Policy and contract benefits........... $ 1,718,596,923 $ 1,538,301,850 $ 1,334,612,551
Dividends.............................. 3,098,930,945 2,874,077,216 2,928,108,945
Increase in policy and contract
reserves............................. 5,329,040,178 5,043,786,384 5,167,901,788
Operating expenses..................... 241,795,245 216,465,411 192,124,351
Transfers to Separate Accounts, net.... 92,995,463 4,270,646
Federal income taxes................... 9,487,967 9,843,630 10,482,862
Other, net............................. (4,380,395) (2,972,008) 525,332
Increase in contingency reserves
from operations...................... 923,089,839 728,843,842 511,572,961
--------------- --------------- ---------------
TOTAL DISTRIBUTION OF INCOME $11,409,556,165 $10,412,616,971 $10,145,328,790
=============== =============== ===============
</TABLE>
See notes to financial statements.
II - 8
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
STATEMENTS OF CHANGES IN CONTINGENCY RESERVES
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
CHANGES IN CONTINGENCY RESERVES:
From operations..................................... $ 923,089,839 $ 728,843,842 $ 511,572,961
Net realized capital loss on investments............ (56,264,893) (95,070,954) (36,426,429)
Net unrealized capital gain (loss) on investments... 52,706,109 38,906,936 (40,018,527)
Transfer to the Interest Maintenance Reserve........ (114,840,183) (170,430,156) (181,606,193)
Transfers from (to) the Asset Valuation Reserve:
Required formula contribution...................... (302,387,557) (249,405,235) (344,323,583)
Net capital losses absorbed........................ 106,215,365 226,638,932 255,224,945
Voluntary contribution............................. (193,508,281) (207,828,000)
Increase in non-admitted assets other than
investments....................................... (802,629) (22,194,906) (18,153,629)
Change in valuation basis of policy reserves........ 2,314,689 (1,224,324)
Other, net.......................................... 10,639,807 1,522,064
-------------- -------------- --------------
NET CHANGE IN CONTINGENCY RESERVES 618,355,858 267,616,931 (62,782,779)
CONTINGENCY RESERVES AT BEGINNING OF YEAR 3,435,324,016 3,167,707,085 3,230,489,864
-------------- -------------- --------------
CONTINGENCY RESERVES AT END OF YEAR $4,053,679,874 $3,435,324,016 $3,167,707,085
============== ============== ==============
</TABLE>
See notes to financial statements.
II - 9
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH PROVIDED
By operating activities:
Insurance and annuity premiums, deposits
and considerations....................... $ 2,999,426,179 $ 2,886,724,538 $ 2,766,077,897
Transfers from CREF, net.................. 351,869,029 191,582,916 247,849,674
Annuity dividend additions................ 1,943,614,354 1,844,416,805 1,961,603,015
Investment income, net.................... 5,998,015,040 5,372,299,141 5,219,656,004
--------------- --------------- ---------------
Total Receipts 11,292,924,602 10,295,023,400 10,195,186,590
--------------- --------------- ---------------
Policy and contract benefits.............. 1,715,727,236 1,500,323,250 1,312,182,472
Dividends................................. 2,987,866,832 2,819,852,489 2,879,831,053
Operating expenses........................ 240,323,235 214,008,001 192,147,540
Federal income taxes...................... 8,510,881 10,114,286 8,014,769
Transfers to Separate Accounts, net....... 159,017,898 29,164,199
Other, net................................ 6,823,917 6,798,405 (45,847,231)
--------------- --------------- ---------------
Total Disbursements 5,118,269,999 4,580,260,630 4,346,328,603
--------------- --------------- ---------------
Cash Provided by Operating Activities 6,174,654,603 5,714,762,770 5,848,857,987
--------------- --------------- ---------------
By investing activities:
Sales and redemptions of bonds and stocks. 3,863,412,778 3,810,787,301 6,413,280,415
Repayment of mortgage principal........... 1,166,625,456 1,684,113,871 1,639,165,691
Sales of real estate...................... 1,084,222,765 1,610,589,922 1,078,327,249
Other, net................................ 135,661,132 243,837,007 87,362,080
--------------- --------------- ---------------
Cash Provided By Investing Activities 6,249,922,131 7,349,328,101 9,218,135,435
--------------- --------------- ---------------
TOTAL CASH PROVIDED 12,424,576,734 13,064,090,871 15,066,993,422
--------------- --------------- ---------------
DISBURSEMENTS FOR NEW INVESTMENTS
Investments acquired:
Bonds and stocks.......................... 8,696,169,089 10,084,139,605 11,826,791,371
Mortgages................................. 2,352,232,441 2,217,021,154 1,043,674,867
Real Estate............................... 866,388,613 1,495,492,478 1,319,927,724
Other, net................................ 228,181,527 352,457,763 60,550,529
--------------- --------------- ---------------
TOTAL DISBURSEMENTS FOR
NEW INVESTMENTS 12,142,971,670 14,149,111,000 14,250,944,491
--------------- --------------- ---------------
INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 281,605,064 (1,085,020,129) 816,048,931
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF YEAR 431,445,982 1,516,466,111 700,417,180
--------------- --------------- ---------------
CASH AND SHORT-TERM INVESTMENTS
AT END OF YEAR $ 713,051,046 $ 431,445,982 $ 1,516,466,111
=============== =============== ===============
</TABLE>
See notes to financial statements.
II - 10
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS
Note 1--Organization
Teachers Insurance and Annuity Association of America ("TIAA") was established
as a legal reserve life insurance company under the insurance laws of the State
of New York in 1918. TIAA was formed by the Carnegie Foundation for the
Advancement of Teaching for the express purpose of aiding and strengthening
nonprofit educational and research organizations by providing retirement and
insurance benefits for their faculties and other staff members, and by
counseling these organizations and their employees on benefit plans and other
measures of economic security. All of the outstanding common stock of TIAA is
collectively held by the TIAA Board of Overseers, a nonprofit corporation
created solely for the purpose of holding the stock of TIAA.
Note 2--Significant Accounting Policies
TIAA's financial statements have been prepared on the basis of accounting
policies prescribed or permitted by the New York State Insurance Department
("Department"), which policies, hereinafter referred to as statutory accounting
policies, as to TIAA, also represent generally accepted accounting principles.
(Refer to the separate sections, entitled "Permitted Statutory Accounting
Policies" and "Generally Accepted Accounting Principles", within this note.) The
preparation of TIAA's financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses. Actual results could differ from those estimates. The following is
a summary of the significant accounting policies consistently followed by TIAA.
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 amortized 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.
Accounting for Investments: Investment transactions are accounted for as of the
date the investments are purchased or sold (trade date) for publicly traded
common stocks and as of the date the investment transactions are settled
(settlement date) for all other investments. Realized capital gains and losses
on investment transactions are accounted for under the specific identification
method.
Foreign Currency Transactions and Translation: Investments denominated in
foreign currencies and asset swap contracts are valued in U.S. dollars, based on
the exchange rate at the end of the period. Investment transactions in foreign
currencies are recorded at the exchange rates prevailing on the respective
transaction dates. All other asset and liability accounts that are denominated
in a foreign currency are adjusted to reflect the exchange
II - 11
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 2--Significant Accounting Policies--(Continued)
rate at the end of the period. Realized and unrealized gains and losses due to
foreign exchange transactions, and those due to translation adjustments, are not
separately reported and are reflected in realized and unrealized capital gains
and losses, respectively.
Securities Lending: TIAA has a securities lending program whereby it loans
securities to qualified brokers in exchange for cash collateral, generally at
least equal to 102% of the market value of the securities loaned. When
securities are loaned, TIAA receives additional income on the collateral and
continues to receive income on the securities loaned. The collateral liability
is netted against the short-term investments in which the cash collateral is
invested and such short-term investments and the equivalent liability are not
reflected in the balance sheet caption, "Cash and short-term investments". TIAA
may bear the risk of delay in recovery of, or loss of rights in, the securities
loaned should a borrower of securities fail to meet contractual obligations.
Asset Swap Contracts: TIAA enters into asset swap contracts to exchange fixed
and variable amounts of foreign currency at specified future dates and at
specified rates to hedge against currency risks on investments denominated in
foreign currencies. Changes in the value of the contracts related to foreign
currency exchange rates are recognized at the end of the period as unrealized
gains or losses. Asset swap contracts incorporate a series of swap transactions
which result in the exchange of TIAA's fixed and variable foreign currency cash
flows into fixed amounts of U.S. dollar cash flows. Asset swap contracts are
entered into directly with a counterparty and TIAA is exposed to the risk of
default of such counterparty, although TIAA does not anticipate non-performance
by any of the counterparties. The maximum potential loss from such risk is equal
to the change in the value of the asset swap during the term of the contract. In
order to minimize the risk associated with potential counterparty default, TIAA
monitors the credit quality of its counterparties.
Interest Rate Swap Contracts: TIAA enters into interest rate swap contracts with
qualified commercial banks to hedge against the effect of interest rate
fluctuations on certain variable interest rate bonds. These contracts allow TIAA
to lock in a fixed interest rate and to transfer the risk of higher or lower
interest rates. TIAA also enters into interest rate swap contracts to swap the
cash flows on certain fixed interest rate bonds into variable interest rate cash
flows in connection with certain adjustable rate products. These contracts
subject TIAA to credit risk should the counterparties not perform according to
the terms of the contracts. However, the maximum potential loss from such credit
risk is much smaller than the par value of the related notes and TIAA does not
anticipate non-performance by any of the counterparties. In order to minimize
the risk associated with potential counterparty default, TIAA monitors the
credit quality of its counterparties. Payments received and payments made under
interest rate swap contracts are reflected in net investment income.
Covered Call Options Written: TIAA writes covered call options on selected bonds
as part of TIAA's asset and liability management program for certain adjustable
rate products. When an option is written, an amount equal to the premium
received is recorded as a liability. Premiums received on options which expire
are recorded as realized capital gains. Premiums received from writing options
which are exercised are added to the proceeds from the sale of the underlying
bond in recognizing the net realized capital gain or loss on the disposition. In
writing
II - 12
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 2--Significant Accounting Policies--(Continued)
options, it is assumed that the option may be exercised at any time prior to the
expiration of TIAA's obligation as a writer, and that in such circumstances the
net proceeds of the sale of the underlying bond pursuant to the call option may
be below the prevailing market value.
Investment Income Due and Accrued: Investment income due and accrued excludes
non-admitted amounts of approximately $311,279,000 and $341,199,000 at December
31, 1995 and 1994, respectively.
Non-Admitted Assets Other than Investments: Certain non-investment assets, such
as furniture and fixtures and various receivables, are designated as
non-admitted assets by the Department and, as such, cannot be included in life
insurance company balance sheets filed with the Department. Such non-admitted
assets approximated $174,603,000 at December 31, 1995 and $173,867,000 at
December 31, 1994.
Policy and Contract Reserves: TIAA offers a range of group and individual
retirement annuities and group and individual life and other insurance products.
Policy and contract reserves for such products are determined in accordance with
standard valuation methods approved by the Department. Reserves are stated at
account balances for annuities in the accumulation phase, at the present value
of all future guaranteed benefits for annuities in the payout phase and, for
insurance policies, are computed in accordance with standard actuarial formulas.
The reserves established utilize assumptions for interest (at an average rate of
approximately 3%), mortality and other risks insured. Such reserves establish a
sufficient provision for all contractual benefits guaranteed under policy and
contract provisions.
Dividends Declared for the Following Year: Dividends on insurance policies and
pension annuity contracts in the payout phase are generally declared by the TIAA
Board of Trustees ("Board") in November of each year, and such dividends are
credited to policyholders in the following calendar year. Dividends on pension
annuity contracts in the accumulation phase are generally declared by the Board
in February of each year and such dividends on the various existing vintages of
pension annuity contracts in the accumulation phase are credited to
policyholders during the ensuing twelve month period beginning March 1.
Asset Valuation Reserve: The Asset Valuation Reserve ("AVR"), which covers all
invested asset classes, is an explicit liability reserve required by the
National Association of Insurance Commissioners ("NAIC") and is intended to
provide for potential future credit and equity losses. Reserve components of the
AVR are maintained for bonds, stocks, mortgages, real estate and other invested
assets. Realized and unrealized credit and equity capital gains and losses, net
of capital gains taxes, are credited to or charged against the related
components of the AVR. Formula calculations determine the required contribution
amounts for each component. Insurance companies may also make voluntary
contributions to any component as long as the resulting ending balance does not
exceed the computed maximum reserve for that component. TIAA makes voluntary
contributions to the mortgage and real estate reserves of the AVR as necessary
to keep the reserve balances at least equal to the aggregate differences between
carrying value and the most recent valuation for mortgage and real estate
investments under valuation review. Contributions to the AVR are reported as
transfers from Contingency Reserves.
II - 13
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 2--Significant Accounting Policies--(Continued)
Interest Maintenance Reserve: The Interest Maintenance Reserve ("IMR") is a
liability reserve required by the NAIC which accumulates realized capital gains
and losses resulting from interest rate fluctuations. Such capital gains and
losses are amortized out of the IMR as an adjustment to net investment income
over the remaining lives of the assets sold.
Contingency Reserves: By Charter, TIAA operates without profit to the
corporation or its sole shareholder, the TIAA Board of Overseers. As a result,
all contingency reserves are held solely for the benefit of TIAA's
policyholders.
Income and Expenses: Premiums, investment income and expenses are reported as
incurred.
Federal Income Taxes: TIAA is a nonprofit educational organization exempt from
federal income taxation under Section 501(c)(3) of the Internal Revenue Code.
However, any nonpension related income is subject to federal income taxation as
unrelated business income. The federal income tax provision in the accompanying
statements of operations is based on taxes actually paid or anticipated to be
paid with the tax return filing.
Separate Accounts: The balance sheet captions for Separate Account assets and
liabilities (which include participant account values) are stated at market
value. The Separate Accounts' operating results are reflected in the changes to
these assets and liabilities.
TIAA Separate Account VA-1 ("VA-1") is a segregated investment account and was
organized on February 16, 1994 under the insurance laws of the State of New York
for the purpose of issuing and funding variable annuity contracts. VA-1 was
registered with the Securities and Exchange Commission ("Commission") effective
November 1, 1994 as an open-end, diversified management investment company under
the Investment Company Act of 1940. Currently, VA-1 consists of a single
investment portfolio, the Stock Index Account ("SIA"), which invests in a
diversified portfolio of equity securities selected to track the overall United
States stock market.
SIA was established on October 3, 1994 with a $25,000,000 seed money investment
by TIAA. TIAA purchased 1,000,000 Accumulation Units of SIA and such units share
in the pro rata investment experience of SIA and are subject to the same
valuation procedures and expense deductions as all other Accumulation Units in
SIA. On November 14, 1994, TIAA began to offer Accumulation Units of SIA to
participants other than TIAA. At December 31, 1995 and 1994, the number of units
retained by TIAA in SIA were 2,685 and 1,000,000 with a total value of
approximately $92,000 and $25,271,000, respectively.
The TIAA Real Estate Account ("REA") is a segregated investment account and was
organized on February 22, 1995 under the insurance laws of the State of New York
for the purpose of funding variable annuity contracts. REA was registered with
the Commission under the Securities Act of 1933 effective October 2, 1995. REA
will ultimately invest primarily in real estate and real estate-related
investments (70% to 80% of total REA assets) as well as publicly-traded
securities to maintain adequate liquidity.
REA was established on July 3, 1995 with a $100,000,000 seed money investment by
TIAA. TIAA purchased 1,000,000 Accumulation Units of REA and such units share in
the pro rata investment experience of REA and
II - 14
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 2--Significant Accounting Policies--(Continued)
are subject to the same valuation procedures and expense deductions as all other
Accumulation Units in REA. On October 2, 1995, TIAA began to offer Accumulation
Units of REA to participants other than TIAA. At December 31, 1995 the number of
units retained by TIAA in REA remained at 1,000,000 with a total value of
approximately $102,566,000.
Permitted Statutory Accounting Policies: Statutory accounting policies
prescribed by the Department include accounting practices reflected in New York
State Insurance Laws and Regulations as well as in NAIC publications. Permitted
statutory accounting policies encompass all accounting practices which are
allowed by the Department but have not been prescribed. TIAA does not utilize
any statutory accounting practices which depart from prescribed statutory
accounting practices; however, TIAA does follow certain permitted statutory
accounting practices. The following permitted statutory accounting policies have
been approved by the Department: inclusion of real estate subsidiaries and real
estate limited partnerships in the Real Estate caption in the accompanying
balance sheets; determination of permanent impairments; and netting of
securities lending collateral against short-term investments.
The NAIC issued prescribed accounting requirements for loan-backed securities,
including collateralized mortgage obligations ("CMO's"), in 1993. The new
accounting requirements stipulated that loan-backed securities should be
accounted for using the interest method. Under the interest method, actual and
anticipated cash flows of a security are utilized to determine the carrying
value of that security. TIAA elected the prospective method for determining
yields and carrying values for interest-only CMO's and the retrospective method
for all other CMO's.
Certain provisions of these statutory accounting policies were required to be
implemented in 1994; the remaining provisions were required for 1995. TIAA
implemented the required provisions of the new accounting policies in 1994 and
also adopted the provisions in 1994 for TIAA's public market CMO portfolio. This
early adoption for public market CMO's represented a permitted accounting
practice which was also approved by the Department. The required provisions of
the new accounting policies for TIAA's private market CMO portfolio were
implemented in 1995. The effect of this change in accounting in 1995 and 1994
was to increase contingency reserves by approximately $11 million and $50
million, respectively.
Generally Accepted Accounting Principles: The Financial Accounting Standards
Board ("FASB") issued FASB Interpretation No. 40, entitled "Applicability of
Generally Accepted Accounting Principles to Mutual Life Insurance and Other
Enterprises" ("Interpretation"), in April 1993. The Interpretation clarifies
that financial statements that are intended to be in conformity with generally
accepted accounting principles should follow all authoritative accounting
pronouncements except to the extent that a pronouncement explicitly exempts a
particular type of enterprise or that enterprise does not have the transaction,
event, or circumstance addressed in the pronouncement. The Interpretation, as
amended, is effective for financial statements issued for fiscal years beginning
after December 15, 1995.
The effect of the Interpretation will be that TIAA (and mutual life insurance
and other enterprises) will not be permitted to refer to financial statements
prepared in accordance with statutory accounting practices as having
II - 15
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 2--Significant Accounting Policies--(Concluded)
been prepared in accordance with generally accepted accounting principles
("GAAP") beginning in 1996. If TIAA elects to prepare GAAP financial statements,
the effect of initially applying the Interpretation will be reported
retroactively through restatement of all financial statements presented for
comparative purposes, with the cumulative effect of adopting the Interpretation
included in the earliest year restated. TIAA has analyzed those requirements of
GAAP which differ from statutory accounting practices and is in the process of
quantifying the effects of the potential application of the Interpretation on
its financial statements.
Reclassifications: Certain amounts in the 1994 financial statements have been
reclassified to conform with the 1995 presentation.
II - 16
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 3--Investments
Securities Investments: At December 31, 1995 and 1994, the carrying values
(balance sheet amounts) and estimated market values of long-term bond
investments, and gross unrealized gains and losses with respect to such market
values, are shown below:
<TABLE>
<CAPTION>
Gross Gross
Carrying Unrealized Unrealized Estimated
December 31, 1995 Value Gains Losses Market Value
- -------------------------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 805,105,863 $ 195,202,463 $ 1,000,308,326
Debt securities issued by
foreign governments 1,456,997,622 226,995,685 $ 1,494,536 1,682,498,771
Corporate securities 28,094,698,003 2,942,081,089 78,607,386 30,958,171,706
Mortgage-backed securities 15,163,886,154 1,547,907,663 45,110,081 16,666,683,736
Asset-backed securities 3,315,143,416 317,275,533 4,448,112 3,627,970,837
--------------- -------------- ------------ ---------------
Total $48,835,831,058 $5,229,462,433 $129,660,115 $53,935,633,376
=============== ============== ============ ===============
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Carrying Unrealized Unrealized Estimated
December 31, 1994 Value Gains Losses Market Value
- -------------------------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 867,096,984 $ 4,361,537 $ 170,252,620 $ 701,205,901
Debt securities issued by
foreign governments 1,468,763,896 25,553,121 92,875,437 1,401,441,580
Corporate securities 27,531,583,866 590,403,140 1,340,430,128 26,781,556,878
Mortgage-backed securities 11,307,671,148 302,144,903 1,064,037,897 10,545,778,154
Asset-backed securities 2,603,401,722 31,766,572 179,575,622 2,455,592,672
--------------- ------------ -------------- ---------------
Total $43,778,517,616 $954,229,273 $2,847,171,704 $41,885,575,185
=============== ============ ============== ===============
</TABLE>
At December 31, 1995 and 1994, approximately 94.9% and 94.3%, respectively, of
the long-term bond portfolio was comprised of investment grade securities. At
December 31, 1995, outstanding forward commitments for future long-term bond
investments approximated $1,281,939,000. It is estimated that $1,275,173,000
will be disbursed in 1996 and $6,766,000 in later years. The funding of bond
commitments is contingent upon the continued favorable financial performance of
the potential borrowers. Debt securities amounting to approximately $237,943,000
and $210,889,000 at December 31, 1995 and 1994, respectively, were on deposit
with governmental authorities or trustees as required by law.
The carrying values and estimated market values of long-term bond investments at
December 31, 1995, by contractual maturity, are shown below:
II - 17
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 3--Investments--(Continued)
Carrying Estimated
Value Market Value
------------ -------------
Due in one year or less $ 429,714,344 $ 433,016,648
Due after one year through five years 3,546,510,594 3,816,740,001
Due after five years through ten
years 11,965,866,370 12,939,511,409
Due after ten years 14,414,710,180 16,451,710,745
--------------- ---------------
Subtotal 30,356,801,488 33,640,978,803
Mortgage-backed securities 15,163,886,154 16,666,683,736
Asset-backed securities 3,315,143,416 3,627,970,837
--------------- ---------------
Total $48,835,831,058 $53,935,633,376
=============== ===============
Bonds not due at a single maturity date have been included in the preceding
table based on the year of final maturity. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations, although prepayment premiums may be applicable.
At December 31, 1995 and 1994, the carrying values of long-term bond investments
were diversified by industry classification as follows:
1995 1994
----- ------
Mortgage-backed securities 31.1% 25.8%
Public utilities 15.5 18.3
Manufacturing 14.0 15.0
Finance and financial
services 8.8 9.7
Asset-backed securities 6.8 6.0
Government 5.7 5.5
Retail and wholesale trade 5.1 5.1
Communications 4.3 5.6
Oil and gas 3.9 4.2
Other 4.8 4.8
----- ------
Total 100.0% 100.0%
===== ======
II - 18
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 3--Investments--(Continued)
The approximate carrying values and market values of debt securities loaned and
the cash collateral received in connection therewith were as follows:
Carrying Market Cash
Value Value Collateral
----------- ----------- -------------
December 31,
1995 $1,345,534,000 $1,410,965,000 $1,482,603,000
December 31,
1994 $1,036,779,000 $ 957,529,000 $ 993,763,000
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 bonds. At December 31, 1995 and 1994, TIAA had asset swap contracts
outstanding related to $245,462,000 and $115,211,000, respectively, of
investments denominated in foreign currencies. The net change in unrealized
losses on such asset swap contracts were approximately $(1,099,000) and
$(7,635,000) for the years ended December 31, 1995 and 1994, respectively.
During 1995, TIAA wrote two covered call options related to $13,500,000 par
value of bonds and received premiums of approximately $142,000. The options were
exercised and the premiums were recorded as additional proceeds on the
dispositions. There were no outstanding covered call options at December 31,
1995.
Mortgage Loan and Real Estate Investments: TIAA makes mortgage loans,
principally collateralized by commercial real estate, and direct investments in
real estate. TIAA's mortgage underwriting standards generally limit mortgage
investments to first mortgage liens on completed income-producing properties for
which the loan-to-value ratio at the time of closing generally ranges between
65% and 75%. Current real estate market conditions in certain regions of the
country are characterized by above-normal but improving vacancy rates and
reduced but stabilizing real estate values. TIAA employs a system to monitor the
effects of current and expected market conditions and other factors on the
collectability of mortgage loans and the realizability of real estate
investments. This system is utilized to identify and quantify any permanent
impairments in value and to determine the appropriate level of mortgage and real
estate reserves in the AVR.
II - 19
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 3--Investments--(Continued)
At December 31, 1995 and 1994, the carrying values of mortgage loan investments
were diversified by property type and geographic region as follows:
Property Type 1995 1994
- ------------- ----- -------
Office buildings 41.1% 41.6%
Shopping centers 30.6 31.1
Mixed-use projects 9.9 10.4
Apartments 8.1 6.2
Hotels 4.6 4.7
Industrial buildings 3.9 4.1
Other 1.8 1.9
----- ------
Total 100.0% 100.0%
===== ======
Geographic Region
- -----------------
West 29.2% 30.1%
Northeast 23.1 22.7
Midwest 20.4 20.3
Southeast 17.1 17.5
Southwest/Plains 10.2 9.4
----- ------
Total 100.0% 100.0%
===== ======
At December 31, 1995 and 1994, approximately 24% and 26%, respectively, of the
mortgage portfolio was invested in California and is included in the West region
shown above.
At December 31, 1995, the contractual maturity schedule of mortgage loans is
shown below:
Carrying
Value
-------------
Due in one year or less $ 1,628,678,100
Due after one year through five years 4,111,058,868
Due after five years through ten years 7,996,176,192
Due after ten years 7,264,366,170
---------------
Total $21,000,279,330
===============
Actual maturities may differ from contractual maturities because borrowers may
have the right to prepay mortgage loans, although prepayment premiums may be
applicable.
At December 31, 1995, outstanding forward commitments for future mortgage loan
investments approximated $1,546,060,000, including commitments under litigation.
Of this, $840,814,000 is scheduled for disbursement in 1996, $92,003,000 in
1997, $84,200,000 in 1998 and $529,043,000 in later years. The funding of
mortgage loan commitments is contingent upon the underlying properties meeting
specified construction, leasing, occupancy and other requirements. Of the total
commitments scheduled for disbursement in 1996, $250,000,000 is related to a
mortgage loan refinancing which occurred in 1993. In connection with the
refinancing, a third party made a five year, interest-only loan to a TIAA
borrower and the borrower made a partial repayment to TIAA. TIAA made
II - 20
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 3--Investments--(Continued)
a one year forward commitment to loan $250,000,000 to the borrower. The loan
commitment may be extended, at TIAA's option, for additional one year periods,
up to a total of five years, provided that the borrower's first mortgage to the
third party is not in default at the time the loan commitment is extended. The
loan commitment has been extended to 1996.
At December 31, 1995, 1994 and 1993, the aggregate carrying values of mortgages
with restructured or modified terms, as defined by generally accepted accounting
principles, were approximately $872,377,000, $913,551,000 and $771,038,000,
respectively. For the years ended December 31, 1995, 1994 and 1993, the
investment income earned on such mortgages was approximately $57,142,000,
$41,643,000 and $47,003,000, respectively, which would have been approximately
$96,625,000, $101,394,000 and $86,406,000, respectively, if they had performed
in accordance with their original terms. When restructuring mortgage loans, TIAA
generally requires participation features, yield maintenance stipulations,
and/or the establishment of property specific escrow accounts funded by the
borrowers.
At December 31, 1995 and 1994, the carrying values or real estate investments
were diversified by property type and geographic region as follows:
Property Type 1995 1994
- ------------- ----- -------
Office buildings 61.7% 60.4%
Shopping centers 15.2 15.9
Mixed-use projects 7.3 6.2
Industrial buildings 3.4 4.0
Income-producing land underlying improved real
estate 3.3 3.4
Land held for future development 2.0 2.0
Apartments 0.7 2.0
Other 6.4 6.1
----- ------
Total 100.0% 100.0%
===== ======
Geographic Region
- -----------------
Midwest 34.8% 39.1%
Southeast 24.7 21.8
West 16.2 16.3
Northeast 14.2 13.9
Southwest/Plains 10.1 8.9
----- -----
Total 100.0% 100.0%
===== =====
At December 31, 1995 and 1994, approximately 12% and 13%, respectively, of the
real estate portfolio was invested in Minnesota and is included in the Midwest
region shown above; for both years, approximately 12% was invested in California
and is included in the West region shown above.
At December 31, 1995, outstanding forward commitments for future real estate
investments approximated $291,444,000. Under these commitments, it is estimated
that $261,022,000 will be disbursed in 1996 and $30,422,000 in later years. The
funding of real estate investment commitments is contingent upon the properties
meeting specified construction, leasing, occupancy and other requirements.
II - 21
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 3--Investments--(Concluded)
Depreciation expense on real estate investments for the years ended December 31,
1995, 1994 and 1993, was approximately $98,198,000, $84,872,000 and $70,881,000,
respectively; the amount of accumulated depreciation at December 31, 1995 was
approximately $529,939,000.
Asset Valuation Reserves: The AVR balances at December 31, 1995 and 1994 were
comprised of the following asset-specific reserves:
1995 1994
----------- -------------
Bonds and preferred
stock $ 673,859,636 $ 650,783,617
Mortgages 564,444,067 578,989,017
Real Estate 495,577,164 389,347,850
Common stock 62,372,040 22,592,888
Other invested assets 64,614,984 22,982,326
-------------- --------------
Total $1,860,867,891 $1,664,695,698
============== ==============
Note 4--Investment Income and Capital Gains and Losses
Net Investment Income: For the years ended December 31, 1995, 1994 and 1993, the
components of net investment income were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -------------
<S> <C> <C> <C>
Gross Investment Income:
Bonds $4,113,077,743 $3,591,625,656 $3,146,653,149
Mortgages 1,688,836,730 1,613,072,996 1,813,370,120
Real Estate (net of property
expenses,
taxes and depreciation) 279,016,562 298,290,866 222,457,480
Stocks 24,460,434 12,296,076 9,928,302
Other long-term investments 16,706,459 10,794,114 8,530,439
Cash and short-term investments 52,050,980 37,997,294 42,629,115
Other 8,500,640 9,894,077 6,082,027
-------------- -------------- --------------
Total 6,182,649,548 5,573,971,079 5,249,650,632
Less investment expenses (112,287,010) (102,523,873) (103,129,901)
-------------- -------------- --------------
Net investment income before
amortization of net IMR gains 6,070,362,538 5,471,447,206 5,146,520,731
Plus amortization of net IMR gains 38,134,446 14,624,032 17,485,464
-------------- -------------- --------------
Net investment income $6,108,496,984 $5,486,071,238 $5,164,006,195
============== ============== ==============
</TABLE>
Participation income received on securities, mortgages and real estate included
in the above table was approximately $28,088,000, $27,488,000 and $24,015,000 in
1995, 1994 and 1993, respectively.
II - 22
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 4--Investment Income and Capital Gains and Losses--(Concluded)
The net earned rates of investment income on total invested assets (computed as
net investment income before amortization of net IMR gains divided by mean
invested assets) were 8.29%, 8.11% and 8.32% in 1995, 1994 and 1993,
respectively.
Future rental income expected to be received during the next five years under
existing real estate leases in effect as of December 31, 1995 is approximately
$491,476,000 in 1996, $430,958,000 in 1997, $368,419,000 in 1998, $311,099,000
in 1999 and $246,027,000 in 2000.
Realized Capital Gains and Losses: For the years ended December 31, 1995, 1994
and 1993, the net realized capital gains (losses) on sales, redemptions and
writedowns of investments computed under the specific identification method were
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- --------------
<S> <C> <C> <C>
Bonds $ 32,698,203 $ 23,169,838 $ 84,338,721
Mortgages (204,033,034) (103,763,171) (137,342,068)
Real Estate 99,207,556 (24,555,825) 5,859,835
Stocks 9,808,562 5,435,716 (8,149,796)
Other long-term investments 7,885,199 1,550,624 19,014,949
Cash and short-term investments (758,274) 2,377,735 (148,608)
Other 1,360,695 714,129 538
------------- ------------- --------------
Total realized gains (losses)
before capital gains tax (53,831,093) (95,070,954) (36,426,429)
Less capital gains tax (2,433,800) 0 0
------------- ------------- --------------
Total $ (56,264,893) $ (95,070,954) $ (36,426,429)
============= ============= ==============
</TABLE>
Proceeds from sales and redemptions of long-term bond investments during 1995,
1994 and 1993 were approximately $3,822,394,000, $3,685,078,000 and
$6,391,828,000, respectively. Gross gains of approximately $122,093,000,
$96,579,000 and $358,273,000 and gross losses of approximately $49,736,000,
$75,097,000 and $75,475,000 were realized on these sales and redemptions during
1995, 1994 and 1993, respectively.
Unrealized Capital Gains and Losses: For the years ended December 31, 1995, 1994
and 1993, the net changes in unrealized capital gains (losses) on investments,
resulting in a net increase (decrease) in the valuation of investments, were as
follows:
1995 1994 1993
----------- ----------- -------------
Bonds $ 51,534,565 $ 64,026,744 $ 18,250,130
Mortgages (1,807,561) (3,125,696) (6,673,961)
Real Estate (42,391,326) (37,141,679) (67,998,555)
Stocks 26,290,762 19,432,861 27,435,407
Other long-term investments 23,553,601 8,458,998 (7,607,109)
Cash and short-term
investments 0 1,285,511 (762,703)
Other (4,473,932) (14,029,803) (2,661,736)
------------ ------------ -------------
Total $ 52,706,109 $ 38,906,936 $(40,018,527)
============ ============ =============
II - 23
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 5--Disclosures About Fair Value of Financial Instruments
The estimated fair value amounts of financial instruments presented in the
following tables have been determined by TIAA using market information available
as of December 31, 1995 and 1994, and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret market data
in developing the estimates of fair value for financial instruments for which
there are no available market value quotations. The estimates presented are not
necessarily indicative of the amounts TIAA could have realized in a market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
Notional Carrying Estimated
December 31, 1995 Amount Value Fair Value
- ----------------- ----------- ------------ --------------
<S> <C> <C> <C>
Assets
Bonds $48,835,831,058 $53,935,633,376
Mortgages 21,000,279,330 22,600,402,237
Stocks 223,028,483 223,028,483
Cash and short-term investments 713,051,046 713,051,046
Policy loans 134,538,623 134,538,623
Liabilities
Teachers Personal Annuity--Fixed
Account 580,720,683 580,720,683
Other financial instruments
Asset swap contracts $238,063,450 (7,398,975) (27,116,738)
Interest rate swap contracts 110,000,000 15,152,000
Stock warrants 6,532,500
December 31, 1994
- -----------------
Assets
Bonds $43,778,517,616 $41,885,575,185
Mortgages 20,216,879,404 19,627,287,444
Stocks 163,284,129 163,284,129
Cash and short-term investments 431,445,982 431,445,982
Policy loans 97,262,920 97,262,920
Liabilities
Teachers Personal Annuit--Fixed
Account 358,987,888 358,987,888
Other financial instruments
Asset swap contracts $108,911,004 (6,300,443) (12,348,000)
Interest rate swap contracts 105,000,000 2,813,000
Stock warrants 1,722,000
</TABLE>
II - 24
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 5--Disclosures About Fair Value of Financial Instruments--(Concluded)
Bonds: Fair values for publicly traded long-term bond investments were
determined using quoted market prices. For privately placed long-term bond
investments without a readily ascertainable market value, such values were
determined with the assistance of an independent pricing service utilizing a
discounted cash flow methodology based on coupon rates, maturity provisions and
assigned credit ratings. The aggregate carrying values and estimated fair values
of publicly traded and privately placed bonds at December 31, 1995 and 1994 were
as follows:
<TABLE>
<CAPTION>
1995 1994
---------------------------- ------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Publicly traded bonds $28,152,735,556 $31,029,476,823 $25,330,827,112 $24,008,853,534
Privately placed bonds 20,683,095,502 22,906,156,553 18,447,690,504 17,876,721,651
--------------- --------------- --------------- ----------------
Total $48,835,831,058 $53,935,633,376 $43,778,517,616 $41,885,575,185
=============== =============== =============== ================
</TABLE>
Mortgages: The fair value of mortgages was determined with the assistance of an
independent pricing service utilizing a discounted cash flow methodology based
on coupon rates, maturity provisions and assigned credit ratings.
Stocks, Cash and Short-Term Investments, and Policy Loans: The carrying values
are reasonable estimates of fair values.
Teachers Personal Annuity-Fixed Account: The carrying values of the liabilities
are reasonable estimates of fair values.
Asset Swap Contracts: The fair value of asset swap contracts (used for hedging
purposes) is the estimated net gain or (loss) that TIAA would record if the
asset swaps were liquidated at year-end. The fair value of asset swap contracts
was estimated by external institutions, including our counterparties, based on
future cash flows and anticipated exchange relationships, and such values were
reviewed internally for reasonableness.
Interest Rate Swap Contracts: The fair value of interest rate swap contracts
(used for hedging purposes) is the estimated net gain or (loss) that TIAA would
record if the interest rate swaps were liquidated at year-end. The swap
agreements have no carrying value. The fair value of interest rate swap
contracts was estimated internally using modeling software developed by
independent third parties.
Stock Warrants: The fair value of stock warrants represents the excess of the
market value of the related stock over the exercise price associated with the
stock warrant. The stock warrants have no carrying value.
Commitments to Extend Credit or Purchase Investments: TIAA does not charge
commitment fees on these agreements, and the related interest rates reflect
market levels at the time of the commitments.
Insurance and Annuity Contracts: TIAA's insurance and annuity contracts, other
than the Teachers Personal Annuity - Fixed Account disclosed above, entail
mortality risks and are, therefore, exempt from the fair value disclosure
requirements related to financial instruments.
II - 25
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 6--Management Agreements
All services necessary for the operation of College Retirement Equities Fund
(CREF), a companion organization, are provided, at cost, by two subsidiaries of
TIAA, TIAA-CREF Investment Management, Inc. ("Investment Management") and
TIAA-CREF Individual & Institutional Services, Inc. ("Services"), which provide
investment advisory, administrative and distribution services for CREF. Such
services are provided in accordance with an Investment Management Services
Agreement between CREF and Investment Management, and in accordance with a
Principal Underwriting and Administrative Services Agreement between CREF and
Services. Investment Management is registered with the Commission as an
investment adviser; Services is registered with the Commission as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc. Investment Management and Services receive management fee payments from
each CREF account on a daily basis according to formulas established each year
with the objective of keeping the management fees as close as possible to each
account's actual expenses. Any differences between actual expenses and the
management fees are adjusted quarterly. Such fees and the equivalent allocated
expenses, which amounted to approximately $226,645,000, $199,396,000 and
$171,411,000 in 1995, 1994 and 1993, respectively, are not included in the
statements of operations and had no effect on TIAA's operations.
All services necessary for the operation of REA are provided, at cost, by TIAA
and Services. TIAA provides investment management services for REA, while
distribution and administrative services are provided by Services in accordance
with a Distribution and Administrative Services Agreement between REA and
Services. TIAA also provides a liquidity guarantee to REA, for a fee, to ensure
that funds are available to meet participant transfer and cash withdrawal
requests in the event that REA'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 REA on a daily
basis to TIAA and Services according to formulas established annually. Any
differences between actual expenses and daily charges are adjusted quarterly.
Teachers Advisors, Inc. ("Advisors"), a subsidiary of TIAA VA Holdings, Inc.
("Holdings"), which is itself a wholly-owned subsidiary of TIAA, provides
investment advisory services for VA-1 in accordance with an Investment
Management Agreement between TIAA, Advisors and VA-1. TIAA provides all
administrative services for VA-1 in accordance with an Administrative Services
Agreement with VA-1 and also receives a fee for assuming certain mortality and
expense risks. Teachers Personal Investors Services, Inc. ("TPIS"), a subsidiary
of Holdings, distributes contracts for VA-1. Expense deductions are made from
VA-1 on a daily basis. Advisors is registered with the Commission as an
investment adviser; TPIS is registered with the Commission as a broker-dealer
and is a member of the National Association of Securities Dealers, Inc.
II - 26
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 7--Pension Plan and Postretirement Benefits
TIAA maintains a qualified, noncontributory defined contribution pension plan
covering substantially all employees. All pension plan liabilities are fully
funded through individually owned retirement annuity contracts. Contributions
are made semi-monthly to each participant's contract based on a percentage of
salary, with the applicable percentage varying by attained age. All
contributions are fully vested for employees hired before 1988. For employees
hired after 1987, contributions are vested after five years of service.
Forfeitures arising from terminations prior to vesting are used to reduce future
employer contributions. The accompanying statements of operations include
contributions to the pension plan of approximately $19,467,000, $17,828,000 and
$16,167,000 in 1995, 1994 and 1993, respectively.
In addition to the pension plan, TIAA provides certain other postretirement life
and health insurance benefits to eligible retired employees who meet prescribed
age and service requirements. The cost of such benefits reflected in the
accompanying statements of operations were approximately $2,273,000, $2,307,000
and $1,641,000 for 1995, 1994 and 1993, respectively. TIAA also maintains a
deferred compensation plan for non-officer trustees and members of the TIAA
Board of Overseers. Under this plan, an eligible board member who has served at
least five years is eligible for a single-sum payment upon leaving the board
equal to 50% of the annual stipend in effect during the last term multiplied by
the number of years of credited service, up to a maximum of 20 years.
Note 8--Unconsolidated Subsidiaries and Other Affiliates
TIAA's wholly-owned subsidiaries primarily involve real estate investment
activities and are primarily included in real estate assets on the accompanying
balance sheets. At December 31, 1995 and 1994, the carrying values of TIAA's
investments in real estate subsidiaries were approximately $4,599,673,000 and
$4,963,164,000, respectively. Subsidiary assets, liabilities and gross rental
income, of real estate subsidiaries, as of and for the years ended December 31,
1995 and 1994, were approximately as follows:
1995 1994
----------- -------------
Assets $5,523,739,000 $5,893,047,000
Liabilities 981,438,000 926,695,000
Gross rental
income 841,970,000 804,576,000
Earnings from primarily real estate subsidiaries in 1995, 1994 and 1993, of
approximately $164,676,000, $210,302,000 and $166,144,000, respectively, are
included in net investment income in the accompanying statements of operations.
Some of the real estate subsidiaries referred to above are partners in joint
ventures. At December 31, 1995 and 1994, the carrying values of TIAA real estate
subsidiaries that are partners in joint ventures were approximately
$2,371,931,000 and $2,945,089,000. Joint venture total assets, liabilities and
gross rental income, as of and for the years ended December 31, 1995 and 1994,
were approximately as follows:
II - 27
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Concluded)
Note 8--Unconsolidated Subsidiaries and Other Affiliates--(Concluded)
1995 1994
----------- -------------
Assets $3,437,761,000 $3,770,043,000
Liabilities 1,233,262,000 746,584,000
Gross rental income 608,507,000 550,225,000
The subsidiaries' equity share in these assets, liabilities and gross rental
income were approximately as follows:
1995 1994
----------- -------------
Assets $3,307,523,000 $3,549,882,000
Liabilities 937,673,000 621,281,000
Gross rental income 551,259,000 486,563,000
Net income earned by the subsidiaries from joint venture investments was
approximately $60,689,000, $92,342,000 and $48,299,000 in 1995, 1994 and 1993,
respectively. Some of the real estate joint ventures have mortgage loans from
TIAA. At December 31, 1995 and 1994, the unpaid principal of such mortgage loans
was approximately $826,216,000 and $539,769,000, respectively.
Note 9--Contingencies
It is the opinion of management that any liabilities which might arise from
litigation, state guaranty fund assessments, and other matters, over and above
amounts already provided for in the financial statements, are not considered
material in relation to TIAA's financial position or the results of its
operations.
Note 10--Subsequent Event
Effective January 1, 1996, TIAA ceased conducting insurance and annuity
operations in Canada and reinsured all existing business with an independent
third party insurer under an assumption reinsurance agreement. Under this
agreement, TIAA transferred approximately $129 million (US) of assets to the
independent third party insurer, and, under the reinsurance agreement, this
transfer released all of TIAA's Canadian policy reserves and other liabilities.
TIAA will have no continuing material obligation associated with its withdrawal
from the Canadian insurance market.
II - 28
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
BALANCE SHEET (Unaudited)
<TABLE>
<CAPTION>
June 30,
1996
---------------
<S> <C>
ASSETS
Bonds.......................................................................................... $51,788,660,981
Stocks......................................................................................... 220,486,592
Mortgages...................................................................................... 20,751,659,909
Real estate.................................................................................... 7,130,276,982
Other long-term investments.................................................................... 438,000,113
Cash and short-term investments................................................................ 774,132,600
Investment income due and accrued.............................................................. 1,165,017,877
Separate Account assets........................................................................ 364,218,681
Other assets................................................................................... 274,139,657
---------------
TOTAL ASSETS $82,906,593,392
===============
LIABILITIES, CAPITAL AND CONTINGENCY RESERVES
Policy and contract reserves................................................................... $73,230,209,560
Dividends declared for the following year...................................................... 1,639,976,733
Asset Valuation Reserve........................................................................ 2,055,640,853
Interest Maintenance Reserve................................................................... 688,192,201
Separate Account liabilities................................................................... 257,814,181
Other liabilities.............................................................................. 649,536,872
---------------
Total Liabilities 78,521,370,400
---------------
Capital........................................................................................ 2,500,000
---------------
Contingency reserves:
For group life insurance................................................................... 8,248,340
For investment losses, annuity and insurance mortality,
and other risks.......................................................................... 4,374,474,652
---------------
Total Contingency Reserves 4,382,722,992
---------------
Total Capital and Contingency Reserves 4,385,222,992
---------------
TOTAL LIABILITIES, CAPITAL AND CONTINGENCY RESERVES $82,906,593,392
===============
</TABLE>
See notes to unaudited interim financial statements.
II - 29
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
STATEMENT OF OPERATIONS AND
CHANGES IN CONTINGENCY RESERVES (Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1996
------------------
<S> <C>
INCOME
Insurance and annuity premiums and deposits...................................................... $1,401,839,316
Transfers from CREF, net......................................................................... 39,666,294
Annuity dividend additions....................................................................... 1,000,681,706
Net investment income............................................................................ 3,191,457,710
Supplementary contract considerations............................................................ 99,409,201
--------------
TOTAL INCOME $5,733,054,227
==============
DISTRIBUTION OF INCOME
Policy and contract benefits..................................................................... $ 902,979,022
Dividends to policyholders and beneficiaries..................................................... 1,703,387,077
Increase in policy and contract reserves......................................................... 2,415,794,816
Operating expenses............................................................................... 120,581,454
Net transfers to Separate Accounts............................................................... 132,339,293
Federal income taxes............................................................................. 6,929,984
Other, net....................................................................................... 6,373,066
Increase in contingency reserves................................................................. 444,669,515
--------------
TOTAL DISTRIBUTION OF INCOME $5,733,054,227
==============
CHANGES IN CONTINGENCY RESERVES:
From operations.................................................................................. $ 444,669,515
Net realized capital gain on investments......................................................... 177,677,519
Net unrealized capital gain on investments....................................................... 9,672,555
Transfer to the Interest Maintenance Reserve..................................................... (103,280,870)
Transfer to the Asset Valuation Reserve:
Required formula contribution.................................................................. (111,748,110)
Net capital gains.............................................................................. (83,024,853)
Increase in non-admitted assets other than investments........................................... (8,761,807)
Other, net....................................................................................... 3,839,169
--------------
Net Change in Contingency Reserves 329,043,118
Contingency Reserves at Beginning of Year 4,053,679,874
--------------
Contingency Reserves at End of Period $4,382,722,992
==============
</TABLE>
See notes to unaudited interim financial statements.
II - 30
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
STATEMENT OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1996
------------------
<S> <C>
CASH PROVIDED
By operating activities:
Insurance and annuity premiums,
deposits and considerations ..................................................... $1,493,119,706
Transfers from CREF, net .......................................................... 39,666,294
Annuity dividend additions ........................................................ 1,000,681,706
Investment income, net ............................................................ 3,110,897,011
--------------
Total Receipts 5,644,364,717
--------------
Policy and contract benefits ...................................................... 1,081,854,419
Dividends ......................................................................... 1,551,895,764
Operating expenses ................................................................ 121,511,876
Federal income taxes .............................................................. 10,784,747
Net transfers to Separate Accounts ................................................ 132,621,852
Other, net ........................................................................ 72,340,195
--------------
Total Disbursements 2,971,008,853
--------------
Cash Provided by Operating Activities 2,673,355,864
--------------
By investing activities:
Sales and redemptions of bonds and stocks ......................................... 2,840,793,601
Repayment of mortgage principal ................................................... 732,481,851
Sales of real estate .............................................................. 107,624,010
Other, net ........................................................................ 158,072,559
--------------
Cash Provided By Investing Activities 3,838,972,021
--------------
TOTAL CASH PROVIDED 6,512,327,885
--------------
DISBURSEMENTS FOR NEW INVESTMENTS
Investments acquired:
Bonds and stocks .................................................................. 5,572,692,763
Mortgages ......................................................................... 544,045,487
Real estate ....................................................................... 235,243,321
Other, net ........................................................................ 99,264,760
--------------
TOTAL DISBURSEMENTS FOR NEW INVESTMENTS 6,451,246,331
--------------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 61,081,554
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF YEAR 713,051,046
--------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 774,132,600
==============
</TABLE>
See notes to unaudited interim financial statements.
II - 31
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
Note 1--General
These interim unaudited financial statements of Teachers Insurance and Annuity
Association of America ("TIAA") have been prepared on the basis of accounting
practices prescribed or permitted by the New York State Insurance Department and
reflect all adjustments (all of which are of a normal recurring nature)
necessary, in the opinion of management, for a fair statement of results for the
interim period presented.
Note 2--Investments
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:
As a percentage of total
bond investments:
Below investment grade bonds 5%
As a percentage of total mortgage investments:
Below investment grade mortgage loans 5%
Total mortgage investments in California 24%
Total mortgage investments in office buildings 41%
Total mortgage investments in shopping centers 31%
As a percentage of total real estate investments:
Total real estate investments in Minnesota 11%
Total real estate investments in California 12%
Total real estate investments in office buildings 64%
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 June 30, 1996, TIAA had interest rate swap
contracts with commercial banks related to $110,000,000 par value of variable
interest rate notes, and asset swap contracts outstanding related to
$238,701,000 of investments denominated in foreign currencies.
II - 32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant, TIAA Real Estate Account, has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in New York, New York, on the 3rd day of October, 1996.
TIAA REAL ESTATE ACCOUNT
By: TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
By: /s/ Peter C. Clapman
--------------------------------
Peter C. Clapman
Senior Vice President and
Chief Counsel, Investments
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons, trustees and
officers of Teachers Insurance and Annuity Association of America, in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ John H. Biggs Chairman of the Board and 10-3-96
- ----------------------------- Chief Executive Officer
John H. Biggs (Principal Executive Officer)
/s/ Thomas W. Jones Vice Chairman, President and 10-3-96
- ----------------------------- Chief Operating Officer
Thomas W. Jones (Principal Financial Officer)
and Trustee
/s/ Richard L. Gibbs Executive Vice President 10-3-96
- ----------------------------- (Principal Accounting Officer)
Richard L. Gibbs
<PAGE>
Signature of Trustee Date Signature of Trustee Date
- -------------------- ---- -------------------- ----
/s/ Martin L. Leibowitz 10-3-96 /s/ Frederick R. Ford 10-3-96
- --------------------------- --------------------------
Martin L. Leibowitz Frederick R. Ford
/s/ David Alexander 10-3-96
- --------------------------- --------------------------
David Alexander Ruth Simms Hamilton
/s/ Marcus Alexis 10-3-96 /s/ Dorothy Ann Kelly 10-3-96
- --------------------------- --------------------------
Marcus Alexis Dorothy Ann Kelly, O.S.U.
/s/ A. Howard Amon, Jr. 10-3-96 /s/ Ronald L. Thompson 10-3-96
- --------------------------- --------------------------
A. Howard Amon, Jr. Ronald L. Thompson
/s/ Robert M. O'Neil 10-3-96
--------------------------
Robert M. O'Neil
/s/ Willard T. Carleton 10-3-96 /s/ Leonard S. Simon 10-3-96
- --------------------------- --------------------------
Willard T. Carleton Leonard S. Simon
/s/ Robert C. Clark 10-3-96 /s/ Paul R. Tregurtha 10-3-96
- --------------------------- --------------------------
Robert C. Clark Paul R. Tregurtha
/s/ Flora Mancuso Edwards 10-3-96 /s/ Charles J. Urstadt 10-3-96
- --------------------------- --------------------------
Flora Mancuso Edwards Charles J. Urstadt
/s/ William H. Waltrip 10-3-96
- --------------------------- --------------------------
Estelle A. Fishbein William H. Waltrip
- ---------------------------
Rosalie J. Wolf
<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 financial statements of the TIAA Real Estate Account
("Account") of Teachers Insurance and Annuity Association of America ("TIAA") as
of December 31, 1995, and for the period July 3, 1995 (commencement of
operations) to December 31, 1995, and have issued our report thereon dated March
8, 1996. Our audit also included the financial statement schedule - Schedule III
- - Real Estate Owned. This financial statement schedule is the responsibility of
the TIAA's management. Our responsibility is to express an opinion based on our
audit. In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
March 8, 1996
[logo]
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
S - 1
<PAGE>
SCHEDULE III - REAL ESTATE OWNED
TIAA REAL ESTATE ACCOUNT
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Costs
Initial Cost Capitalized Value at Year
Encum- to Acquire Subsequent December 31, Construction Date
Description brances Property to Acquisition 1995 Completed Acquired
<S> <C> <C> <C> <C> <C> <C>
River Road Distribution Center $-0- $ 4,166,787 $-0- $ 4,166,787 1995 11/22/95
Industrial Building
Fridley, Minnesota (1)
The Greens At Metrowest -0- 12,490,895 -0- 12,490,895 1990 12/15/95
Apartments
Orlando, Florida (1)
Butterfield Industrial Park -0- 4,431,166 -0- 4,431,166 1980 12/22/95
Industrial Building
El Paso, Texas (2)
Brixworth Apartments -0- 15,574,647 -0- 15,574,647 1989 12/28/95
Apartments
Atlanta, Georgia (1)
Plantation Grove Shopping Center -0- 7,326,170 -0- 7,326,170 1995 12/28/95
Shopping Center
Ocoee, Florida (1)
____ ___________ ____ ____________
$-0- $43,989,665 $-0- $43,989,665
</TABLE>
(1) Fee interest
(2) Leasehold interest
<TABLE>
<CAPTION>
<S> <C>
Reconciliation of investment property owned:
Balance at beginning of period $ --
Acquisitions 43,989,665
Capital improvements and carrying costs --
Balance at end of period $43,989,665
</TABLE>
S - 2
Teacher Insurance and Annuity Association
730 Third Avenue
New York, New York 10017-3206
212 490-9000
October 3, 1996
Board of Trustees of
Teachers Insurance and Annuity Association
730 Third Avenue
New York, New York 10017-3206
Ladies and Gentlemen:
This opinion is furnished in connection with the Registration
Statement on Form S-1 (File No. 33-92990) (the "Registration Statement") of the
TIAA Real Estate Account (the "Account") being filed with the Securities and
Exchange Commission under the Securities Act of 1933. Interests in the Account
are offered through endorsements to certain individual, group and tax-deferred
annuity contracts and through income-paying contracts (collectively, the
"Contracts") issued by Teachers Insurance and Annuity Association of America
("TIAA").
I have examined the Charter, Bylaws and other corporate records of
TIAA, including TIAA's Plan of Operations for Separate Account Business, and
other organizational records of the Account, and the relevant statutes and
regulations of the State of New York. On the basis of such examination, it is my
opinion that:
1. TIAA is a nonprofit life insurance company duly organized
and validly existing under the laws of the State of New York.
2. The Account is a "separate account" of TIAA within the meaning
of Section 4240 of the New York Insurance Law, duly established
by a resolution of TIAA's Board of Trustees and validly existing
under the laws of the State of New York.
3. The Contracts have been duly authorized by TIAA and, when issued
as contemplated by the Registration Statement, constitute legal,
validly issued and binding obligations of TIAA enforceable in
accordance with their terms.
<PAGE>
October 3, 1996
Page 2
I hereby consent to the use of this opinion as an exhibit to the
Registration Statement, and to the reference to my name under the heading "Legal
Matters" in the Registration Statement.
Sincerely,
/s/ Charles H. Stamm
--------------------
Charles H. Stamm
Executive Vice President
and General Counsel
TEACHER INSURANCE AND ANNUITY ASSOCIATION
730 Third Avenue
New York, New York 10017-3206
(212) 490-9000
June 9, 1995
Institutional Property Consultants, Inc.
4330 La Jolla Village Drive, Suite 310
San Diego, California 92122
RE: Teachers Insurance and Annuity
Association of America
Real Estate Separate Account;
ERISA Independent Fiduciary
------------------------------
Dear Sirs:
This letter sets forth the terms and conditions under which Teachers
Insurance and Annuity Association of America (the "Company") offers to appoint
Institutional Property Consultants, Inc. ("IPC") to serve as the Independent
Fiduciary, as defined below, under the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") for a new real estate pooled separate account (the
"Account") designed primarily for investment by participants in defined
contribution plans qualified under (Section) 401(a) and (Section) 403(a) of the
Internal Revenue Code of 1986, as amended, ("Code"), Code (Section) 403(b)
plans, and certain individual retirement annuities under (Section) 408 of the
Code.
1. Background
----------
On December 22, 1994 the Company filed an application (the
"Application") with the Department of Labor ("DOL") for exemption from
certain potential prohibited transactions under (Section) 406 of ERISA
and (Section) 4975 of the Code with respect to certain transactions or
classes of transactions involving the establishment and subsequent
administration by the Company of the Account. Among other features, the
Account offers a stand-by liquidity mechanism under which units of
interest in the Account ("Units") may be purchased or sold by the
Company. The Application contemplates that various
<PAGE>
Institutional Property Consultants, Inc. Page 2
June 9, 1995
aspects of the Account's operation will be subject to the oversight of
an independent fiduciary ("Independent Fiduciary") which will be a
business organization with substantial real estate investment
experience and which will be familiar with the responsibilities of a
fiduciary with respect to benefit plans under ERISA. The Independent
Fiduciary will act for the exclusive benefit of the plan participants
who elect to participate in the Account.
As of this date, the Application has yet to be approved by the
DOL, although on the basis of discussions to date with the
representatives of the DOL, the Company has no reason to believe that
an exemption with respect to the Account will not be issued in due
course. However, prior to the final disposition of the Application by
the DOL, the Company intends to appoint an Independent Fiduciary who
will undertake responsibility for such activities and such classes of
transactions as are described in the Application, pages 16-33, and for
such other matters as the Company may from time to time request.
Included in the Application are descriptions of the responsibilities of
the Independent Fiduciary. The proposed valuation procedures and rules
for the Account are described in the Application and in Exhibit A to
this Agreement.
2. Compensation
------------
Compensation for services rendered by IPC pursuant to this
Agreement shall be paid from the Account in the amounts and in
accordance with the terms and conditions set forth in Schedule 1
attached hereto.
3. Duties and Responsibilities of the Company
------------------------------------------
The Company is an investment manager, as defined in Section
3(38) of ERISA, with respect to the Account, and shall be primarily
responsible, as a fiduciary under ERISA, for all aspects of the
establishment and administration of the Account. The Company alone
shall be responsible for making determinations with respect to the
acquisition and disposition of properties by the Account and for all
other aspects of the investment of Account assets, subject to the
duties and responsibilities of IPC specifically set forth in the
Application and paragraph 4 hereof.
<PAGE>
Institutional Property Consultants, Inc. Page 3
June 9, 1995
4. Duties and Responsibilities of IPC
----------------------------------
A. IPC's duties and responsibilities under this Agreement shall be
those set forth in the Application and as described below:
(1) IPC will review and approve the valuation of the Account
and of the properties held in the Account as outlined on
pages 24-27 of the Application and as more specifically
described in Valuation Procedures and Rules which shall be
adopted for the Account by the Company and which shall be
subject to the approval of IPC. (A copy of the current
draft of the valuation procedures and rules for the
Account is attached as Exhibit A.)
(2) IPC will approve the appointment of all independent
appraisers retained by the Company to perform periodic
valuations of Account properties. For this purpose, the
Company will forward to IPC information provided to the
Company with respect to the background, education and
experience of each such independent appraiser.
(3) IPC may require an appraisal in addition to those
conducted by an independent appraiser appointed as
provided in clause (2) above, when it believes that the
characteristics of a particular property have changed
materially or with respect to any property where it deems
an additional appraisal to be necessary or appropriate in
order to assure a correct Account valuation. IPC will
perform such reviews of Account properties as it may
determine to be necessary or desirable in establishing the
necessity of such additional appraisals. IPC shall have
the authority to designate independent appraisers to be
hired by the Company to perform any such additional
appraisals, but the Company hereby reserves the right to
disapprove any such selection. Accordingly, IPC shall
notify the Company at least fourteen (14) days prior to
the anticipated hiring of any appraiser not previously
approved by the Company. Any such appraiser will be deemed
approved by the Company if the Company fails to object
within fourteen (14) days of receipt of the aforesaid
notice and the Company will, thereupon, hire such
appraiser. The Company may in its sole discretion withdraw
its approval
<PAGE>
Institutional Property Consultants, Inc. Page 4
June 9, 1995
of an appraiser at any time prior to hiring such appraiser
for future appraisals by giving a notice of withdrawal of
its approval.
(4) IPC shall review purchases and sales of Units by Account
participants and the Company to assure that correct
Account values are applied. IPC shall also review the
fixed repayment schedule applicable to the redemption of
Seed Money Units during the Start Up Period, as defined in
the Application, as approved by the New York Insurance
Department. With respect to the foregoing, IPC may rely
upon the truth, completeness and correctness of
information provided to it by the Company or by the
independent auditor designated by the Company with respect
to the Account.
(5) After (and, if necessary, during) the Start Up Period, as
defined in the Application, IPC will determine with the
Company the appropriate "trigger" guidelines relating to
the level of the Company's ongoing ownership of Liquidity
Units in the Account, as defined in the Application, and
the manner in which any reduction of the Company's
participation in excess of such guidelines is to be
effected as contemplated under the Application. If IPC and
the Company agree that asset sales may be required in
order to reduce the Company's ownership of Units in the
Account, IPC will participate in the planning of any such
program of sales, including the selection of the
properties to be sold and the guidelines to be followed in
making such sales.
(6) In the event of the termination of the Account as
described on pages 27-29 of the Application, IPC will
approve the sale of Account properties and supervise
Account operation during the Wind Down Period (as defined
in the Application). Such period will commence with the
Company's notice to Account participants of its
termination of the Account and will end on the date that
no Units are held by any Participant (and, if applicable,
Participating Plans), as defined in the Application.
(7) IPC will review and approve the investment
<PAGE>
Institutional Property Consultants, Inc. Page 5
June 9, 1995
guidelines established by the Company for the Account and
will monitor the conformity of all property acquisitions
and sales with the requirements of such guidelines.
(8) With respect to any other transaction or matter involving
the Account that is submitted to IPC by the Company, IPC
will review said transaction or matter in order to
determine whether it is fair to the Account and in the
Account's best interests.
B. In the event that the Company or the DOL or any other
governmental agency requires or requests IPC to perform
additional functions reasonably related to the type of review
described herein, or to undertake duties with respect to the
Account beyond those specifically enumerated herein, these
additional duties and functions shall be deemed to be included
among the duties of IPC under this Agreement, provided that:
(1) The Company requests IPC to perform such activity in
writing; and
(2) IPC and the Company determine the nature and amount of any
additional compensation that may be appropriate with
respect to such additional duties. If IPC and the Company
are not able to agree upon the nature and amount of any
additional compensation, IPC and the Company hereby agree
to submit any disputed issues to arbitration and to be
bound by the results thereof; provided, however, that IPC
shall nevertheless perform the additional duties described
above during the time required for a final determination
to be made with respect to the nature and/or amount of any
additional compensation that it may receive.
C. IPC will meet with the Company on a quarterly basis to review
the activities of the Account and the actions that IPC has
taken under this Agreement. IPC will submit to the Company a
summary report from time to time as it may deem necessary or
appropriate, but no less frequently than annually. Such report
shall be a written report that summarizes and explains all
actions and activities that IPC has undertaken since the
submission of the last such report or the commencement of its
terms, except those actions and activities that IPC in its
judgment deems to be not material. All or
<PAGE>
Institutional Property Consultants, Inc. Page 6
June 9, 1995
any part of any such report may, after consultation with IPC,
be provided by the Company to any Account participant or to the
DOL or any other governmental agency. IPC shall maintain
appropriate records of its actions and activities under this
Agreement and will allow the Company to review such records
during normal business hours upon reasonable prior request by
the Company, and the Company, after consultation with IPC, may
provide the results of any such review to the DOL or to any
other governmental agency.
D. IPC may make all reasonable inquiries, consult with whomever it
reasonably deems necessary, do all acts that are reasonably
necessary to the performance of its duties, and review such
Company documents as are reasonably appropriate for carrying
out its responsibilities under this Agreement. All work to be
performed pursuant to this paragraph 5, may be performed during
normal business hours at the Company's Home Office, 730 Third
Avenue, New York, New York 10017 or such other place as may be
reasonably designated by IPC, including IPC's offices.
5. Representations
---------------
IPC represents and agrees that:
A. IPC has at least five years of experience with respect to
commercial real estate investments.
B. The gross income which is received by IPC (or any partnership
or corporation of which IPC is a 10 percent or more partner or
shareholder) from the Company and its affiliates (as defined in
any proposed exemption issued with respect to the Account) for
any fiscal year ending during the term of this Agreement shall
not exceed 5 percent of its annual gross income from all
sources for the preceding fiscal year. Such income limitation
will include services rendered to the Account as the
Independent Fiduciary under any prohibited transaction
exemption granted by the DOL. IPC will provide, on an annual
basis, a report to the Company of the gross income it receives
from the Company as a percentage of the gross income received
during the preceding fiscal year.
C. IPC shall not (i) acquire any property from, sell any
<PAGE>
Institutional Property Consultants, Inc. Page 7
June 9, 1995
property to or borrow any funds from, the Company or any of its
affiliates during the period for which it serves as an
Independent Fiduciary under this Agreement and for a period of
six months thereafter, or (ii) negotiate any such transaction
described in (i) during the period that IPC serves as the
Independent Fiduciary.
D. In the event that the DOL requires additional representations
by IPC, it is agreed that IPC will make any such reasonably
required representations that are true in fact.
6. Independent Status
------------------
As the Independent Fiduciary, IPC shall not be an agent of the
Company. In keeping with this status, IPC shall be free to control its
method of fulfilling its responsibilities within the framework of its
obligations to the Participants and their beneficiaries (and, if
applicable, Participating Plans), as defined in the Application, and to
the Company.
7. Fiduciary Standards/Confidentiality
-----------------------------------
Notwithstanding any other provision of this Agreement, it is
understood that IPC will act as a fiduciary, as defined in ERISA, with
respect to the Participants and their beneficiaries (and, if
applicable, Participating Plans) that invest in the Account, and that
IPC will perform its duties under this Agreement for the exclusive
benefit of such Participants, their beneficiaries and Participating
Plans and in conformity with the legal requirements imposed upon it by
ERISA.
It is understood that IPC will not unnecessarily engage in any
activity in connection with this appointment that is adverse to the
interest of the Company. IPC may provide similar independent fiduciary
services with respect to other benefit plans subject to ERISA; provided
that IPC does not use or disclose in such relationships confidential
information obtained by it in the course of providing services under
this Agreement.
Upon termination of this Agreement, IPC will disclose to the
Company all material in its possession that has been
<PAGE>
Institutional Property Consultants, Inc. Page 8
June 9, 1995
released to it by the Company or produced pursuant to this Agreement.
Such material may be retained by IPC if it deems such retention to be
necessary to protect its interests or the interests of the Participants
and their beneficiaries (and, if applicable, Participating Plans) that
have invested in the Account. If IPC retains any such material, it
shall promptly notify the Company in writing of such action. The
aforesaid notice shall include an itemized list of all retained
documents and other materials. Upon receipt of the aforesaid notice, or
at any time thereafter, the Company may at its option, require that IPC
deliver all such retained material to the person who succeeds to its
position as Independent Fiduciary. However, IPC may retain any
materials that it deems necessary to protect its interests, provided
that copies of said materials are furnished to either the Company or
IPC's successor as Independent Fiduciary, upon request. IPC will not at
any time during the term of this Agreement or thereafter disclose any
of the Company's trade secrets, confidential business methods, or any
other confidential information which it may have acquired during its
service as Independent fiduciary under this Agreement.
8. Personnel
---------
IPC agrees that, without limiting its responsibilities under
this Agreement or under ERISA, primary responsibility for the
performance of the services contemplated under this Agreement shall be
assigned to Barbara R. Cambon and that it will use its best efforts to
assure that Barbara R. Cambon continues to act in such capacity during
the term of this Agreement. In the event that Barbara R. Cambon does
not, for any reason, continue to serve in such capacity, IPC agrees
that it will assign primary responsibility for the duties contemplated
under this Agreement to a senior employee of similar experience and
ability.
9. Effective Date/Termination/Notice
---------------------------------
A. This Agreement shall become effective on the date of receipt by
the Company of a copy of this Agreement that has been executed
by IPC and by an authorized officer of the Company.
B. IPC's appointment shall commence on the date this Agreement
becomes effective for a five year term, and
<PAGE>
Institutional Property Consultants, Inc. Page 9
June 9, 1995
shall be renewable by the Company, from time to time and
without limitation on the number of renewals, for additional
three (3) year terms. Upon expiration of IPC's appointment
without renewal this Agreement shall terminate. IPC may
terminate this Agreement at any time but must give at least 180
days prior written notice to the Company. The Company may
terminate this Agreement and IPC's appointment prior to the
expiration of the term of its appointment if: (1) a special
subcommittee of the Company's Mortgage Committee, after an
annual revue, decides to terminate the Agreement upon 180 days
prior written notice; or (2) if the Company determines that IPC
has breached any representation set forth in paragraph 5 or
that IPC has failed to carry out its responsibilities under
this Agreement in an effective manner, or is unable to do so.
The Company may terminate this agreement if it determines that
a merger or restructuring of IPC with or into another entity
may cause a conflict of interest that shall impair IPC's
ability to carry out its responsibilities under this Agreement
in an effective manner. The Company may terminate this
Agreement at any time prior to the date on which Units are
acquired by a Participant (or, if applicable, Participating
Plan). In the event that IPC's term shall terminate as
described in this paragraph 9B, IPC shall be compensated only
for services performed by it prior to the date of such
termination.
C. Unless otherwise expressly provided herein, any notice, demand
or request under this Agreement shall be deemed to have been
properly given and served by depositing the same in the United
States mail, addressed as provided herein, postpaid and
registered or certified with return receipt requested. Any such
notice, demand or request shall be effective upon being
deposited in the United States mail. However, the time period
in which a response or action to any such notice, demand or
request must be given or taken shall commence to run from the
date of receipt on the return receipt of the notice, demand or
request by the addressee thereof. Rejection or other refusal to
accept or the inability to deliver because of changed address
of which no notice was given shall be deemed to be receipt of
the notice, demand or request. Notice to the Company shall be
addressed to Joan H. Fallon, Director, Teachers Insurance and
Annuity Association of America, 730 Third Avenue, New York, New
York, 10017-3206, with a copy to
<PAGE>
Institutional Property Consultants, Inc. Page 10
June 9, 1995
Jeanne Cullinan Ray, Vice President and Chief Counsel,
Teachers Insurance and Annuity Association of America, 730
Third Avenue, New York, New York, 10017-3206, (or such other
person or persons as the Company may designate). Notice to IPC
shall be addressed to Barbara R. Cambon, Institutional
Property Consultants, Inc., 4330 La Jolla Village Drive, Suite
310, San Diego, California 92122.
10. Indemnification and Insurance
-----------------------------
A. Subject to the limitations in clause C of this paragraph 10,
IPC shall be indemnified and saved harmless by the Account from
and against any and all claims of liability arising in
connection with the exercise of its duties and responsibilities
to the Account by reason of any act or omission, including all
expenses reasonably incurred in the defense of such act or
omission, unless (1) it shall be established by final judgement
of a court of competent jurisdiction that such act or omission
involved a violation of the duties imposed by Part 4 of Title I
of ERISA on the part of IPC or (2) in the event of a settlement
or other disposition of such claim involving the Account, it is
determined by written opinion of independent counsel acceptable
to both parties that such act or omission involved a violation
of the duties imposed by Part 4 of Title I of ERISA on the part
of IPC.
B. Subject to the limitation in clause C of this paragraph 10, the
Account shall pay expenses (including reasonable attorneys'
fees and disbursements), judgments, fines and amounts paid in
settlement incurred by IPC in connection with any of the
proceedings described above, in advance of the final
disposition of such proceedings, provided that (1) IPC shall
repay such advances to the Account, plus reasonable interest,
if it is established by a final judgment of a court of
competent jurisdiction, or by written opinion of independent
counsel under the circumstances described in section A above,
that IPC violated its duties under Part 4 of Title I of ERISA,
and (2) IPC shall, in the discretion and upon the request of
the Company, provide a bond or make other appropriate
arrangements for repayment of advances. Notwithstanding the
foregoing, no such advances shall be made in connection with
any claim against IPC that
<PAGE>
Institutional Property Consultants, Inc. Page 11
June 9, 1995
is made by the Account or the Company, provided that upon the
final disposition of such claim, the expenses (including
reasonable attorneys' fees and disbursements), judgments, fines
and amounts paid in settlement incurred by IPC shall be
reimbursed by the Account to the extent provided above.
C. The indemnification provided under clauses A and B of this
paragraph 10 shall apply only to claims and expenses not
actually covered by insurance. IPC agrees to maintain
professional liability coverage that includes coverage for its
responsibilities under this Agreement, with limits of at least
$1 million, throughout the term of this Agreement.
11. Entire Agreement
----------------
This letter contains the entire agreement between the parties.
However, where the text of this Agreement contains express reference to
the Application, or specific paragraphs of the Application, it is the
intention of the parties that the Application be incorporated in this
Agreement for the purpose of construing the meaning of such express
references. This Agreement may not be changed orally or by conduct but
only by agreement in writing signed by both parties.
12. No Waiver
---------
Failure to insist upon strict compliance with any of the terms,
covenants, or conditions of this Agreement shall not be deemed a waiver
of such term, covenant, or condition, nor shall any waiver or
relinquishment of any right or power hereunder at any one or more times
be deemed a waiver or relinquishment of such right or power at any
other time or times.
13. Severability
------------
The invalidity or unenforceability of any provision of this
Agreement shall in no way affect the validity or enforceability of any
other provision.
<PAGE>
Institutional Property Consultants, Inc. Page 12
June 9, 1995
14. Choice of Law
-------------
This Agreement and performance hereunder is subject to ERISA.
However, to the extent that this Agreement and performance hereunder is
not governed by ERISA or other applicable federal law, the laws of the
State of New York shall apply. The choice of law embodied in this
paragraph 15 shall be effective irrespective of the jurisdiction in
which any suit, action or proceeding may be instituted.
Please signify your acceptance by signing below and returning a copy of
this letter to the Company.
Sincerely,
TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
By /s/ Joan H. Fallon
------------------
Joan H. Fallon
Accepted:
Institutional Property Consultants, Inc.
By: /s/ Barbara R. Cambon Date: June 9, 1995
---------------------- ------------
Barbara R. Cambon
<PAGE>
SCHEDULE 1
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
FIDUCIARY COMPENSATION SCHEDULE
FOR REAL ESTATE SEPARATE ACCOUNT
--------------------------------
The annual fee payable to IPC shall be $100,000 per year plus its
reasonable direct out-of-pocket expenses. The annual fee shall be paid
quarterly, on first business day of each quarter, in advance, with the first
quarterly payment due on July 3, 1995. Direct out-of-pocket expenses shall be
reimbursed as incurred and shall be limited to reasonable travel-related
expenses, including transportation, hotels, and meals incurred in the
performance of IPC's duties. IPC shall, however, bear the cost of all operating
and administrative expenses relating to the performance of its obligations and
duties under this Agreement.
<PAGE>
EXHIBIT A
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
VALUATION PROCEDURES AND RULES
FOR REAL ESTATE ACCOUNT
-----------------------
This outline summarizes the basic elements of the valuation procedures
and rules for the Account.
Basic Principles
- ----------------
1. The valuation of equity real estate holdings is not an exact science;
it requires appraisals which are independent estimates of market
value.
A. Sales are the best measure of the value of equity real estate
holdings, but since they don't occur frequently, appraisals are
generally believed to be the best estimate of value at a given
point in time.
B. Independent appraisals are expensive, and a balance is required
between the accuracy of the estimate of value and the cost to
the Account of additional appraisals.
2. The Account's valuation procedures and rules are under the direct
supervision of an Independent Fiduciary and operate within guidelines
and limits established by the Independent Fiduciary.
Valuation Procedures for the Account
- ------------------------------------
1. Independent Fiduciary. The valuation of Account properties is
conducted under the supervision of the Independent Fiduciary.
A. The valuation procedures and rules will be approved by the
Independent Fiduciary. They cannot be changed without the
consent of the Independent Fiduciary.
B. The rules will limit the extent to which a property's value can
change without the prior approval of the Independent Fiduciary.
C. The Independent Fiduciary may require a new independent
appraisal of any property at any time.
<PAGE>
2. Initial Valuation. The initial value of each property will be the
price at which it is acquired (including all expenses relating to
purchase, such as acquisition fees, legal fees and expenses, and other
closing costs).
3. Scheduled Valuations.
---------------------
A. Independent Appraisals. Each property will be valued by an
independent appraiser at least once per year.
(i) The appraisal cycle will be set up so that properties
will be independently appraised in as even a pattern
as practical over the course of a calendar year. This
will be done by assigning to each property, at the
time it is purchased, the month in which its
independent appraisal will occur each year.
(ii) The independent appraisers selected by TIAA must be
approved by the Independent Fiduciary.
(iii) The following would be among the factors generally
considered in the annual appraisal:
- description and condition of the property
- regional and local market conditions
- current and projected occupancy levels
- highest and best use of the property
- cost approach
- sales comparison approach
- income approach including discounted cash flow
analysis
B. Quarterly Updates. TIAA's staff will update the independent
appraisals on a quarterly basis.
(i) Appraisal assumption (e.g. discount rates and rates
of inflation) will be reviewed and revised as
necessary.
(ii) Occupancy levels, cash flow, etc. will be reviewed as
well as regional and local market conditions.
<PAGE>
C. Accruals. The Accumulation, Seed and Liquidity Unit Values of
the Account may change by a daily accrual of projected income
and expenses during a given month. The Annuity Unit values of
the Account may change on the last calendar day of each month
by the accrual of projected income and expenses for that month.
4. Special Adjustments. The value of a given property could be adjusted at
any time to reflect any immediate or significant changes in value.
5. Limits and Supervision
A. The Independent Fiduciary receives quarterly valuation reports
from TIAA which, in addition to their involvement, detail
Account activity. The format of these reports will be developed
with the Independent Fiduciary. The Fiduciary will, therefore,
be familiar with Account properties.
B. Daily accruals of income and expenses, as well as incremental
adjustments in property value (from quarterly updates), will be
reported to the Independent Fiduciary as they are included in
the Unit value calculation.
C. Material changes in value (as described in D. below) and all
independent appraisals will be approved by the Fiduciary prior
to inclusion in a Unit Value calculation.
D. TIAA cannot, without the prior approval of the Independent
Fiduciary, change the values of one or more properties if such
changes would exceed the following limits:
(i) The adjustment would result in a 6 percent increase
or decrease in the value of a given property since
the last independent appraisal of that property;
(ii) The adjustments would result in a greater than 2
percent change in the value of the Account since the
prior monthly valuation date; or
(iii) The adjustments would result in a greater than 4
percent change in the value of the Account within any
quarter.
<PAGE>
In addition, the Independent Fiduciary will approve any adjustments
made within the first three months after the receipt of the annual appraisal
performed by an independent qualified appraiser.
<PAGE>
TEACHER INSURANCE AND ANNUITY ASSOCIATION
730 Third Avenue
New York, New York 10017-3206
(212) 490-9000
October 5, 1995
Institutional Property Consultants, Inc.
4330 La Jolla Village Drive
San Diego, California 92122
Re: Teachers Insurance and Annuity Association
of America Real Estate Separate Account;
ERISA Independent Fiduciary
------------------------------------------
Dear Sirs:
This letter supplements the June 9, 1995 letter setting forth the terms
and conditions under which Teachers Insurance and Annuity Association of America
(the "Company") appointed Institutional Property Consultants, Inc. ("IPC") to
serve as an Independent Fiduciary under the Employee Retirement Income Security
Act of 1974 ("ERISA") for its Real Estate Account ("Account").
Section 4A. of the June 9, 1995 letter setting forth the duties and
responsibilities of IPC is amended by the addition of new subparagraph (9) to
read as follows:
(9) IPC will review and approve in advance any exercise of discretion
by the Company to accelerate the fixed repayment schedule applicable to
the redemption of Seed Money Units and will only give its approval upon
determining that it would be to the benefit of the Account's
participants to do so.
Sincerely,
TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
By: /s/ Joan H. Fallon
------------------
Joan H. Fallon
Accepted:
INSTITUTIONAL PROPERTY CONSULTANTS, INC.
By: /s/ Barbara R. Cambon Date: October 5, 1995
--------------------- ---------------
Barbara R. Cambon
<PAGE>
TEACHER INSURANCE AND ANNUITY ASSOCIATION
730 Third Avenue
New York, New York 10017-3206
(212) 490-9000
June 24, 1996
Institutional Property Consultants, Inc.
4330 La Jolla Village Drive
San Diego, California 92122
Re: Teachers Insurance and Annuity Association
of America Real Estate Separate Account;
ERISA Independent Fiduciary
------------------------------------------
Dear Sir or Madam:
This letter supplements the June 5, 1995 and the October 5, 1995
letters setting forth the terms and conditions under which Teachers Insurance
and Annuity Association of America (the "Company") appointed Institutional
Property Consultants, Inc. ("IPC") to serve as an Independent Fiduciary under
the Employee Retirement Income Security Act of 1974, as amended ("ERISA") for
its Real Estate Account ("Account").
Section 9B. of the June 9, 1995 letter setting forth the
termination provisions is deleted and replaced by a new Section
9B. to read as follows:
IPC's appointment shall commence on the date this Agreement becomes
effective for a five year term, and shall be renewable by the Company,
from time to time, and without limitation on the number of renewals,
for additional three (3) year terms. The Company shall delegate to a
special subcommittee of the Company's Mortgage Committee (the
"Subcommittee") the sole power to renew any such appointment and the
Subcommittee shall not renew the appointment if forty percent (40%) of
the Subcommittee members disapprove
<PAGE>
Institutional Property Consultants, Inc. Page 2
June 24, 1996
of such renewal. Upon expiration of IPC's appointment without renewal
this Agreement shall terminate. IPC may terminate this Agreement at any
time but must give at least 180 days prior written notice to the
Company. The Company must terminate this Agreement and IPC's
appointment prior to the expiration of the term of its appointment if a
majority of the Special Subcommittee members determines that: (1) IPC
has breached any representation set forth in paragraph 5; (2) that IPC
has failed to carry out its responsibilities under this Agreement in an
effective manner, or is unable to do so; or (3) that a merger or
restructuring of IPC with or into another entity may cause a conflict
of interest that shall impair IPC's ability to carry out its
responsibilities under this Agreement in an effective manner. In the
event that IPC's term shall terminate as described in this paragraph
9B., IPC shall be compensated only for services performed by it prior
to the date of such termination.
Sincerely,
TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
By: /s/ Joan H. Fallon
------------------
Joan H. Fallon
Accepted:
INSTITUTIONAL PROPERTY CONSULTANTS, INC.
By: /s/ Barbara R. Cambon Date: June 27, 1996
--------------------- -------------
Barbara R. Cambon
Sutherland, Asbill & Brennan, L.L.P.
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
Tel: (202) 383-0100 Steven B. Boehm
Fax: (202) 637-3593 Direct Line (202) 383-0176
October 4, 1996
Teachers Insurance and Annuity Association of America
730 Third Avenue
New York, New York 10017-3206
Re: Registration of Individual, Group and Tax-Deferred
Variable Annuity Contracts on Form S-1 for the
TIAA Real Estate Account
--------------------------------------------------
Ladies and Gentlemen:
We hereby consent to the reference to our name under the
caption "Legal Matters" in the Prospectus filed as a part of the registration
statement on Form S-1 filed to register additional securities for the TIAA Real
Estate Account. In giving this consent, we do not admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933.
Sincerely,
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
By: /s/ Steven B. Boehm
--------------------------
Steven B. Boehm
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement on Form S-1 of our report
dated March 8, 1996 relating to the TIAA Real Estate Account, our report dated
March 8, 1996 relating to The Greens at Metrowest Apartments and
Brixworth-Atlanta Apartments, our report dated April 12, 1996 relating to The
Millbrook Collection and the Lynnwood Collection Retail Centers, appearing in
the Prospectus, which is a part of this Registration Statement and of our report
dated March 8, 1996 relating to the financial statement schedule, Schedule
III--Real Estate Owned, appearing elsewhere in this Registration Statement. We
also consent to the incorporation by reference into this Registration Statement
of our report dated March 12, 1996 relating to Teachers Insurance and Annuity
Association of America.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
New York, New York
October 4, 1996
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