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
May 1, 1998
[TIAA Logo]
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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 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.
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. For a discussion of the
risks of investing in the Account, see "Risk Factors," page 15.
Neither the Securities and Exchange Commission ("SEC") nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is May 1, 1998
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TABLE OF CONTENTS
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Page
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DEFINITIONS ............................................. 3
SUMMARY ................................................. 5
THE REAL ESTATE ACCOUNT AND TIAA ........................ 8
INVESTMENT PRACTICES OF THE ACCOUNT ..................... 9
GENERAL INVESTMENT AND OPERATING POLICIES ............... 14
RISK FACTORS ............................................ 15
ROLE OF TIAA ............................................ 19
CONFLICTS OF INTEREST ................................... 22
DESCRIPTION OF PROPERTIES ............................... 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ......... 28
VALUATION OF ASSETS ..................................... 32
MANAGEMENT AND INVESTMENT ADVISORY
ARRANGEMENTS .......................................... 35
EXPENSE DEDUCTIONS ...................................... 36
THE ACCUMULATING ANNUITY CONTRACTS ...................... 37
INCOME-PAYING ANNUITY CONTRACTS ......................... 44
DEATH BENEFITS .......................................... 49
FEDERAL INCOME TAXES .................................... 50
GENERAL MATTERS ......................................... 54
DISTRIBUTION OF THE CONTRACTS ........................... 56
STATE REGULATION ........................................ 56
LEGAL MATTERS ........................................... 56
EXPERTS . ............................................... 56
LEGAL PROCEEDINGS ....................................... 56
ADDITIONAL INFORMATION .................................. 57
FINANCIAL STATEMENTS .................................... 57
INDEX TO FINANCIAL STATEMENTS ........................... F-1
APPENDIX A--MANAGEMENT OF TIAA .......................... A-1
</TABLE>
This prospectus does not constitute an offering in any jurisdiction in which an
offering of this type may not be legally made. No dealer, salesman, or other
person is authorized to give any information or make any representations about
this offering other than those contained in this prospectus. If information is
given or representations are made that are not in the prospectus, the
information or representations should not be relied upon.
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DEFINITIONS
Throughout the prospectus, "TIAA," "we," and "our" refer to Teachers Insurance
and Annuity Association of America. "You" and "your" mean any participant or any
prospective participant.
Account The TIAA Real Estate Account, a separate account of TIAA.
Accumulation The total value of your accumulation units in the Real Estate
Account.
Accumulation Fund The assets of the Real Estate Account not dedicated to
current retirement benefits or other liabilities.
Accumulation Period The period that begins with your first premium and
continues until the entire accumulation has been applied to purchase annuity
income, transferred from the Account, or paid to you or a beneficiary.
Accumulation Unit A share of participation in the Real Estate Account for
someone in the accumulation period.
Annuity Fund The assets in the Account that fund current retirement benefits.
The Account has two annuity funds--one that tracks the experience of
participants receiving benefits under the annual income change method and
another annuity fund for the monthly income change method. The investment
experience of the entire Account will be used to calculate changes in income for
all annuity payments paid from the Account.
Annuity Partner Anyone you name under a two-life 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.
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 adjusted
for investment gains or losses since the annuity unit value was last calculated.
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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.
CREF The College Retirement Equities Fund, TIAA's companion organization.
Eligible Institution A public or private institution in the United States that
is nonproprietary and nonprofit, and the main purpose of which is to offer
instruction, conduct research, or 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.
Income Change Method The method under which you choose to have your annuity
payments revalued. Under the annual income change method, your payments are
revalued once each year. Under the monthly income change method, your payments
are revalued every month.
Independent Fiduciary The firm appointed by TIAA to provide independent
fiduciary services to the Real Estate Account and which is 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.
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, profit-sharing, or tax-deferred annuity program.
Premium The amount you or your employer sends to the Real Estate Account to
purchase retirement benefits.
Two-Life Annuity Option An income option that continues lifetime annuity
payments to your annuity partner after you die.
Valuation Day Any day the NYSE is open for trading, as well as the last
calendar day of each month. Valuation days end as of the close of all U.S.
national exchanges where securities or other investments of the Account are
principally traded. Valuation days that aren't business days will end at 4 p.m.
eastern time.
Valuation Period The time from the end of one valuation day to the end of the
next.
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SUMMARY
The following summary of prospectus information should be read together with the
detailed information contained elsewhere in this prospectus.
The TIAA Real Estate Account
This prospectus describes the TIAA Real Estate Account, a separate investment
account of TIAA. Its investment objective is a favorable rate of return over the
long term, primarily through rental income and capital appreciation from real
estate investments owned by the Account. The majority of the Account's real
estate investments will be ownership interests in income-producing office,
industrial, retail, and multi-family residential properties. The Account can
make other real estate-related investments, including mortgage loans and
purchasing shares of real estate investment trusts and other entities engaged
primarily in real estate-related activities. The Account will also invest in
publicly-traded securities and other instruments to maintain liquidity to make
distributions and cover capital expenditures and expenses. TIAA will provide
additional liquidity to the Account as needed, according to its arrangement with
the U.S. Department of Labor, as described on page 20. As with any variable
account, we can't 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," page 35.
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 15. 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 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 only existed 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).
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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
22).
TIAA's guarantee to provide liquidity for the Account under certain
circumstances could also raise conflicts of interest (see "Liquidity Guarantee,"
page 20).
The Contracts
TIAA offers the Real Estate Account as a variable component of the following
accumulating annuity contracts: a Retirement Annuity ("RA"), a Group Retirement
Annuity ("GRA"), a Supplemental Retirement Annuity ("SRA"), and a Group
Supplemental Retirement Annuity ("GSRA"). The Real Estate Account is also
available through an Individual Retirement Annuity ("Classic IRA") and the Roth
Individual Retirement Annuity ("Roth IRA"). Both the Classic IRA and Roth IRA,
which we will refer to collectively as "IRAs", accept direct and rollover
contributions. (The Classic IRA that accepts direct contributions and the Roth
IRA may not yet be available in several states where we are awaiting regulatory
approval.) Subject to regulatory approval, we may also offer the Account through
a Keogh Plan Annuity ("Keogh"). RAs, SRAs, IRAs, and Keoghs are issued to you
directly. GRAs and GSRAs are issued under the terms of a group contract.
The Real Estate Account is also available through a variety of income-paying
annuity contracts. For details, see "Income-Paying Annuity Contracts," page 44.
Generally, you can allocate all or part of your premiums to the Real Estate
Account under your accumulating contracts, unless your employer has specifically
restricted your ability to invest in the Real Estate Account under your RA, GRA,
or GSRA contracts. 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 39, "Allocation of
Premiums," page 40, "Possible Restrictions on Acceptance of Premiums and
Transfers," page 40, and "Federal Income Taxes," page 50.
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
for providing liquidity guarantees. The current annual expense deductions from
the net assets of the Account total 0.60%: 0.28% for investment management
services, 0.23% for administrative and distribution expenses, 0.07% 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 36.
Transfers and Cash Withdrawals. You can transfer your accumulation in the
Account to TIAA's traditional annuity or to one of the CREF accounts once a
calendar month.
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Starting July 1, 1998, you may transfer accumulations out of your Account only
once a calendar quarter. We permit cash withdrawals from SRAs, GSRAs, and IRAs
at any time, subject to federal tax law. Your employer's plan can restrict your
ability to withdraw funds from RAs and GRAs. Federal tax law also restricts your
ability to transfer or withdraw funds. In addition, 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 50.
Contacting TIAA
You may contact TIAA by writing us at: Teachers Insurance and Annuity
Association of America, 730 Third Avenue, New York, NY 10017-3206. You can ask
questions by calling toll-free 800 842-2776 Monday through Friday, 8 a.m.
through 11 p.m. ET.
Selected Financial Data
The following selected financial data should be considered together with the
Account's financial statements and related notes, which are presented later in
this prospectus.
<TABLE>
<CAPTION>
July 3, 1995
(commencement
Year Ended Year Ended of operations) to
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ -----------------
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Investment income:
Real estate income, net:
Rental income ..................... $ 44,342,342 $ 10,951,183 $ 165,762
------------ ------------ ------------
Real estate property level expenses and taxes:
Operating expenses ............... 9,024,240 2,116,334 29,173
Real estate taxes ................ 4,472,311 1,254,163 14,659
------------ ------------ ------------
Total real estate
property level
expenses and taxes ............. 13,496,551 3,370,497 43,832
------------ ------------ ------------
Real estate income,
net ............................ 30,845,791 7,580,686 121,930
Dividends and interest ............ 16,486,279 6,027,486 2,828,900
------------ ------------ ------------
Total investment
income ......................... $ 47,332,070 $ 13,608,172 $ 2,950,830
============ ============ ============
Net realized and unrealized
gain on investments ............... $ 18,147,053 $ 3,330,539 $ 35,603
============ ============ ============
Net increase in net assets
resulting from operations ......... $ 60,071,400 $ 15,782,915 $ 2,676,000
============ ============ ============
Net increase in net assets
resulting from participant
transactions ...................... $356,052,262 $233,653,793 $117,582,345
============ ============ ============
Net increase in net assets ......... $416,123,662 $249,436,708 $120,258,345
============ ============ ============
</TABLE>
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<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
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Total assets ........................... $815,760,825 $426,372,007 $143,177,421
============ ============ ============
Total liabilities and
minority interest ...................... $ 29,942,110 $ 56,676,954 $ 22,919,076
============ ============ ============
Total net assets ....................... $785,818,715 $369,695,053 $120,258,345
============ ============ ============
Accumulation units outstanding ......... 6,313,015 3,295,786 1,172,498
============ ============ ============
Accumulation unit value ................ $ 122.30 $ 111.11 $ 102.57
============ ============ ============
</TABLE>
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
56).
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 insurance 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, NY
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, 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 and is currently one of the largest and most
experienced investors in mortgages and real estate equity interests in the
nation. As of December 31, 1997, TIAA employees managed for TIAA's general
account a mortgage portfolio of $18.8 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).
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As of December 31, 1997, TIAA employees oversaw for TIAA's general account a
real estate equity portfolio of $6.4 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.
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 two
million people at over 8,000 institutions. As of December 31, 1997, TIAA's
assets were approximately $93 billion; the combined assets for TIAA and CREF
totalled approximately $213 billion (although CREF doesn't stand behind TIAA's
guarantees).
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.
The Account's target is to invest between 70% and 80% of its assets 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 in
other real estate or real estate-related investments, through joint ventures,
real estate partnerships or real estate investment trusts ("REITs"). To a
limited extent, the Account can also invest in conventional mortgage loans,
participating mortgage loans, common or preferred stock of companies whose
operations involve real estate (i.e., that primarily own or manage real estate),
and collateralized mortgage obligations.
Between 20% and 30% of the Account is targeted to be invested in government and
corporate debt securities, short-term money market instruments and other cash
equivalents, and, to some extent, common or preferred stock of companies that
don't primarily own or manage real estate. In some circumstances, the Account
can increase the portion of its assets invested in debt securities or money
market instruments for a period of time. This could happen because of a rapid
influx of participants' funds, lack of suitable real estate investments, or a
need for more liquidity.
The Account may invest in foreign real estate or other types of foreign real
estate-related investments. 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.
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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).
TIAA can, in its discretion, decide to change the operating policies of the
Account or wind it down. If the Account is wound down, you may be required to
transfer your accumulations or annuity income to TIAA's traditional annuity or
any CREF account available under your employer's plan. If you don't tell us
where to transfer your accumulations or annuity income, we'll automatically
transfer them to the CREF Money Market Account. You will be notified in advance
if we decide to change or wind down the Account.
Investments in Direct Ownership Interests in Real Estate
Acquisition. The Account's main investment policy is to acquire direct ownership
interests in existing or newly-constructed income-producing real estate,
including office buildings, multi-family residential properties, and retail and
industrial properties. TIAA will invest a substantial part of the Account's
assets in established properties that have existing rent and expense schedules
or in new properties with predictable cash flows. The Account will usually
acquire real estate that's ready for occupancy by tenants, which eliminates the
development or construction risks inherent in buying unimproved real estate.
However, from time to time the Account can, consistent with its objective,
invest in a real estate development project. The Account can also buy
recently-constructed properties that are subject to agreements with sellers that
provide for certain minimum levels of income.
Purchase-Leaseback Transactions. Some of the Account's investments can be real
property purchase-leaseback transactions ("leasebacks"). In these transactions,
the Account typically will buy land and income-producing improvements on the
land, and simultaneously lease the land and improvements. Leasebacks can be 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.
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Investments in Mortgages
The Account can make mortgage loans or hold interests in mortgage loans made by
it or others, generally on the same types of properties it would otherwise
purchase. These will include commercial mortgage loans that may pay fixed or
variable rates of interest or have "participating" features (as defined below).
The Account's mortgage loans usually will be secured by properties that have
income-producing potential based on historical or projected data. Mortgage loans
usually will be non-recourse, which means they won't be the borrower's personal
obligations. They usually will not be insured or guaranteed by government
agencies or anyone else. We expect most of the Account's mortgage loans to be
secured by first mortgages on existing income-producing property. First mortgage
loans are secured by mortgages which have first-priority liens on the real
property. These loans may be amortized, or may provide for interest-only
payments, with a balloon payment at maturity.
Participating Mortgage Loans. The Account may also seek to make mortgage loans
which, in addition to charging interest, permit the Account to share (have a
"participation") in the income from or appreciation of the underlying property.
These participations let the Account receive additional interest, calculated as
a percentage of the revenues the borrower receives from (i) operating the
property and/or (ii) selling or refinancing the property or otherwise.
Participations can also involve 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.
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Foreign Real Estate and Other Foreign Investments
The Account may buy foreign real estate or make real estate-related investments
in foreign countries. It might also invest in securities or other instruments of
foreign governmental or private issuers that are consistent with its investment
objective and policies. Often, different factors affect foreign and domestic
investment decisions. For example, foreign real estate markets have different
liquidity and volatility attributes than U.S. markets. Changes in currency
rates, currency exchange control regulations, possible expropriation or
confiscatory taxation, political, social, and economic developments, and foreign
regulations can also affect foreign real estate investments. It may be more
difficult to obtain and collect a judgment on foreign investments than on
domestic ones.
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 investing
in 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 the Account may buy shares or debt instruments
issued by 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.
The value of a REIT can be affected by such factors as cash flow dependency, the
skill of its management team and defaults by lessees or borrowers. In the event
of a default by a lessee or borrower, a REIT may experience delays in enforcing
its rights as a lessor or mortgagee and may incur substantial costs associated
with protecting its investments.
While most of the Account's REIT investments will be in the common and preferred
stock of a REIT, at times it may purchase debt securities issued by a REIT.
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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 15 and
"Risks of REIT Investments," page 19.
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 may be listed on 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 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, 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.
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GENERAL INVESTMENT AND OPERATING POLICIES
The Account doesn't intend to buy and sell any direct ownership interests in
properties, mortgage loans, leasebacks, or other real estate investments simply
to make short-term profits by their sale. However, the Account may sell
investments to raise cash, if market conditions dictate, or otherwise. The
Account will reinvest any proceeds from sales of assets (and any cash flow from
operations) that it doesn't need to pay operating expenses or to meet redemption
requests (e.g., cash withdrawals or transfers).
Appraisals. When acquiring properties, leasebacks, or other real estate
investments, the Account will rely on TIAA's analysis of the investment and
usually won't receive an independent appraisal before an acquisition. However,
the Account will get an independent appraisal when it makes mortgage loans. We
expect that the Account's properties and participating mortgage loans will be
appraised or valued annually by an independent state-certified appraiser who is
a member of a professional appraisal organization.
Borrowing. Usually, the Account won't borrow money to purchase direct ownership
interests in real properties--i.e., these investments will be unleveraged.
However, the Account may use a line of credit to meet short-term cash needs.
While the properties the Account acquires ordinarily will be free and clear of
mortgage indebtedness immediately after their acquisition, it is possible that
the terms of a short-term line of credit may require the Account to secure a
loan with one or more of its properties or other assets.
Joint Investments. While the Account will often own the entire fee interest in a
property, it can also hold other ownership interests. The Account can hold
property jointly through general or limited partnerships, joint ventures,
leaseholds, tenancies-in-common, or other legal arrangements. However, 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 local
management company to perform the day-to-day management services for properties
the Account owns and operates, including 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
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advertising programs to attain and maintain good occupancy rates by responsible
tenants. The Account may also hire one or more leasing companies to perform or
coordinate leasing and marketing services for any property with actual or
projected vacancies. 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 use a management services company for mortgage loans (except
for mortgage servicing), unless we're foreclosing on a mortgage loan.
RISK FACTORS
Participants should consider various risks before investing in the Account.
These include valuation risks (see "Valuation of Assets," page 32), conflicts of
interest (see "Conflicts of Interest," page 22), 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.
Another risk for the Account is that it may be unable to attract and retain
tenants, which means that rental income declines. Third parties in
purchase-leaseback transactions may default on rental agreements or rent
guarantees. We also can't assure that operating a property will produce a
satisfactory profit because operating costs can increase in relation to a
property's gross rental income. In particular, property taxes and utility,
maintenance, and insurance costs may go up. The Account may have to advance
funds to third parties to protect its investment, or sell properties on
disadvantageous terms in order to raise needed funds.
Resale of Real Property. Because the Account invests in real property, its
investments may be illiquid compared to the readily-marketable securities held
by other variable annuity accounts. A poor market for real estate can make it
harder to sell any particular investment for its full value. This could lead to
losses or reduced profits for the Account. The risk that resale will be
difficult will vary with the size, location, and type of investment. The Account
might not be able to sell a property at a particular time or price. Although the
Account ordinarily would sell real property for cash, the Account may at times
find it necessary to provide financing to purchasers.
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<PAGE>
Properties Acquired Prior to Completion of Development and Construction and
Recently-Constructed Properties. If the Account chooses to develop a real
property, it faces the risk of delays or unexpected increases in the cost of
property development and construction. These risks can come from over-building,
which lowers demand for rentals. They can also be the result of slower growth in
local economies, poor performance of local industries, higher interest rates,
strikes, bad weather, material shortages, or increases in material and labor
costs. We can't guarantee that once a property is developed it will operate at
the income and expense levels we projected before developing it. We also can't
guarantee that a property will be developed the same way we originally planned.
The Account may buy recently-constructed properties that are subject to
agreements with sellers that provide for certain minimum levels of income. We
can't guarantee that the sellers or other parties will be able to carry out
their obligations under those agreements. We also can't assure you that when
these agreements expire or the seller defaults, the operating income from the
properties will be enough to produce as high a return as the Account was getting
from those properties before the expiration or default.
Risks with Purchase-Leaseback Transactions. Risks under purchase-leaseback
transactions relate to the ability of the lessee to make required payments to
the Account. 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.
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 may default. 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.
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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.p
If interest rates are volatile during the investment period, the Account's
variable-rate mortgage loans could have lower yields.
Prepayment Risks. The Account's mortgage loan investments will usually be
subject to the risk that the borrower decides to prepay the loan. Prepayments
can change the Account's return because we may be unable to reinvest the prepaid
proceeds at as good an interest rate as the original mortgage loan rate.
Loan-to-Value Ratio. The larger the mortgage loan compared to the fair market
value of the property securing it, the greater the loan's risk. The Account
therefore usually won't make mortgage loans of more than 85% of the appraised
value of the property. (It will make larger loans only if it's compensated for
the extra risk.) However, we can't guarantee that if a borrower defaults, the
Account will be able to sell the property for its estimated or appraised value.
Interest Limitations. Because state laws could change during the term of a loan
or for other reasons, we might not always be able to determine with certainty
whether the interest rate we are charging on mortgage loans complies with state
usury laws that limit rates. If we inadvertently violate those laws, we could
incur penalties such 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 rely on appraisals from real estate professionals to value
properties. However, appraisals are only estimates based on the professional's
opinion and may not be the amount the Account receives if it sells the property.
If appraisals are too high, participants sending in premiums will be credited
with fewer accumulation units than if the value were lower. Participants
withdrawing funds or receiving income when appraisals are too high will receive
more money than they would otherwise be entitled to, which hurts other
participants. If appraisals are too low, participants sending in premiums would
be credited with too many accumulation units, which hurts other participants.
Payments to participants making cash withdrawals or receiving income would be
lower when appraisals are too low than they would have been if the appraisals
were higher.
Inaccurate appraisals can also affect the fees the Account pays to TIAA, since
TIAA's fees are based on the Account's value. See "Conflicts of Interest," page
22.
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Investment Opportunities. 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.
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 its
original investment 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. Restrictive zoning regulations and land use
controls, strict air and water quality standards, and noise pollution
regulations by 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
affected by new environmental regulations because of the increased costs
associated with regulatory compliance. Under some federal statutes, the
Account's potential liability for environmental damage could exceed the value of
the Account's investment in a property.
Under various 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, could 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.
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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 that the issuer won't
be able to pay principal and interest when due. For common or preferred stock,
it comes from the possibility that the issuer's current earnings will fall or
that its overall financial soundness will decline. Another kind of risk is
market risk--price volatility due to changing conditions in the financial
markets and, particularly for debt securities, changes in overall interest
rates. Finally, volatile interest rates may affect current income from an
investment.
Other Risks
Risk of Unspecified Investments. While we intend to supplement this prospectus
periodically to describe the Account's new property investments, in most cases
supplements will not 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 20.
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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.
Since September 16, 1996, TIAA has been redeeming the accumulation units related
to its $100 million seed money investment, in accordance with a five-year
repayment schedule approved by the New York Insurance Department (NYID). The
Account, with NYID approval, recently modified the seed money redemption
schedule by increasing the Account's monthly redemption payments to TIAA to 25%
of the Account's prior months' net asset growth (with no less than 16,666.67 and
no more than 100,000 units to be redeemed per month). TIAA may, with prior
approval of the independent fiduciary (see page 21), further accelerate the
redemption schedule. Any prepayment, however, will not modify the existing
schedule to the extent that TIAA still owns accumulation units related to its
seed money investment.
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
9.5% of the Account's net assets, as of December 31, 1997.
Liquidity Guarantee
If the Account's cash flow (from premiums and investment income) and liquid
investments are insufficient to fund participant requests to make cash
withdrawals or transfers from the Account, TIAA's general account will fund them
by purchasing accumulation units. 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 if allowed by 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 36.
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 applied for and received a prohibited transaction
exemption from the U.S. Department of Labor (PTE 96-76). In connection with the
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, during) the period during which the Account must repay
TIAA's seed money investment, the independent fiduciary will calculate the
percentage of total accumulation units that TIAA's ownership shouldn't exceed
(the "trigger point"). The independent fiduciary will also create a method for
changing the trigger point. It must approve any adjustment of TIAA's interest in
the Account and can require an adjustment. If TIAA's investment reaches the
trigger point, the independent fiduciary may plan and participate in any program
for selling the Account's assets. This can include selecting properties for
sale, providing sales guidelines, and approving those sales that, in the
independent fiduciary's opinion, are desirable to reduce TIAA's ownership in the
Account or to facilitate winding down the Account.
The independent fiduciary will supervise the Account during any winding down of
operations. It will review any program for selling the assets of the Account
during that time. This review can include selecting the properties to be sold,
providing sales guidelines, and approving the sale of the properties in the
Account, if in the independent fiduciary's opinion, the sales would facilitate
winding down.
The independent fiduciary will also review any other transactions or matters
involving the Account that TIAA submits for review to determine whether those
transactions are fair and in the Account's best interest.
TIAA appointed the independent fiduciary for a five-year term, and has
established a special subcommittee of the Investment 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
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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.
Conflicts of interest may arise because TIAA's general account may sometimes
compete with the Real Estate Account in the purchase or sale of investments.
Although the Real Estate Account and TIAA's general account will normally have
different investment and sale objectives and will generally not be in the market
for 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.
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
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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 Real Estate 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.
DESCRIPTION OF PROPERTIES
The Properties--In General
As of the date of this prospectus, the Account has 34 properties in its real
estate portfolio. The following charts break down the Account's real estate
assets, as of December 31, 1997, by region and property type.
[2 Pie Charts]
- --------------------------------------------------------------------------------
East--30.3% Office--46.7%
West--26.6% Residential--27.1%
Midwest--26.1% Industrial--16.9%
South--16.9% Retail--9.3%
- --------------------------------------------------------------------------------
The percentages shown above exclude the interests owned by the Account's
joint venture partners in the portfolio properties.
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Set forth below is general information about each of the Account's portfolio
properties, as of December 31, 1997.
<TABLE>
<CAPTION>
Annual Avg.
Rentable Base Rent
Year Year Area Percent per Leased Market
Property Location Built Purchased (sq. ft.) Leased sq. ft.(1) Value(2)
- --------------------------------- -------------------- ----- --------- ---------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OFFICE PROPERTIES
Columbia Centre III Rosemont, IL 1988 1997 238,941 99% $25.12 $ 38,580,850
371 Hoes Lane Piscataway, NJ 1986 1997 136,088 100% $15.55 $ 15,499,306
Corporate Center at Sawgrass Sunrise, FL 1997 1997 91,113 94% $13.93 $ 12,956,957
Parkview Plaza(3) Oakbrook, IL 1990 1997 263,912 100% $18.84 $ 51,614,733
Fairgate at Ballston(3) Arlington, VA 1988 1997 143,564 97% $22.54 $ 27,560,000
Five Centerpointe(3) Lake Oswego, OR 1988 1997 113,910 98% $14.16 $ 16,200,000
Two Newton Place(3) Newton, MA 1987 1997 108,819 100% $18.67 $ 16,900,000
USF&G Building(3) Salt Lake City, UT 1985 1997 66,526 99% $12.20 $ 7,900,000
Northmark Business Center(3) Blue Ash, OH 1986 1997 106,552 92% $10.10 $ 9,873,570
Metro Center Office Park(3) Sacramento, CA 1988 1997 257,989 87% $11.30 $ 21,500,000
Longview Executive Park(3) Hunt Valley, MD 1988 1997 257,944 95% $ 9.90 $ 23,500,000
Southbank Building Phoenix, AZ 1995 1996 122,535 100% $ 9.01 $ 10,700,000
---------- ------------
Subtotal--Office Properties 1,907,893 $252,785,416
INDUSTRIAL PROPERTIES
Eastgate Distribution Center San Diego, CA 1996 1997 200,000 100% $ 5.34 $ 12,200,000
Saks Distribution Facility Aberdeen, MD 1997 1997 470,707 100% $ 5.38 $ 27,700,000
Westinghouse Coral Springs, FL 1997 1997 75,630 100% $ 7.29 $ 6,100,000
Interstate Acres Urbandale, IA 1981-88 1997 440,000 97% $ 3.28 $ 13,813,908
Interstate Crossing Eagan, MN 1995 1996 131,380 100% $ 7.25 $ 6,400,000
Arapahoe Park E. Boulder, CO 1979-82 1996 129,425 100% $ 9.01 $ 10,000,000
River Road Distribution Center Fridley, MN 1995 1995 100,584 100% $ 5.97 $ 4,225,000
Butterfield Industrial Park El Paso, TX 1980-81 1995 183,510 100% $ 3.58 $ 4,700,000
---------- ------------
Subtotal--Industrial Properties 1,731,236 $ 85,138,908
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Annual Avg.
Rentable Base Rent
Year Year Area Percent per Leased Market
Property Location Built Purchased (sq. ft.) Leased sq. ft.(1) Value(2)
- -------- -------- ----- --------- --------- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
RETAIL PROPERTIES
Rolling Meadows Rolling Meadows, IL 1957(4) 1997 131,070 90% $10.77 $ 13,000,000
River Oaks Woodbridge, VA 1995 1996 90,885 92% $14.04 $ 12,760,835
Lynnwood Collection Raleigh, NC 1988 1996 86,362 100% $ 8.44 $ 7,100,000
Millbrook Collection Raleigh, NC 1988 1996 102,221 95% $ 7.26 $ 7,000,000
Plantation Grove Ocoee, FL 1995 1995 73,655 96% $ 9.96 $ 7,200,000
---------- ------------
Subtotal--Retail Properties 484,193 $ 47,060,835
---------- ------------
Subtotal--Commercial Properties 4,123,322 $384,985,159
RESIDENTIAL PROPERTIES(5)
Lodge at Willow Creek Douglas County, CO 1997 1997 NA 80% NA $ 27,562,882
Lincoln Woods Lafayette Hill, PA 1991 1997 NA 97% NA $ 21,476,050
The Crest of Shadow Mt. El Paso, TX 1992 1997 NA 94% NA $ 9,260,000
Westcreek Westlake Village, CA 1988 1997 NA 99% NA $ 13,700,000
Royal St. George W. Palm Beach, FL 1995 1996 NA 98% NA $ 15,800,000
Monte Vista Littleton, CO 1995 1996 NA 90% NA $ 19,000,000
Brixworth Atlanta, GA 1989 1995 NA 98% NA $ 16,100,000
The Greens at Metrowest Orlando, FL 1990 1995 NA 93% NA $ 13,400,000
------------
Subtotal--Residential Properties NA $136,298,932
------------
Total--All Properties 4,123,322 $521,284,091
</TABLE>
(1) Based on total rent (excluding tenant payments for real estate taxes and
operating expenses) on leases existing at December 31, 1997.
(2) Market value reflects the value determined in accordance with the procedures
described under "Valuation of Assets," page 32. The values shown here assume
the Account owns 100% of the properties, including those held jointly.
(3) Purchased in partnership with Pegasus Partners, Inc., a subsidiary of USF&G
Corporation.
(4) Renovated in 1991 and 1995.
(5) For the average unit size and annual average rent per unit for each
residential property, see "Residential Properties" below.
25
<PAGE>
Commercial (Non-Residential) Properties
In General. The Account holds 25 commercial (non-residential) properties in its
portfolio. None of these properties is subject to a mortgage, and although the
terms vary under each lease, certain expenses, such as real estate taxes and
other operating expenses, are paid or reimbursed by the tenants.
The Account's office property portfolio currently consists of twelve suburban
office properties located in metropolitan areas throughout the United States.
The office properties together are approximately 96% leased to 127 tenants. The
Account has a 90% interest in eight of the office properties, which are held in
a partnership with Pegasus Partners, Inc., a wholly-owned subsidiary of USF&G
Corporation. USF&G Realty Advisors, Inc. provides real estate advisory services
to the partnership and assists in the overall management of those properties.
The Account's industrial property portfolio currently consists of eight
properties used primarily for warehousing, distribution, or light manufacturing
activities. The Account's industrial properties together are approximately 99%
leased to 37 tenants.
The Account's retail property portfolio currently consists of five neighborhood
shopping centers, each of which is anchored by a supermarket tenant. These
retail properties together are approximately 94% leased to 78 tenants.
Major Tenants. The following table lists the Account's major commercial tenants
based on the total space they occupy in the Account's properties.
<TABLE>
<CAPTION>
Percentage of
Total Rentable
Area of
Occupied Account's
Square Non-Residential Property
Major Tenant Feet Properties Type
- ----------------------------------------- -------- --------------- --------
<S> <C> <C> <C>
Saks & Company 470,707 11.4% Industrial
VanKampen American Capital 208,821 5.1% Office
PHH Vehicle Management Services 199,563 4.8% Office
Ball Aerospace & Technology Corporation 129,425 3.1% Industrial
Roadway Package System 124,000 3.0% Industrial
Ameritech 120,698 2.9% Office
Kroger Supermarket 104,674 2.5% Retail
DJ Plastics 103,510 2.5% Industrial
Kimberly Press 100,000 2.4% Industrial
Scheduled Airlines Traffic Offices 87,438 2.1% Office
</TABLE>
Lease Expirations. The following charts provide lease expiration information for
the Account's commercial properties, categorized by property type. While many of
the leases contain renewal options with varying terms, these charts assume that
none of the tenants exercise their renewal options.
26
<PAGE>
Office Properties
<TABLE>
<CAPTION>
Percent of
Total Rentable
Area of Account's
Rentable Area Non-Residential
Number of Subject to Properties
Leases Expiring Leases Represented by
Year of Lease Expiration Expiring (sq. ft.) Expiring Leases
- ------------------------ --------- --------------- -----------------
<S> <C> <C> <C>
1998 22 190,163 4.6%
1999 16 95,263 2.3%
2000 24 242,225 5.9%
2001 21 194,804 4.7%
2002 27 339,661 8.2%
2003 and thereafter 17 770,619 18.7%
--- --------- ----
Total 127 1,832,735 44.4%
</TABLE>
Industrial Properties
<TABLE>
<CAPTION>
Percent of
Total Rentable
Area of Account's
Rentable Area Non-Residential
Number of Subject to Properties
Leases Expiring Leases Represented by
Year of Lease Expiration Expiring (sq. ft.) Expiring Leases
- ------------------------ --------- --------------- -----------------
<S> <C> <C> <C>
1998 7 133,580 3.2%
1999 3 59,730 1.5%
2000 7 235,592 5.7%
2001 8 226,799 5.5%
2002 2 56,880 1.4%
2003 and thereafter 10 1,010,727 24.5%
-- --------- ----
Total 37 1,723,308 41.8%
</TABLE>
Retail Properties
<TABLE>
<CAPTION>
Percent of
Total Rentable
Area of Account's
Rentable Area Non-Residential
Number of Subject to Properties
Leases Expiring Leases Represented by
Year of Lease Expiration Expiring (sq. ft.) Expiring Leases
- ------------------------ --------- --------------- -----------------
<S> <C> <C> <C>
1998 10 17,124 0.4%
1999 13 26,255 0.6%
2000 19 40,434 1.0%
2001 21 48,407 1.2%
2002 6 16,986 0.4%
2003 and thereafter 9 305,604 7.4%
-- ------- ----
Total 78 454,810 11.0%
</TABLE>
27
<PAGE>
Residential Properties
The Account's residential property portfolio currently consists of nine first
class or luxury multi-family garden apartment complexes. None of the properties
in the portfolio is subject to a mortgage. The complexes generally contain one-
to three-bedroom apartment units, with a range of amenities, such as patios or
balconies, washers and dryers, and central air conditioning. Many of these
apartment communities have use of on-site fitness facilities, including some
with swimming pools. Rents on each of the properties tend to be comparable with
competitive communities and are not subject to rent regulation. The Account is
responsible for the expenses of operating the properties.
Set forth below is more detailed information regarding the complexes in the
Account's portfolio as of December 31, 1997.
<TABLE>
<CAPTION>
Average Avg. Rent
Number Unit Size Per Unit/ Percent
Property Location of Units (sq. ft.) Per Month Leased
- ------------------------- ---------------------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Lodge at Willow Creek Douglas County, CO 316 1001 $1,088 80%
Lincoln Woods Lafayette Hill, PA 216 773 $1,057 97%
The Crest at Shadow Mt. El Paso, TX 232 837 $ 607 94%
Westcreek Westlake Village, CA 126 948 $1,086 99%
Royal St. George West Palm Beach, FL 224 870 $ 811 98%
Monte Vista Littleton, CO 219 888 $ 954 90%
Brixworth Atlanta, GA 271 718 $ 794 98%
The Greens at Metrowest Orlando, FL 200 920 $ 781 93%
</TABLE>
Recent Property Purchases
The Legends at Chase Oaks--Plano, Texas
On March 31, 1998, the Account purchased The Legends at Chase Oaks, a first
class garden apartment complex located in Plano, Texas (a suburb of Dallas) for
a purchase price of approximately $29.7 million. The property is not subject to
a mortgage. The complex, located on 34.6 acres, was built in 1997 and contains
346 one, two, and three bedroom units in 32 two-story buildings, with 692
parking spaces. It is in the final stages of its initial lease-up, and is
currently 94% occupied with monthly rents averaging $1,046 per unit. Rents are
comparable with competitive complexes and are not subject to rent regulation.
The Account is responsible for the expenses of operating the property.
For a discussion of the Account's real estate holdings and recent acquisitions
in the context of the Account's performance as a whole, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
below. Real estate investments made by the Account after the date of this
prospectus will be described in supplements to the prospectus, as appropriate.
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 were
first offered to participants on October 2, 1995.
Through December 31, 1997, the Account had acquired a total of 33 real estate
properties, including twelve office properties, eight industrial properties,
five neighborhood shopping
28
<PAGE>
centers, and eight apartment complexes. As of December 31, 1997, these
properties represented 65.06% of the Account's total investment portfolio.
The Account has purchased one additional apartment property since the beginning
of 1998. 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, significant competition exists for the most desirable properties.
As of December 31, 1997, the Account also held investments in U.S. government
agencies, representing 14.06% of the portfolio, real estate investment trusts
(REITs), representing 13.64% of the portfolio, commercial paper, representing
5.99% of the portfolio, and corporate bonds, representing 1.25% of the
portfolio.
The Account owns a 90% controlling interest in a partnership which owns eight
office buildings throughout the U.S. Consistent with generally accepted
accounting principles (GAAP), the Account's consolidated financial statements
and all of the Account's financial data discussed in this prospectus reflect
100% of the value of the partnership's assets. The 10% interest of the other
partner in the partnership is reflected as a minority interest in the Account's
consolidated financial statements.
Results of Operations-Year Ended December 31, 1997 Compared to Year Ended
December 31, 1996
The Account's total net return was 10.07% for the year ended December 31, 1997
and 8.33% for 1996. The Account's net investment income, after deduction of all
expenses, was $43,805,525 for the year ended December 31, 1997 and $12,452,376
for the year ended December 31, 1996, a 252% increase. This increase was the
result of a growing base of net assets and a greater concentration of real
estate holdings from December 31, 1996 to December 31, 1997. Net assets
increased 113% during that period. In addition, the Account had net realized and
unrealized gains on investments of $18,147,053 and $3,330,539 for the years
ended December 31, 1997 and 1996, respectively. This increase was primarily the
result of the increase in unrealized appreciation of $10,234,316 of the
Account's properties and $6,836,012 of the Account's marketable securities.
These increases reflect the increased values assigned to many of the properties
as a result of periodic revaluations resulting from either internal or
independent appraisals, and the increase in value of REITs and other marketable
securities during the year.
The Account's real estate holdings generated approximately 65% and 56% of the
Account's total investment income (before deducting Account level expenses)
during the years ended December 31, 1997 and 1996, respectively. The remaining
portion of the Account's total investment income was generated by investments in
marketable securities.
Gross real estate rental income was $44,342,342 for the year ended December 31,
1997 and $10,951,183 for 1996. By the end of 1996, the Account owned 13
properties, whereas by the end of 1997, the Account owned 33 properties. This
increase in the number of properties owned by the Account was a major factor in
the higher real estate income for 1997. Interest income on the Account's
short-and intermediate-term investments for the years ended December 31, 1997
and 1996 totalled $12,079,600 and $5,570,907, respectively. This increase in
interest income was due primarily to the Account's
29
<PAGE>
increased short-term investment holdings. Dividend income on the Account's
investments in REITs totalled $4,406,679 and $456,579, respectively, for the
same periods. Shares of REITs represented 13.64% of the Account's investments as
of December 31, 1997 and 4.95% as of December 31, 1996. This higher percentage
and the general growth in the Account's assets accounted for the higher dividend
income for 1997.
Total property level expenses for the year ended December 31, 1997 were
$13,496,551, of which $4,472,311 was attributable to real estate taxes and
$9,024,240 represented operating expenses. Total property level expenses for the
year ended December 31, 1996 were $3,370,497, of which $1,254,163 was
attributable to real estate taxes and $2,116,334 was attributable to operating
expenses. The increase in property level expenses during 1997 reflected the
increased number of properties in the Account.
The Account also incurred expenses for the years ended December 31, 1997 and
1996 of $1,647,689 and $642,042, respectively, for investment advisory services,
$1,368,501 and $437,894, respectively, for administrative and distribution
services and $510,355 and $75,860, respectively, for mortality and expense risk
charges and liquidity guarantee charges. Such expenses increased as a result of
the larger net asset base of the Account in 1997.
Results of Operations-Year Ended December 31, 1996
Compared to Period Ended December 31, 1995
In comparing the Account's 1996 operating results with those of 1995, it is
significant that as of December 31, 1995, the Account had been operational for
only six months and owned only five properties. In fact, the Account's first
real estate purchase was not made until November 22, 1995. In contrast, by
December 31, 1996, the Account had been operating for over a year and owned
thirteen properties. As a result of these and other factors, the Account's total
net return was 8.33% for the year ended December 31, 1996 and 2.57% for the six
month period ended December 31, 1995.
The Account's net investment income, after deducting all expenses, increased
372% from December 31, 1995 to December 31, 1996. This increase was a result of
a full year of operations coupled with a growing base of net assets. Net assets
increased 207% during that period. Net unrealized gains on real estate
properties occurred for the first time during 1996 and accounted for 30% of the
net change in unrealized appreciation for that period. The Account's real estate
gains and losses resulted from the periodic revaluations of the Account's
properties. The 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 losses were based, in part, on slower re-leasing of space at
certain properties owned by the Account.
Net unrealized gains on marketable securities accounted for 70% of the net
change in unrealized appreciation for the year ended December 31, 1996 and for
100% of the net change during the six month period ended December 31, 1995. The
net unrealized gains during both periods resulted primarily from price
appreciation of the shares of REIT stock owned by the Account.
30
<PAGE>
The Account's real estate holdings generated approximately 56% and 4% of the
Account's total investment income (before deducting Account expenses) during the
year ended December 31, 1996 and the six month period ended December 31, 1995,
respectively. The remaining 44% and 96%, respectively, of the Account's total
investment income was generated by marketable securities investments. The higher
real estate income for 1996 was due to the increase in the number of properties
owned by the Account, coupled with the fact that the Account's first real estate
purchase was not made until late 1995.
Both property level and account level expenses increased in 1996. The increased
expenses resulted from the increased number of properties in the Account, the
Account's larger net asset base during 1996, and the fact that the 1995 amounts
represent a six month period while 1996 represents a full year of activity.
Liquidity and Capital Resources
Since September 16, 1996, TIAA has been redeeming the accumulation units related
to its $100 million seed money investment in the Account, in accordance with a
five-year repayment schedule approved by the New York Insurance Department
(NYID). As of December 31, 1997, the Account had redeemed 389,136 accumulation
units at prevailing daily unit values, amounting to $45,209,324 in total
redemption payments to TIAA. TIAA retained 610,864 accumulation units at
December 31, 1997 with a total value of $74,706,529. The Account, with NYID
approval, recently modified the seed money redemption schedule by increasing the
Account's monthly redemption payments to TIAA to 25% of the Account's prior
months' net asset growth (with no less than 16,666.67 and no more than 100,000
units to be redeemed per month). Under this schedule, at the current level of
asset growth, TIAA expects to complete the redemption of its seed money
investment sometime in 1998, but, in any event, no later than in the year 2000.
For the years ended December 31, 1997 and 1996, the Account earned $43,805,525
and $12,452,376, respectively, in net investment income. During 1997 and 1996,
the Account received $52,344,830 and $9,665,306, respectively, in premiums and
$351,174,584 and $232,509,882, respectively, in net participant transfers from
other TIAA and CREF accounts. Real estate properties costing $377,086,207 and
$86,731,333 were purchased during 1997 and 1996, respectively. At December 31,
1997 and 1996, the Account's liquid assets (i.e., its cash, REITs, short- and
intermediate-term investments, and government securities) had a value of
$280,409,640 and $240,109,263, respectively. It is anticipated that much of the
Account's liquid assets as of December 31, 1997, exclusive of the REITs, will be
used by the Account to purchase additional suitable real estate properties. The
remaining liquid assets, exclusive of the REITs, will continue to be available
to meet expense needs and redemption requests (e.g., cash withdrawals or
transfers).
If the Account's liquid assets and its cash flow from operating activities and
participant transactions are not sufficient to meet its cash needs, including
redemption requests, TIAA's general account will purchase liquidity units in
accordance with TIAA's liquidity guarantee to the Account.
31
<PAGE>
Capital expenditures totalling approximately $2,171,583 were made during 1997.
These expenditures were primarily for ongoing tenant improvements and leasing
commissions at the commercial properties, in addition to other building
improvements, and were generally related to renewing existing tenants or
re-leasing space to new tenants in the ordinary course of business. The Account
expects to increase this level of expenditures as the portfolio of office and
industrial properties grows and new tenants are attracted to lease space in the
buildings. For the apartment complexes, the Account expects to incur only
routine recurring costs, e.g., painting and carpet cleaning and minor
replacements to re-lease apartments that become vacant.
Year 2000 Issues
Many computer software systems in use today cannot recognize the year 2000 and
may revert to 1900 or some other date because of the way in which dates were
encoded and calculated. The Account could be adversely affected if its computer
systems or those of its external service providers do not properly process and
calculate date-related information and data on and after January 1, 2000. We
have been actively working on necessary changes to our computer systems to
prepare for the Year 2000 and have also obtained reasonable assurances from our
service providers that they are taking comparable steps with respect to their
computer systems. However, the steps we are taking do not guarantee complete
success or eliminate the possibility that interaction with outside computer
systems may have an adverse impact on the Account.
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 36.
Our valuation procedures are described below. The independent fiduciary approves
these procedures and any changes to them (see page 21).
Valuing Real Estate-Related Investments
Valuation Methods for Real Property. Individual real properties 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.
32
<PAGE>
Quarterly, we will conduct an internal review of each of the Account's
properties. We'll adjust a valuation if we believe that the value of the
property has changed since the previous valuation. We'll continue to use the
revised value to calculate the Account's net asset value until the next review
or appraisal. However, we can adjust the value of a property in the interim to
reflect what we believe are actual changes in property value.
The Account's net asset value will include the current value of any note
receivable (an amount that someone else owes the Account) from selling a real
estate-related investment. We'll estimate the value of the note by applying a
discount rate appropriate to then-current market conditions.
Valuation Methods for Conventional Mortgages. Individual mortgages will
initially be valued at their face amount. Thereafter, quarterly, we'll value the
Account's fixed interest mortgage loans by discounting payments of principal and
interest to their present value (using a rate at which commercial lenders would
make similar mortgage loans of comparable maturity). We'll also use this method
for foreign mortgages with conventional terms.
We'll adjust mortgage values quarterly using this formula, unless we believe
that it's necessary to adjust them more frequently. We'll get information about
commercial lenders by surveying typical lending institutions and from other
sources.
Valuation Methods for Participating Mortgages. Individual mortgages will
initially be valued at their face amount. Thereafter, quarterly, we'll calculate
the values of the Account's mortgage loans with participation features. To do so
we'll make various assumptions about occupancy rates, rental rates, expense
levels, capitalization rates upon sale, and other things. We'll use these
assumptions to project the cash flow from each investment over the term of the
loan, or sometimes over a shorter period. For these purposes, cash flow includes
fixed interest, the participation feature, and any anticipated share in sale
proceeds. To calculate asset value, we'll assume that the real property
underlying each investment will be sold at the end of the period used in the
valuation at a price based on market assumptions for the time of the projected
sale. Although we use this time period to calculate asset values, it doesn't
mean that the Account will actually hold the investment for that period. We
chose it simply as a frame of reference for estimating asset values.
After we calculate estimated cash flows and sale proceeds, we discount them to
their present value (using rates appropriate to then-current market conditions).
We can then estimate the value of the mortgage.
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-
33
<PAGE>
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
the prior month for each property ("actual net operating income"). We will then
recognize the actual net operating income on the accounting records of the
Account. We will also adjust accordingly the daily accrued receivable that is
then outstanding. As the Account actually receives cash from a property, we'll
adjust the daily accrued receivable and other accounts appropriately.
Appraisals and Realizable Value of Investments
The Account's net asset value won't necessarily reflect the true or realizable
value of the Account's assets (i.e., what the Account would get if it sold
them). We believe that we use reasonable assumptions, estimates, and formulas to
calculate the values of the Account's investments. However, we can't guarantee
the Account will receive that amount when it sells a property. We also expect
that the Account will sell some of its real properties for cash and notes (i.e.,
promises to pay in the future), rather than cash alone. In the future, the
amount of the note could be greater or less than the amount of the cash.
TIAA will use annual independent appraisals of the real properties in
calculating asset values. However, appraisals are only estimates and don't
necessarily reflect an investment's true or realizable value. If necessary, TIAA
will have properties appraised more frequently than currently planned.
Adjustments. We can adjust the values of an investment if we believe events or
market conditions have increased or decreased the realizable value of that
investment. We might do so, for example, if an event directly affects a property
or its 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 inde-
34
<PAGE>
pendent fiduciary consents. Changes in TIAA's valuation methods could change the
Account's net asset value. This, in turn, could change the values at which
participants purchase or redeem Account interests.
Valuing Other 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 current market quotations are not readily available at fair
value as determined in good faith under the direction of the Investment
Committee of TIAA's Board of Trustees and in accordance with the
responsibilities of TIAA's Board as a whole.
MANAGEMENT AND INVESTMENT ADVISORY ARRANGEMENTS
The Account doesn't have its own management or board of directors. Rather, TIAA
employees, under the direction and control of TIAA's Board of Trustees and its
Investment 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
21). TIAA also provides all
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portfolio accounting, custodial, and related services for the Account. In
addition, TIAA may arrange for other parties to provide certain advisory or
other management services to the Account's joint ventures or other investments.
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 A 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 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 0.28% of net assets
annually.
Administrative and Distribution Expense Deduction
This deduction is for Services' administrative expenses, such as allocating
premiums and paying annuity income, and for expenses related to the distribution
of the contracts. The current daily deduction for the Account is equivalent to
0.23% of net assets annually, of which 0.20% is for administrative services and
0.03% is for distribution services.
Mortality and Expense Risk Deduction
TIAA imposes a daily charge as compensation for bearing certain mortality and
expense risks. The current daily deduction is equal to 0.07% of net assets
annually. TIAA computes the actual mortality and expense risk charge it deducts
as a percentage of the Account's net assets, less seed money invested by TIAA.
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 guarantee. The current daily deduction
for the Account is equivalent to 0.02% of net assets annually. TIAA computes the
actual liquidity expense it charges the Account as a percentage of the Account's
real estate assets, less seed money invested by TIAA.
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
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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 we may deduct such expenses in the future.
Brokerage Fees and Related Transaction Expenses
Brokers' commissions, transfer taxes, and other portfolio fees are charged
directly to the Real Estate Account.
THE ACCUMULATING ANNUITY CONTRACTS
TIAA offers the Real Estate Account as a variable component of the following
accumulating annuity contracts: a Retirement Annuity ("RA"), a Group Retirement
Annuity ("GRA"), a Supplemental Retirement Annuity ("SRA"), and a Group
Supplemental Retirement Annuity ("GSRA"). The Real Estate Account is also
available through an Individual Retirement Annuity ("Classic IRA") and the Roth
Individual Retirement Annuity ("Roth IRA"). Both the Classic IRA and Roth IRA,
which we will refer to collectively as "IRAs", accept direct and rollover
contributions. (The Classic IRA that accepts direct contributions and the Roth
IRA may not yet be available in several states where we are awaiting regulatory
approval.) Subject to regulatory approval, we also may offer the Account through
a Keogh Plan Annuity ("Keogh"). The Account is not available under these
contracts in the State of California.
We issue RAs, SRAs, and IRAs, directly to you. In contrast, GRAs and GSRAs are
group contracts issued to employers. 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.
Right to Cancel Contract
You can cancel any TIAA RA, SRA, GSRA, or IRA contract up to 30 days after you
first receive it, unless we've begun making annuity payments from it to you.
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 with a signed
Notice of Cancellation to TIAA's home office. TIAA will cancel the contract as
of its date of issue, then send the entire current accumulation (including
investment gains or losses) back to the premium remitter. 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 IRC sections 401(a), 403(a), 403(b), and, for GRAs only, 401(k).
Occasionally we
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issue RA or GRA contracts to employers for deferred compensation obligations or
in advance of the contract's eventual transfer to an employee who meets
delayed-vesting requirements.
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 particular amount, and sends that 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 directly to TIAA.
GRA premiums can be paid by your employer or both you and your employer. Your
GRA premiums can be contributed pre-tax (by salary reduction) and after-tax (by
payroll deduction)--again subject to your employer's plan. You can't make GRA
contributions directly to TIAA; 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 42).
Your rights under these contracts may be subject to vesting requirements under
your employer's plan.
SRA and GSRA Contracts
SRA and GSRA contracts are used for voluntary tax-deferred annuity ("TDA") plans
set up under IRC sections 403(b) and 401(k). SRAs are issued directly to you,
while GSRAs are 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).
IRA Contracts
Classic IRA. The Classic IRA is issued under IRC section 408(b). You or your
spouse can open a Classic IRA account with direct annual before-tax or after-tax
contributions of up to $2,000 each, as long as you meet our eligibility
criteria. Earnings grow tax-deferred. You can also open a Classic IRA account
with (i) tax-deferred funds rolled over from any retirement plan or (ii) funds
rolled over from another IRA regardless of whether they are attributable to
before- or after-tax contributions, as long as you meet our eligibility
criteria. To be able to make tax-deductible contributions to the Classic IRA,
you must also meet income level requirements. Although withdrawals before age
59-1/2 are generally subject to a 10% federal tax penalty, withdrawals may be
made before age 59-1/2 penalty free upon death or disability, for qualified
higher education expenses or for the qualified purchase of a first home of up to
$10,000. See "Federal Income Taxes," page 50.
Roth IRA. The Roth IRA is issued under IRC section 408A. The Roth IRA currently
accepts direct annual contributions of up to $2,000 and rollovers from other
IRAs, as long as you meet our eligibility criteria. There are significant
differences between the Classic and the Roth IRA. Contributions to a Roth IRA
are not tax-deductible but can be withdrawn tax-free at anytime. Earnings accrue
tax-deferred and can be withdrawn tax-free if
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you are at least 59-1/2 and you've had the account for at least five years. You
can also get tax-free distributions after the fifth year upon death or
disability and of up to $10,000 for the qualified purchase of a first home.
Unlike the Classic IRA, you can continue to make contributions to a Roth IRA
after you reach age 70-1/2. To be eligible to contribute to a Roth IRA, you must
meet income level requirements. To be eligible to rollover funds from a Classic
IRA to a Roth IRA you must meet different income level requirements. See
"Federal Income Taxes," page 50.
Eligibility for IRAs. You can open a Classic or Roth IRA account if (a) you are
a current or retired employee of an eligible institution; (b) you are a trustee
of an eligible institution; (c) you own a TIAA or CREF annuity or a TIAA
individual insurance contract; or (d) you are the spouse of any of the preceding
individuals. Additionally, even if you do not meet these eligibility criteria
you can set up a Classic or Roth IRA with funds rolled over from an eligible
institution's retirement plan or from an individual retirement account that was
itself set up with amounts originally in an eligible institution-sponsored plan.
Keogh Plan Contracts
Subject to regulatory approval, we have plans to offer Keogh contracts under IRC
sections 401(a) and 403(a). If you own an unincorporated business, you can use
our contracts for 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 50.
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 form.
If the allocation instructions on your application or enrollment form are
incomplete, violate plan restrictions, or don't total 100%, we'll credit your
premiums to the CREF Money Market Account until we do receive complete
instructions. Any amounts that we credited to the CREF Money Market Account
before we received correct instructions will be transferred to the Real Estate
Account only on request, and will be credited as of the business day we receive
that request.
TIAA doesn't restrict the amount or frequency of premiums to your RA, GRA, and
IRA contracts, although we reserve the right to impose restrictions. 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 51).
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In most cases (subject to any temporary restriction on acceptance of premiums
and transfers, described below), TIAA will accept premiums to a contract at any
time during your accumulation period. Once your first premium has been paid,
your TIAA contract can't lapse or be forfeited for nonpayment of premiums. TIAA
can stop accepting premiums to GRA and GSRA contracts at any time.
If you are employed at or retired from an eligible institution you may buy a
contract to begin receiving annuity income starting on a future date of your
choice.
Allocation of Premiums
You can allocate all or part of your premiums to the Real Estate Account, unless
your employer's plan precludes that for your RA, GRA, or GSRA contract. Amounts
can also be allocated to TIAA's traditional annuity or any of the variable
annuity investment accounts offered by CREF. TIAA reserves the right to refuse
to allocate premiums where the allocation is not consistent with an employer's
plan.
You can change your allocation for future premiums by writing to our home
office, calling 800 842-2252, or using our Inter/ACT Internet service at
www.tiaa-cref.org. We can suspend or terminate your right to change your
allocation by telephone or over the Internet at any time.
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.
Accumulation Units
When you pay premiums or make transfers into the Real Estate Account, you buy
accumulation units; when you take a cash withdrawal, transfer from the Account,
or apply funds to begin annuity income, the number of your accumulation units
decrease. We calculate how many accumulation units to credit by dividing the
amount you applied to the Account by its accumulation unit value for the
business day when we received your premium or transfer. 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 transaction request and all
required information and documents (unless you ask for a later date).
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),
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realized and unrealized capital gains and losses, as well as expense charges
against the Account's assets (see page 36). 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.
The valuation of accumulation units will be reviewed and approved by the
independent fiduciary (see page 21).
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 one
of the CREF accounts once a calendar month. Starting July 1, 1998, you may
transfer accumulations out of the Account only once a calendar quarter.
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). Under RAs, GRAs, and
GSRAs, transfers to certain CREF accounts may be restricted by your plan. For
more information, contact TIAA (see page 54).
You can also transfer some or all of your accumulation in TIAA's traditional
annuity or in your CREF accounts 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 through a TIAA
transfer payout annuity. There are no similar restrictions on transfers from
TIAA's traditional annuity under SRA, GSRA, IRA, or Keogh contracts, as long as
you are transferring at least $1,000 at a time.
You can also transfer during the annuity period (see page 45). Currently, we
don't charge you for transfers to CREF or to TIAA's traditional annuity.
Because excessive transfer activity can hurt Account performance and other
participants, we may further limit transfer frequency or otherwise modify the
transfer privilege.
Transfers to Other Companies and Cash Withdrawals
from the Real Estate Account
If you have an RA, GRA, or GSRA contract, your ability to move funds from the
Real Estate Account to a company other than TIAA or CREF depends on the terms of
your employer's plan. Under a TIAA SRA, IRA, or Keogh contract, you may transfer
funds from the Real Estate Account to any company without similar plan
limitations. These transfers must be for at least $1,000 at a time (or the
entire part of your accumulation permitted to be withdrawn, if that's less than
$1,000).
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Cash withdrawals from your SRA, GSRA, IRA, or Keogh 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 that's less than $1,000). For more
information, see "General Considerations for all Cash Withdrawals and
Transfers," below, "Tax Issues," page 43 and "Federal Income Taxes," page 50.
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, subject to any restrictions in your employer's plan. 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.
Transfers to TIAA from Other Plans
Ordinarily you can transfer funds from another 403(b) retirement plan to a TIAA
contract. Likewise, if your TIAA contract is part of a 401(a) or 403(a) plan,
you can transfer to it from other 401(a) or 403(a) plans, if your plans permit.
Amounts transferred to TIAA may still be subject to provisions of your original
employer's retirement plan. You can also transfer funds from some 401(a),
403(a), and 403(b) plans to a TIAA Classic IRA, or, assuming you meet the income
eligibility criteria, from an IRA containing funds originally contributed to
such plans, to either a TIAA Classic IRA or a TIAA Roth IRA.
General Considerations for All Cash Withdrawals and Transfers
Current federal tax law restricts the availability of cash withdrawals from your
accumulation under most voluntary salary reduction agreements (including
investment earnings). Withdrawals are generally available only if you reach age
59-1/2, leave your job, become disabled, or die. Withdrawals of elective
deferral amounts may also be permitted if your employer's plan is a 401(k) plan
and your employer terminates the plan. If your employer's plan permits, you may
also be able to withdraw money 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 a Classic IRA,
although if you make a withdrawal before you reach age 59-1/2, you will be
subject to a ten percent penalty tax. Special distribution rules apply to the
Roth IRA. For more about tax consequences, see "Tax Issues" page 43 and page 53.
Ordinarily, you can't withdraw any part of an accumulation from which you've
already begun receiving annuity income.
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Cash withdrawals and transfers are effective at the end of the business day we
receive your request and all required 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, call us at 800 842-2252, or
use our Inter/ACT Internet service at www.tiaa-cref.org. We can suspend or
terminate your right to make transfers by telephone or over the Internet at any
time. For more about telephone or Internet transfers, see page 54.
Tax Issues
Before you transfer or make a cash withdrawal, make sure you understand the
possible federal and other income tax consequences. Here are some general rules:
Transfers between retirement plans governed by the same section of the IRC, or
between like IRAs funded at other companies, or from 401(a), 403(a), and 403(b)
plans to a TIAA Classic IRA, aren't normally considered taxable distributions.
Cash withdrawals are usually taxed at ordinary income rates. Withdrawals before
age 59-1/2 may subject you to early distribution taxes. (Different rules may
apply to residents of Puerto Rico.) For details, see "Federal Income Taxes,"
page 50.
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 we make the following transactions for you : (1) a cash withdrawal
(except from most IRAs); (2) a payment of a retirement transition benefit (see
page 46); (3) a transfer to a retirement plan not covered by ERISA; or (4) a
direct rollover from one plan to another or to an IRA (you don't receive a
check). 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 44. There are limited exceptions to the
waiver requirement.
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. You'll retain all rights under your contract, and
continue participating in the Real Estate Account, 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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Length-of-service and other rules vary considerably from plan to plan, so ask
your employer about your vesting status. Benefits under SRAs, GSRAs, IRAs, and
Keoghs are immediately vested and can't be forfeited.
INCOME-PAYING ANNUITY CONTRACTS
The Annuity Period
The Real Estate Account is available through a variety of income options. See
"Income Options," on page 45. Subject to certain federal tax law restrictions,
you can receive income from all or 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 (but not less than $10,000) of your accumulation,
but once you've started payments you can't change your income option (unless you
picked the Minimum Distribution Option annuity) or annuity partner 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 $100.) We'll send
your payments by mail to your home address or, on your request, by mail or
electronic funds transfer to your bank.
Initial income payment amounts are calculated based on the accumulation on the
last valuation day before the annuity starting date. Your payments change after
the initial payment based on the Account's investment experience and the income
change method you choose. There are two income change methods for annuity
payments: annual and monthly.
Under the annual income change method, payments from the Account change each May
1, based on the net investment results during the prior year (April 1 through
March 31). Under the monthly income change method, payments from the Account
change every month, based on the net investment results during the previous
month. (Note that the monthly income change method may not yet be available in
several states where we are awaiting regulatory approval.) For the formulas used
to calculate the amount of annuity payments, see page 47. The total value of
your annuity payments may be more or less than your total premiums.
Annuity Starting Date
Generally, you pick an annuity starting date when you first apply for a TIAA
contract. You can change this date at any time prior to the day before that
annuity starting date. The annuity starting date can't be later than the latest
date allowed under the IRC's minimum distribution rules (see page 53). In
addition, you can't begin a one-life annuity after you reach age 90, nor may you
begin a two-life annuity after either you or your annuity partner reach age 90.
Ordinarily, annuity payments begin on your annuity starting date, but the terms
of your employer's plan can restrict when you begin retirement income. For
payments to begin on the annuity starting date, we must have received all
documentation necessary for the
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income option you've picked. (For more information, contact TIAA--see page 54.)
If something's missing, we'll defer your annuity starting date until we receive
it. Your first annuity check may be delayed while we process your choice of
income options and calculate the amount of your initial payment. Any premiums
received within seventy days after payments begin may be used to provide
additional annuity income. Premiums received after seventy days will remain in
your accumulating annuity contract until you give us further instructions.
Ordinarily, your first annuity payment will begin on any business day between
the first and twentieth of any month.
Transfers During the Annuity Period
After you begin receiving annuity income, you can transfer all or part of the
future annuity income payable at least once a year (on March 31), or, subject to
regulatory approval, once each calendar quarter (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 are
payable under the same income option, and have the same first and second
annuitant, remaining guaranteed period, and payment mode.
We'll process your transfer on the business day we receive your request. You can
also choose to have a transfer 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. (In those states where we are awaiting regulatory approval,
transfers will not be effective on any date other than March 31.) Transfers
under the annual income payment method will affect your annuity payments
beginning on the May 1 following the March 31 which is on or after the effective
date of the transfer. Transfers under the monthly income payment method and all
transfers into TIAA's traditional annuity will affect your annuity payments
beginning with the first payment due after the monthly payment valuation day
(see page 47) that is on or after the transfer date. You can switch between the
annual and monthly income change methods, and the switch will be go into effect
on the following March 31 only.
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 RA or GRA. Ordinarily you'll choose your income option(s) shortly before
you want payments to begin; but, you can make or change your choice(s) any time
before your annuity starting date. Once annuity payments start, you can't change
the income option for the accumulation on which the payments are based (unless
you choose the Minimum Distribution Option annuity, see page 46).
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 with 10-Year Guaranteed Period, with your spouse
as your annuity partner, paid from TIAA's traditional annuity.
See below and "Spousal Rights," page 43.
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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 provide variable payments, and the amount
of income you receive depends in part on the number and value of your
accumulation units being converted and the investment experience of the Account.
The current options are:
o One-Life Annuity with or without Guaranteed Period. Pays income as long as
you live. If you opt for a guaranteed period (10, 15 or 20 years) 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's possible for you to receive only
one payment if you die less than a month after payments start.
o Annuity for a Fixed Period. Pays income for any period you choose from 5 to
30 years.
o Two-Life Annuities. 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 two-life annuity options, all available with or
without a guaranteed period--Full Benefit to Survivor, Two-Thirds Benefit to
Survivor, and a Half-Benefit to Annuity Partner.
o Minimum Distribution Option ("MDO") Annuity. Generally available only if you
must begin annuity payments under the IRC minimum distribution requirements
(see page 53). (Some employer plans allow you to elect this option
earlier--contact TIAA for more information.) 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; however, it's possible you won't receive income for life under
an MDO. 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 an MDO won't affect your right to take a cash withdrawal of
any accumulation not yet distributed.
For 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.
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 54.
Retirement Transition Benefit. Under TIAA's current practice, and if your
employer's plan allows, you may be able to receive a single sum payment of up to
10% of the value of any part of an RA or GRA accumulation being converted to
annuity income on the annuity starting date. Of course, if your employer's plan
allows cash withdrawals, you can take a larger amount (up to 100%) of your
accumulation in the Real Estate Account as a cash payment (see page 42).
The retirement transition benefit will be subject to current federal income tax
requirements and possible early distribution penalties. See "Federal Income
Taxes," page 50, as well as "Spousal Rights," page 43.
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Annuity Payments
The amount of annuity payments paid to you or your beneficiary ("annuitant")
will depend upon the number and the value of the annuity units payable. The
number of annuity units is first determined on the day before the annuity
starting date. The amount of the annuity payments will change according to the
income change method chosen. Separate annuity units are maintained for payments
being made under each of the two income change methods. Annuitants bear no
mortality risk under their contracts.
Under the annual income change method, the value of an annuity unit for payments
is redetermined on March 31 of each year--the payment valuation day. Annuity
payments change beginning May 1. The change reflects the net investment
experience of the Real Estate Account. The net investment experience for the
twelve months following each March 31 revaluation will be reflected in the
following year's value.
Under the monthly income change method, available subject to regulatory
approval, the value of an annuity unit for payments is determined on the payment
valuation day, which is the 20th day of the month preceding the payment due date
or, if the 20th is not a business day, the preceding business day. The monthly
changes in the value of an annuity unit reflect the net investment experience of
the Real Estate Account.
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 under an income change method 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 for that income change method
and an annuity factor. The annuity factor as of the annuity starting date is the
value of an annuity in the amount of $1.00 per month beginning on the first day
such annuity units are payable, 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 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.
When you or any beneficiary receiving annuity income transfers annuity units
under an income change method from a CREF account to the Real Estate Account or
vice versa, 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 for that income change method, determined on the
effective date of the transfer, for the account from which annuity units
are being transferred.
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B. an annuity factor. Under the annual income change method, the annuity
factor is equal to the value, as of the effective date of the transfer, of
an annuity in the amount of $1.00 per month beginning on the following May
1 (for an April transfer, the May 1 in the subsequent calendar year) and
continuing for as long as such annuity units are payable. Under the monthly
income change method, the annuity factor is equal to the value, as of the
effective date of the transfer, of an annuity in the amount of $1.00 per
month beginning with the first payment due after the payment valuation day
on or after the effective date of the transfer and continuing for as long
as such annuity units are payable. These annuity factors will reflect the
mortality assumptions then in use in the account from which the transfer is
being made.
C. the annuity unit value for that income change method, determined on the
effective date of the transfer, 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.
Value of Annuity Units. The value of the Real Estate Account's annuity units is
calculated separately for each income change method as of each business day and
as of the last calendar day of each month. The annuity unit value for each
income change method is determined by updating the annuity unit value from the
previous valuation day to reflect the net investment performance of the Account
for the current valuation period relative to the 4% assumed investment return.
The value is further adjusted to take into account any changes expected to occur
in the future at revaluation either once a year or once a month, assuming the
Account will earn the 4% assumed investment return in the future.
The initial value of the annuity unit for a new annuitant is the value
determined as of the day before annuity payments start, for the income change
method chosen.
For participants under the annual income change method, the value of the annuity
unit for payments remains level until the following May l. For those who have
already begun receiving annuity income as of March 31, the 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 such March 31.
For participants under the monthly income change method, the value of the
annuity unit for payments changes on the payment valuation day of each month for
the payment due on the first of the following month.
The value of annuity units transferred from the Real Estate Account under the
annual income change method to CREF or the TIAA traditional annuity is equal to
A plus B, where A and B are defined as follows:
A. the present value of the payments due from the first payment due after the
payment valuation day on or after the effective date of the transfer, and
continuing to the following April 1, but not longer than such annuity units
are payable.
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B. the present value of one annuity unit multiplied by the number of annuity
units, payable beginning on the May 1 following the March 31 on or after
the effective date of the transfer, and continuing for as long as such
annuity units are payable.
The present values will be calculated assuming interest at an effective annual
rate of 4%, and the same mortality assumptions then in use in the Real Estate
Account.
The value of annuity units transferred from the Real Estate Account under the
monthly income change method to CREF or to the TIAA traditional annuity will be
equal to the number of annuity units multiplied by the current value of one
annuity unit in the monthly revalued annuity fund multiplied by an annuity
factor. The annuity factor is the value of an annuity in the amount of $1.00 per
month beginning on the first of the month after the payment valuation day on or
after the effective date of the transfer, and continuing for as long as such
annuity units are payable.
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 21).
DEATH BENEFITS
Death benefits under TIAA annuity contracts are payable to the beneficiaries you
name. You can add, remove or change a beneficiary anytime before you die, and,
unless you instruct otherwise, your annuity partner can do the same after your
death. Generally, you can choose the method by which we'll pay the death benefit
(see below). You can block your beneficiaries from changing the method you've
chosen or you can leave the choice to them. We can block any choice of method
that provides an initial payment of less than $25.
If you die during the accumulation period, the death benefit is the amount of
your accumulation. If you and your annuity partner die during the annuity period
while payments are still due under a fixed-period annuity or for the remainder
of a guaranteed period, the death benefit is the value of the remaining
guaranteed payments.
If your beneficiary doesn't specifically request to start receiving death
benefits within a year of your death, we have the option to start making
payments to them over five years using the fixed-period annuity method of
payment.
Methods of Payment of Death Benefits in Accumulation Period
Currently, the available methods of payment for death benefits from funds in the
accumulation period are:
o Single-Sum Payment, in which the entire death benefit is paid to your
beneficiary at once;
o 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;
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o Annuity for a Fixed Period of 2 to 30 years;
o Accumulation-Unit Deposit Option, which pays a lump sum at the end of a
fixed period, ordinarily two to five years, during which period the
accumulation units deposited participate in the Account's investment
experience (generally $5,000 minimum death benefit value); and
o the Minimum Distribution Option, which is available only to beneficiaries
who must receive income under the IRC's minimum distribution requirements,
and operates in much the same way as the MDO annuity. It's possible, under
this method, that your beneficiary won't receive income for life.
Death benefits are usually paid monthly (unless you chose a single-sum method of
payment), but your beneficiary can switch them to quarterly, semi-annual, or
annual payments instead.
Methods of Payment of Death Benefits in Annuity Period
If you and your annuity partner die during the annuity period, your beneficiary
can choose to receive the remaining guaranteed periodic payments due under your
contract. Alternatively, your beneficiary can choose to receive the commuted
value of those payments in a single sum unless you have indicated otherwise. The
amount of the commuted value will be different than the total of the periodic
payments that would otherwise be paid.
Spousal Rights
Your choice of beneficiary for death benefits may, in some cases, be subject to
the consent of your spouse. Similarly, if you are married at the time of your
death, federal law may require a portion of the death benefit be paid to your
spouse even if you have named someone else as beneficiary. If you die without
having named any beneficiary, any portion of your death benefit not payable to
your spouse will go to your estate.
For more detailed information on death benefits, please contact TIAA. See
"Contacting TIAA," page 54. For tax issues concerning death benefits, especially
those paid as single sums, see "Taxation of Annuity Benefits," page 52.
FEDERAL INCOME TAXES
With limited exceptions, the contracts are designed as annuity contracts under
section 72 of the Internal Revenue Code ("IRC").
The Account is not a separate taxpayer for purposes of the IRC--its earnings are
taxed as part of TIAA's operations. TIAA is not expected to owe any federal
income taxes on the Account's earnings. If TIAA does incur taxes attributable to
the Account, it may make a corresponding charge against the Account.
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
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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 with your employer,
less certain prior tax-deferred retirement plan contributions. You usually can
exclude salary reduction contributions of up to $10,000 from your gross taxable
income. There are exceptions to this--contact your tax advisor for more
information.
401(a), 403(a), and 401(k) Plans
RA and GRA contracts are also available for 401(a) and 403(a) retirement plans.
GRA and GSRA contracts are available for 401(k) plans. Employer contributions to
all current defined contribution plans of the employer meeting the requirements
of IRC section 401(a) and 403(a) can't exceed an annual contribution limit of
$30,000 or 25% of your compensation, whichever is less. You usually can exclude
salary reduction contributions of up to $10,000 from your gross taxable income
when such contributions are made to a 401(k) plan.
Individual Retirement Annuities
IRC sections 408 and 408A permit eligible individuals to make direct
contributions to Classic and Roth IRAs, respectively. The amount you can
contribute to an IRA is currently limited to $2,000 per year. If you contribute
to both a Classic IRA and a Roth IRA in the same year, your aggregate limit is
$2,000 for the year. The IRC doesn't limit the amount you can rollover to the
Classic or the Roth IRA.
IRC section 408 permits funds from certain qualified retirement plans or IRAs to
be rolled over to the Classic IRA without losing its tax-deferred status. IRC
section 408A, however, permits only money rolled over to a Roth IRA from another
IRA. This means that funds rolled over from retirement plans must first be
rolled over to a Classic IRA and then a Roth IRA. Although funds rolled over to
a Roth IRA from another IRA are subject to taxation, they grow on a tax-deferred
basis and generally are not subject to the 10% early distribution penalty. In
addition, if the transaction is made in 1998, taxes are to be paid ratably over
a four tax-year period. TIAA IRAs can accept only cash transfers. All noncash
assets must therefore be liquidated prior to being transferred to us.
You also must meet certain income level requirements to make contributions to
the Roth IRA or tax-deductible contributions to the Classic IRA. If you are
married and file a joint tax return with your spouse and make a combined
adjusted gross income of $150,000 or less a year, you can make annual
contributions of up to $2,000 to a Roth IRA. If you are single and make an
adjusted gross income of $95,000 or less a year, you are also eligible to make
contributions of up to $2,000 to a Roth IRA. You can contribute a lower amount
if you are married and file jointly and your combined adjusted gross income is
between $150,000 and $160,000 a year, or if you are single and your adjusted
gross income is between $95,000 and $110,000 a year. You can convert an existing
IRA to a Roth IRA if your adjusted gross income is $100,000 or less.
If you are married and file a joint tax return with your spouse and make a
combined adjusted gross income of $50,000 or less a year or you are single and
make an adjusted gross income of $30,000 or less a year, you can make
tax-deductible contributions up to
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$2,000 a year to a Classic IRA. You can contribute a lesser amount if your
adjusted gross income is between $50,000 and $60,000 if you are married and file
jointly and if your adjusted gross income is $30,000 and $40,000 if you are
single. Different income-based eligibility rules apply if you are not covered
under an employer-sponsored retirement plan or if you have a non-working spouse
or one who is not in a retirement plan.
You can revoke an IRA up to 7 days after you establish it. Contact your tax
advisor for more tax information on IRAs.
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 that were paid in
after-tax dollars, but not the part that comes from the tax-deferred earnings of
after-tax premiums.
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 (not applicable for IRAs);
(3) you begin annuity income after you leave your job (termination isn't
required for IRAs), as long as your annuity income consists of a series of
regular substantially equal payments (at 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;
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(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);
(6) for IRAs only, you are unemployed (as defined in the IRC) and you use the
distribution to pay certain health insurance premiums for yourself, your
spouse or your dependents;
(7) for Classic IRAs only, distributions that do not exceed certain qualified
higher education expenses of the individual, the individual's spouse, or
the child or grandchild of the individual or individual's spouse; or
(8) for IRAs only, distributions to an individual (up to $10,000) for
qualified first time purchases of a principal residence.
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, if any). If your salary reduction contributions
are made to a 403(b) annuity, these restrictions apply only to amounts (and
earnings, if any) credited after December 31, 1988. 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. In
addition, certain 401(k) plans permit distributions of elective deferral amounts
upon termination of the plan provided the employer does not establish or
maintain another defined contribution plan. 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 and Accumulations
Under the recently enacted Taxpayer Relief Act of 1997, there is no longer a 15%
tax on excess retirement distributions and accumulations.
Death Benefits
Ordinarily, death benefits are subject to federal estate tax (see "Tax Advice,"
page 54).
Minimum Distribution Requirements and Taxes
In most cases, payments have to begin from 401(a), 403(a), and 403(b) plans by
April 1 of the calendar year after the calendar year when you reach age 70-1/2
or, if later, retirement. Payments from a Classic IRA must begin by April 1 of
the calendar year after the calendar year you reach age 70-1/2. 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 46.
Deferred Compensation Plans
TIAA RA and GSRA contracts are also available for deferred compensation plans.
Contracts issued under these plans are owned by your employer and subject to the
claims of
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its general creditors. Special tax rules may apply to non-governmental deferred
compensation 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 switch of income
change method; (5) a method of payment for death benefits; (6) a date when the
commuted value of an annuity becomes payable; (7) an annuity partner,
beneficiary, or other person named to receive payments; (8) a cash withdrawal or
other distribution; and (9) 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). 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.
Telephone and Internet Transactions
You can use our Automated Telephone Service ("ATS") or our Inter/ACT system over
the Internet to check your account balances, 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 will be asked to enter your Personal
Identification Number (PIN) and Social Security number for both systems. Both
will lead you through the transaction process and will use reasonable procedures
to confirm that instructions given are genuine. All transactions made over the
ATS and Inter/ACT are electronically recorded.
To use the ATS, you need a touch-tone phone. The toll free number for the ATS is
800 842-2252. To use Inter/ACT, access the TIAA-CREF Internet home page at
http://www.tiaa-cref.org.
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
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Avenue, New York, NY 10017-3206. You can ask questions by calling toll-free 800
842-2776 Monday through Friday, 8 a.m. through 11 p.m. ET.
Electronic Prospectus
If you received this prospectus electronically through our website and would
like a paper copy, please call 800 842-2733, extension 5509, and we will send it
to you.
Householding
To lower costs and eliminate duplicate documents sent to your home, we may, if
the SEC allows, begin mailing only one copy of the Account's prospectus,
prospectus supplements or any other required documents to your household, even
if more than one participant lives there. If you would prefer to continue
receiving your own copy of any of these documents, you may call us toll-free at
800 842-2733, extension 5509, or write us.
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.
Errors or Omissions
We reserve the right to correct any errors or omissions on any form, report or
statement that we send you.
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.
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DISTRIBUTION OF THE CONTRACTS
The contracts are offered continuously by 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. Services and TPIS are direct
or indirect subsidiaries of TIAA. 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, NY 10017-3206.
STATE REGULATION
TIAA, the Real Estate Account, and the contracts are subject to regulation by
the New York Insurance Department ("NYID") 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 LLP, Washington, D.C.
EXPERTS
The consolidated financial statements of the TIAA Real Estate Account as of
December 31, 1997 and for the year then ended, the audited statement of revenues
and certain expenses of Columbia Centre III for the year ended December 31,
1997, the audited statement of revenues and certain expenses of the Arbours
(Lincoln Woods) for the year ended December 31, 1996, and the financial
statements of TIAA as of December 31, 1997 and for the year then ended, all
appearing herein or incorporated herein by reference, have been audited by Ernst
& Young LLP, independent auditors as set forth in their reports thereon
appearing elsewhere herein or incorporated herein by reference in reliance upon
such reports given upon Ernst & Young's authority as experts in accounting and
auditing.
LEGAL PROCEEDINGS
Neither the Real Estate Account, its properties, nor TIAA are involved in any
pending legal action that we consider material to the Real Estate Account.
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ADDITIONAL INFORMATION
Information Available at the SEC
The Account has filed with the SEC a registration statement under the Securities
Act of 1933 which contains this prospectus and additional information related to
the offering described in this prospectus. The Account also files annual,
quarterly and current reports, along with other information, with the SEC, as
required by the Securities Exchange Act of 1934. You may read and copy the full
registration statement, and any reports and information filed with the SEC for
the Account, at the SEC's public reference room at 450 Fifth Street, N.W., Room
1024, Washington, DC 20549. This information can also be obtained through the
SEC's website on the Internet (http://www.sec.gov).
Other Reports to Participants
TIAA will mail to each participant in the Real Estate Account periodic reports
providing information relating to their accumulations in the Account, including
premiums paid, number and value of accumulations, and withdrawals or transfers
during the period, as well as such other information as may be required by
applicable law or regulations.
Further information may be obtained from TIAA at Teachers Insurance and Annuity
Association of America, 730 Third Avenue, New York, NY 10017-3206.
FINANCIAL STATEMENTS
The consolidated financial statements of the TIAA Real Estate Account, financial
statements of certain properties purchased by the Account and condensed
unaudited financial statements of TIAA follow. The full audited financial
statements of TIAA, which are incorporated herein by reference, are available
upon request by calling 800 842-2733 extension 5509.
The financial statements of TIAA should be distinguished from the consolidated
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.
57
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
TIAA REAL ESTATE ACCOUNT
Audited Consolidated Financial Statements:
Report of Management Responsibility .................................. F-2
Report of Independent Auditors ....................................... F-3
Consolidated Statements of Assets and Liabilities .................... F-4
Consolidated Statements of Operations ................................ F-5
Consolidated Statements of Changes in Net Assets ..................... F-6
Consolidated Statements of Cash Flows ................................ F-7
Notes to Consolidated Financial Statements ........................... F-8
Consolidated Statement of Investments ................................ F-14
Proforma Condensed Financial Statements:
Proforma Condensed Statement of Assets and Liabilities ............... F-18
Proforma Condensed Statement of Operations ........................... F-19
Notes to Proforma Condensed Financial Statements ..................... F-20
Columbia Centre III:
Report of Independent Auditors ....................................... F-21
Statement of Revenues and Certain Expenses ........................... F-22
Notes to Statement of Revenues and Certain Expenses .................. F-23
The Arbours (Lincoln Woods):
Report of Independent Auditors ....................................... F-24
Statement of Revenues and Certain Expenses ........................... F-25
Notes to Statement of Revenues and Certain Expenses .................. F-26
Arapahoe Park East, Westcreek Apartments,
Park View Plaza, Fairgate at Ballston, Newton Place,
and Longview Executive Park:
Independent Auditors' Report ......................................... F-27
Combined Statement of Revenues and Certain Expenses .................. F-28
Notes to Combined Statement of Revenues and Certain Expenses ......... F-29
TEACHERS INSURANCE AND ANNUITY ASSOCIATION
OF AMERICA
Condensed Unaudited Statutory-Basis Financial Statements ............. F-31
Supplemental Information to Condensed Unaudited Statutory-Basis
Financial Statements ............................................... F-33
</TABLE>
F-1
<PAGE>
[TIAA Logo]
- --------------------------------------------------------------------------------
REPORT OF MANAGEMENT RESPONSIBILITY
To the Participants of the
TIAA Real Estate Account:
The accompanying financial statements of the TIAA Real Estate Account
("Account") of Teachers Insurance and Annuity Association of America ("TIAA")
are the responsibility of TIAA's management. They have been prepared in
accordance with generally accepted accounting principles and have been presented
fairly and objectively in accordance with such principles.
TIAA has established and maintains a strong system of internal controls designed
to provide reasonable assurance that assets are properly safeguarded and
transactions are properly executed in accordance with management's
authorization, and to carry out the ongoing responsibilities of management for
reliable financial statements. In addition, TIAA's internal audit personnel
provide a continuing review of the internal controls and operations of TIAA,
including its separate account operations. The internal Auditor regularly
reports to the Audit Committee of the TIAA Board of Trustees.
The accompanying financial statements for 1997 have been audited by the
independent auditing firm of Ernst & Young 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
Ernst & Young LLP and internal auditing personnel to review matters relating to
financial reporting, internal controls and auditing.
/s/ John H. Biggs
----------------------------------------------
Chairman, President and Chief Executive Officer
/s/ Richard L. Gibbs
---------------------------------------------------------
Executive Vice President and Principal Accounting Officer
F-2
<PAGE>
[ERNST & YOUNG o 1211 Avenue of the Americas o Phone: 212 773 4900
LLP Logo] New York, New York 10036 Fax: 212 773 4501
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 consolidated statement of assets and
liabilities, including the statement of investments, of the TIAA Real Estate
Account ("Account") of Teachers Insurance and Annuity Association of America
("TIAA") as of December 31, 1997, and the related consolidated statements of
operations, changes in net assets and cash flows for the year then ended. These
consolidated financial statements are the responsibility of TIAA's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements for 1995
and 1996 were audited by other auditors whose report dated February 6, 1997
expressed an unqualified opinion on those consolidated financial statements.
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 consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
Our procedures included confirmation of securities owned as of December 31,
1997, 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, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Account
as of December 31, 1997, the results of its operations, the changes in its net
assets and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
February 6, 1998
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
F-3
<PAGE>
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------------- -----------------
<S> <C> <C>
ASSETS
Investments, at value:
Real estate properties
(cost: $510,096,015 and $130,849,444) ......... $ 521,284,091 $ 131,803,204
Marketable securities
(cost: $270,910,952 and $233,872,445) ......... 280,002,042 236,127,523
Cash ............................................ 407,598 3,981,740
Receivable from securities transactions ......... -- 47,480,000
Other ........................................... 14,067,094 6,979,540
------------- -------------
TOTAL ASSETS 815,760,825 426,372,007
------------- -------------
LIABILITIES
Payable for securities transactions ............. 10,463 51,354,619
Accrued real estate property level
expenses and taxes ............................. 10,343,593 5,007,363
Security deposits held .......................... 1,305,958 314,972
------------- -------------
TOTAL LIABILITIES 11,660,014 56,676,954
------------- -------------
MINORITY INTEREST ................................ 18,282,096 --
------------- -------------
NET ASSETS
Accumulation Fund ............................... 772,059,676 366,197,755
Annuity Fund .................................... 13,759,039 3,497,298
------------- -------------
TOTAL NET ASSETS $ 785,818,715 $ 369,695,053
============= =============
NUMBER OF ACCUMULATION UNITS
OUTSTANDING--Notes 6 and 7 ...................... 6,313,015 3,295,786
============= =============
NET ASSET VALUE,
PER ACCUMULATION UNIT--Note 6 ................... $ 122.30 $ 111.11
============= =============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the For the period
Years July 3, 1995
Ended (Commencement
December 31, of Operations) to
------------------------------ December 31,
1997 1996 1995
-------------- -------------- ------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Real estate income, net:
Rental income ..................................... $ 44,342,342 $10,951,183 $ 165,762
Real estate property level expenses and taxes:
Operating expenses ............................... 9,024,240 2,116,334 29,173
Real estate taxes ................................ 4,472,311 1,254,163 14,659
------------ ----------- ----------
Total real estate property level expenses and taxes 13,496,551 3,370,497 43,832
------------ ----------- ----------
Real estate income, net ............................ 30,845,791 7,580,686 121,930
Interest ........................................... 12,079,600 5,570,907 2,820,229
Dividends .......................................... 4,406,679 456,579 8,671
------------ ----------- ----------
TOTAL INCOME 47,332,070 13,608,172 2,950,830
------------ ----------- ----------
Expenses--Note 3:
Investment advisory charges ........................ 1,647,689 642,042 227,531
Administrative and distribution charges ............ 1,368,501 437,894 66,320
Mortality and expense risk charges ................. 400,925 70,535 8,291
Liquidity guarantee charges ........................ 109,430 5,325 8,291
------------ ----------- ----------
TOTAL EXPENSES 3,526,545 1,155,796 310,433
------------ ----------- ----------
INVESTMENT INCOME, NET 43,805,525 12,452,376 2,640,397
------------ ----------- ----------
REALIZED AND UNREALIZED
GAIN ON INVESTMENTS
Net realized gain on marketable securities ......... 1,076,725 141,439 15,865
------------ ----------- ----------
Net change in unrealized appreciation on:
Real estate properties ............................ 10,234,316 953,760 --
Marketable securities ............................. 6,836,012 2,235,340 19,738
------------ ----------- ----------
Net change in unrealized appreciation
on investments 17,070,328 3,189,100 19,738
------------ ----------- ----------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS 18,147,053 3,330,539 35,603
------------ ----------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS
BEFORE MINORITY INTEREST 61,952,578 15,782,915 2,676,000
Minority interest in net increase in net assets
resulting from operations ......................... (1,881,178) -- --
------------ ----------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 60,071,400 $15,782,915 $2,676,000
============ =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the period
Years July 3, 1995
Ended (Commencement
December 31, of Operations) to
-------------------------------- December 31,
1997 1996 1995
---------------- --------------- ------------------
<S> <C> <C> <C>
FROM OPERATIONS
Investment income, net ............................. $ 43,805,525 $ 12,452,376 $ 2,640,397
Net realized gain on marketable securities ......... 1,076,725 141,439 15,865
Net change in unrealized appreciation
on investments .................................... 17,070,328 3,189,100 19,738
Minority interest in net increase in net assets
resulting from operations ......................... (1,881,178) -- --
------------ ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 60,071,400 15,782,915 2,676,000
------------ ------------ ------------
FROM PARTICIPANT TRANSACTIONS
Premiums .......................................... 52,344,830 9,665,306 500,421
TIAA seed money contributed (withdrawn)--
Note 1 .......................................... (37,915,190) (7,294,134) 100,000,000
Net transfers from TIAA .......................... 43,681,385 19,203,309 2,901,675
Net transfers from CREF Accounts ................. 307,493,199 213,306,573 14,204,597
Annuity and other periodic payments .............. (1,499,054) (336,103) (718)
Withdrawals ...................................... (7,696,711) (864,480) (23,630)
Death benefits ................................... (356,197) (26,678) --
------------ ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM PARTICIPANT
TRANSACTIONS 356,052,262 233,653,793 117,582,345
------------ ------------ ------------
NET INCREASE IN NET ASSETS 416,123,662 249,436,708 120,258,345
NET ASSETS
Beginning of period ............................... 369,695,053 120,258,345 --
------------ ------------ ------------
End of period ..................................... $785,818,715 $369,695,053 $120,258,345
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the For the period
Years July 3, 1995
Ended (Commencement
December 31, of Operations) to
------------------------------------ December 31,
1997 1996 1995
----------------- ----------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net increase in net assets resulting from
operations .................................. $ 60,071,400 $ 15,782,915 $ 2,676,000
Adjustments to reconcile net increase in
net assets resulting from operations to
net cash used in operating activities:
Increase in investments ...................... (433,355,406) (249,948,493) (117,982,234)
Decrease (increase) in receivable from
securities transactions ..................... 47,480,000 (24,330,000) (23,150,000)
Increase in other assets ..................... (7,087,554) (5,331,140) (1,648,400)
Increase (decrease) in payable for
securities transactions ..................... (51,344,156) 28,566,584 22,788,035
Increase in other liabilities ................ 6,327,216 5,191,294 131,041
Increase in minority interest ................ 18,282,096 -- --
------------ ------------ ------------
NET CASH USED IN
OPERATING ACTIVITIES (359,626,404) (230,068,840) (117,185,558)
------------ ------------ ------------
CASH FLOWS FROM
PARTICIPANT TRANSACTIONS
Premiums ..................................... 52,344,830 9,665,306 500,421
TIAA seed money contributed (withdrawn)--
Note 1 ..................................... (37,915,190) (7,294,134) 100,000,000
Net transfers from TIAA ..................... 43,681,385 19,203,309 2,901,675
Net transfers from CREF Accounts ............ 307,493,199 213,306,573 14,204,597
Annuity and other periodic payments ......... (1,499,054) (336,103) (718)
Withdrawals ................................. (7,696,711) (864,480) (23,630)
Death benefits .............................. (356,197) (26,678) --
------------ ------------ ------------
NET CASH PROVIDED BY
PARTICIPANT TRANSACTIONS 356,052,262 233,653,793 117,582,345
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (3,574,142) 3,584,953 396,787
CASH
Beginning of period .......................... 3,981,740 396,787 --
------------ ------------ ------------
End of period ................................ $ 407,598 $ 3,981,740 $ 396,787
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
TIAA REAL ESTATE ACCOUNT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Organization
The TIAA Real Estate Account ("Account") is a segregated investment account of
Teachers Insurance and Annuity Association of America ("TIAA") and was
established by resolution of TIAA's Board of Trustees on February 22, 1995,
under the insurance laws of the State of New York, for the purpose of funding
variable annuity contracts issued by TIAA. Teachers REA, Inc., a wholly-owned
subsidiary of the Account, began operations in July 1996 and holds one property
in Virginia. Light Street Partners, L.P. ("Light Street"), a partnership in
which the Account holds a 90% interest, began operations in March 1997 and holds
eight office buildings throughout the United States. Teachers REA II, Inc., a
wholly-owned subsidiary of the Account, began operations in October 1997 and
holds one property in Pennsylvania.
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 prorata 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 on October 2, and November 1, 1995, respectively. In August
1996, the Account's net assets first reached $200 million and, as required under
a five year repayment schedule approved by the New York State Insurance
Department ("NYID"), TIAA began to redeem its seed money Accumulation Units in
monthly installments of 16,667 Units beginning in September 1996. Since the
Account's assets have been growing rapidly, TIAA in October 1997, with NYID
approval, modified the seed money redemption schedule by increasing the monthly
redemption of Units to a level equal to the value of 25% of the Account's net
asset growth for the prior month, with no fewer than 16,667 Units and no more
than 100,000 Units to be redeemed each month. These withdrawals are made at
prevailing daily net asset values and are reflected in the accompanying
consolidated financial statements. At December 31, 1997, TIAA retained 610,864
Accumulation Units, with a total value of $74,706,529.
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 also invests in publicly-traded
securities and other instruments to maintain adequate liquidity for operating
expenses, capital expenditures and to make benefit payments.
TIAA employees, under the direction of TIAA's Board of Trustees and its
Investment 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 also subject to review by
the Account's independent fiduciary, Institutional Property Consultants, Inc.
TIAA also provides all portfolio accounting
F-8
<PAGE>
TIAA REAL ESTATE ACCOUNT
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--(Continued)
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 preparation of financial statements may require management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, income,
expenses and related disclosures. Actual results may differ from those
estimates. The following is a summary of the significant accounting policies
followed by the Account, which are in conformity with generally accepted
accounting principles.
Basis of Presentation: The accompanying consolidated financial statements
include the Account, Teachers REA, Inc., and Teachers REA II, Inc., its
wholly-owned subsidiaries, and Light Street, in which the Account holds a 90%
interest. The 10% minority interest in Light Street is reflected separately in
the accompanying financial statements. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Valuation of Real Estate Properties: Investments in real estate properties are
stated at fair value, as determined in accordance with procedures approved by
the Investment Committee of the Board of Trustees and in accordance with the
responsibilities of the Board as a whole; accordingly, the Account does not
record depreciation. Fair value for real estate properties is defined as the
most probable price for which a property will sell in a competitive market under
all conditions requisite to a fair sale. Determination of fair value involves
subjective judgement because the actual market value of real estate can be
determined only by negotiation between the parties in a sales transaction. Real
estate properties owned by the Account are initially valued at their respective
purchase prices (including acquisition costs). Subsequently, independent
appraisers value each real estate property at least once a year. The independent
fiduciary must approve all independent appraisers used by the Account. 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's appraisal staff 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
F-9
<PAGE>
TIAA REAL ESTATE ACCOUNT
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--(Continued)
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 on such exchange.
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 Investment
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 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 securities 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.
Reclassifications: Certain 1996 and 1995 amounts in the consolidated financial
statements have been reclassified to conform to the 1997 presentation.
Note 3--Management Agreements
Under established management agreements, various 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. An affiliate of the minority partner in Light Street provides certain
management services for the properties owned by Light Street and the charges for
such services, totaling $507,829 for 1997, are included in investment advisory
charges in the accompanying consolidated statement of operations.
F-10
<PAGE>
TIAA REAL ESTATE ACCOUNT
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--(Continued)
TIAA also provides a liquidity guarantee to the Account, for a fee, to ensure
that sufficient funds are available to meet participant transfer and cash
withdrawal requests in the event that the Account's cash flows and liquid
investments are insufficient to fund such requests. TIAA also receives a fee for
assuming certain mortality and expense risks.
Fee payments are made from the Account on a daily basis to TIAA and Services
according to formulas established each year with the objective of keeping the
fees as close as possible to the Account's actual expenses. Any differences
between actual expenses and daily charges are adjusted quarterly.
Note 4--Real Estate Properties
Had the Account's real estate properties which were purchased during the year
ended December 31, 1997 been acquired at the beginning of the period (January 1,
1997), rental income and real estate property level expenses and taxes for the
year ended December 31, 1997 would have increased by approximately $21,909,000
and $7,808,000 respectively. In addition, interest income for the year ended
December 31, 1997 would have decreased by approximately $9,321,000. Accordingly,
the total proforma effect on the Account's net investment income for the year
ended December 31, 1997 would have been an increase of approximately $4,780,000,
if the real estate properties acquired during the year ended December 31, 1997
had been acquired at the beginning of the period.
Note 5--Leases
The Account's real estate properties are leased to tenants under operating lease
agreements which expire on various dates through 2021. Aggregate minimum annual
rentals for the properties owned, excluding short-term residential leases, are
as follows:
<TABLE>
<CAPTION>
Years Ending
December 31,
------------
<S> <C>
1998 $ 43,936,000
1999 40,923,000
2000 38,197,000
2001 31,847,000
2002 27,746,000
Thereafter 99,572,000
------------
Total $282,221,000
============
</TABLE>
Certain leases provide for additional rental amounts based upon the recovery of
actual operating expenses in excess of specified base amounts.
F-11
<PAGE>
TIAA REAL ESTATE ACCOUNT
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--(Continued)
Note 6--Condensed Consolidated Financial Information
Selected condensed consolidated financial information for an Accumulation Unit
of the Account is presented below.
<TABLE>
<CAPTION>
For the For the period
Years July 3, 1995
Ended (Commencement
December 31, of Operations) to
------------------------------- December 31,
1997 1996 1995(1)
-------------- -------------- ------------------
<S> <C> <C> <C>
Per Accumulation Unit Data:
Rental income ......................................... $ 7.288 $ 6.012 $ 0.159
Real estate property level expenses and taxes ......... 2.218 1.850 0.042
--------- --------- ---------
Real estate income, net 5.070 4.162 0.117
Dividends and interest ................................ 2.709 3.309 2.716
--------- --------- ---------
Total income 7.779 7.471 2.833
Expense charges(2) .................................... 0.580 0.635 0.298
--------- --------- ---------
Investment income, net 7.199 6.836 2.535
Net realized and unrealized gain on investments 3.987 1.709 0.031
--------- --------- ---------
Net increase in Accumulation Unit Value ............... 11.186 8.545 2.566
Accumulation Unit Value:
Beginning of period .................................. 111.111 102.566 100.000
--------- --------- ---------
End of period ........................................ $ 122.297 $ 111.111 $ 102.566
========= ========= =========
Total return .......................................... 10.07% 8.33% 2.57%
Ratios to Average Net Assets:
Expenses(2) .......................................... 0.58% 0.61% 0.30%
Investment income, net ............................... 7.25% 6.57% 2.51%
Portfolio turnover rate:
Real estate properties ............................... 0% 0% 0%
Securities ........................................... 7.67% 15.04% 0%
Thousands of Accumulation Units
outstanding at end of period ......................... 6,313 3,296 1,172
</TABLE>
(1)The percentages shown for this period are not annualized.
(2)Expense charges per Accumulation Unit and the Ratio of Expenses to Average
Net Assets include the portion of expenses related to the 10% minority interest
in Light Street and exclude real estate property level expenses and taxes. If
the real estate property level expenses and taxes were included, the expense
charge per Accumulation Unit for the year ended December 31, 1997 would be
$2.798 ($2.485 for the year ended December 31, 1996 and $0.340 for the period
July 3, 1995 through December 31, 1995) and the Ratio of Expenses to Average Net
Assets for the year ended December 31, 1997 would be 2.82% (2.39% for the year
ended December 31, 1996 and 0.34% for the period July 3, 1995 through December
31, 1995).
F-12
<PAGE>
TIAA REAL ESTATE ACCOUNT
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--(Continued)
Note 7--Accumulation Units
Changes in the number of Accumulation Units outstanding were as follows:
<TABLE>
<CAPTION>
For the For the period
Years July 3, 1995
Ended (Commencement
December 31, of Operations) to
--------------------------- December 31,
1997 1996 1995
------------ ------------ ------------------
<S> <C> <C> <C>
Accumulation Units:
Credited for premiums ........................ 448,822 89,841 1,004,905
Credited for transfers, net disbursements and
amounts applied to the Annuity Fund ......... 2,568,407 2,033,447 167,593
Outstanding:
Beginning of period .......................... 3,295,786 1,172,498 --
--------- --------- ---------
End of period ................................ 6,313,015 3,295,786 1,172,498
========= ========= =========
</TABLE>
F-13
<PAGE>
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
DECEMBER 31, 1997
REAL ESTATE PROPERTIES--65.06%
<TABLE>
<CAPTION>
Location Description Value
- -------- ----------- -----
<S> <C> <C>
Arizona:
Phoenix Office building .............. $ 10,700,000
California:
Sacramento Office building .............. 21,500,000(2)
San Diego Industrial building .......... 12,200,000
Westlake Village Apartments ................... 13,700,000
Colorado:
Boulder Industrial building .......... 10,000,000
Douglas County Apartments ................... 27,562,882
Littleton Apartments ................... 19,000,000
Florida:
Coral Springs Industrial building .......... 6,100,000
Ocoee Shopping center .............. 7,200,000
Orlando Apartments ................... 13,400,000
Sunrise Office building .............. 12,956,957
West Palm Beach Apartments ................... 15,800,000
Georgia:
Atlanta Apartments ................... 16,100,000
Illinois:
Oakbrook Terrace Office building .............. 51,614,733(2)
Rolling Meadows Shopping center .............. 13,000,000
Rosemont Office building .............. 38,580,850
Iowa:
Urbandale Industrial building .......... 13,813,908
Maryland:
Aberdeen Industrial building .......... 27,700,000
Hunt Valley Office building .............. 23,500,000(2)
Massachusetts:
Newton Office building .............. 16,900,000(2)
Minnesota:
Eagan Industrial building .......... 6,400,000
Fridley Industrial building .......... 4,225,000
New Jersey:
Piscataway Office building .............. 15,499,306
North Carolina:
Raleigh Shopping center .............. 7,000,000
Raleigh Shopping center .............. 7,100,000
Ohio:
Blue Ash Office building .............. 9,873,570(2)
Oregon:
Lake Oswego Office building .............. 16,200,000(2)
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE>
<TABLE>
<CAPTION>
Location Description Value
- -------- ----------- -----
<S> <C> <C>
Pennsylvania:
Lafayette Hill Apartments ................... $ 21,476,050(2)
Texas:
El Paso(1) Industrial building .......... 4,700,000
El Paso Apartments ................... 9,260,000
Utah:
Salt Lake City Office building .............. 7,900,000(2)
Virginia:
Arlington Office building .............. 27,560,000(2)
Woodbridge Shopping center .............. 12,760,835
-----------
TOTAL REAL ESTATE PROPERTIES (Cost $510,096,015) 521,284,091
-----------
</TABLE>
(1)Leasehold interest only
(2)The full fair value of this property is reflected; however, the Account only
has a 90% interest in the property. The minority partner in Light Street has
the remaining 10% interest in the property.
MARKETABLE SECURITIES--34.94%
<TABLE>
<CAPTION>
Shares Issuer
- ------ ------
<S> <C> <C>
REAL ESTATE INVESTMENT TRUSTS--13.64%
95,000 Avalon Properties, Inc. ................................ 2,939,063
30,000 Avalon Properties, Inc. Pfd Series A ................... 784,687
139,600 Bradley Real Estate, Inc. .............................. 2,931,600
160,000 Brandywine Realty Trust ................................ 4,020,000
80,000 Camden Property Trust .................................. 2,480,000
200,000 Carramerica Realty Corporation, Pfd Series B ........... 5,025,000
120,000 CBL & Associates Properties, Inc. ...................... 2,962,500
95,000 Colonial Properties Trust .............................. 2,861,875
75,000 Entertainment Properties Trust ......................... 1,453,125
50,000 Equity Office Properties Trust ......................... 1,578,125
200,000 Equity Office Properties Trust Pfd Series A ............ 5,350,000
100,000 Equity Residential Properties Trust, Pfd Series G....... 2,562,500
50,000 Equity Residential Property Trust ...................... 2,528,125
50,000 Excel Realty Trust, Inc. Pfd Series A .................. 1,517,187
25,000 Federal Realty Investment Trust Pfd. ................... 626,563
100,000 First Industrial Realty Trust, Pfd Series C ............ 2,696,875
100,000 Gables Residential Trust, Pfd Series A ................. 2,506,250
160,000 Health and Retirement Property Trust ................... 3,200,000
80,000 Hospitality Properties Trust ........................... 2,630,000
165,000 Innkeepers USA Trust ................................... 2,557,500
35,000 Mack-Cali Realty Corporation ........................... 1,435,000
165,001 Patriot American Hospitality Inc. ...................... 4,754,091
130,000 Public Storage, Inc. ................................... 3,818,750
130,000 Regency Realty Corporation ............................. 3,599,375
67,500 Security Capital Atlantic, Inc. ........................ 1,425,937
200,000 Security Capital Atlantic, Inc., Pfd Series A .......... 5,018,750
19,900 Security Capital Industrial Trust, Pfd. ................ 518,644
</TABLE>
See notes to consolidated financial statements.
F-15
<PAGE>
<TABLE>
<CAPTION>
Shares Issuer Value
- ------ ------ -----
<S> <C> <C>
4,800 Security Capital Wts. 9/98 ........................... $ 25,200
100,000 Simon Debartolo Group, Inc. .......................... 3,268,750
100,000 Spieker Properties, Inc. ............................. 4,287,500
105,000 Starwood Lodging Trust ............................... 6,076,875
85,000 Storage USA, Inc. .................................... 3,394,687
100,000 Taubman Centers, Inc. ................................ 1,300,000
35,000 Taubman Centers, Inc Series A Pfd. ................... 859,688
75,000 Tower Realty Trust, Incorporated ..................... 1,846,875
26,000 Trinet Corporate Realty Trust, Inc., Pfd Series B.... 679,250
98,100 Trinet Corporate Realty Trust, Inc. .................. 3,795,244
100,000 United Dominion Realty Trust, Pfd Series B ........... 2,650,000
50,000 Vornado Realty Trust, Pfd Series A ................... 3,300,000
125,000 Weeks Corp. .......................................... 4,000,000
-----------
TOTAL REAL ESTATE INVESTMENT TRUSTS
(Cost $100,139,030) ......................................... 109,265,591
-----------
</TABLE>
CORPORATE BONDS--1.25%
<TABLE>
<CAPTION>
Principal Issuer, Coupon and Maturity Date
- --------- --------------------------------
<S> <C> <C>
Associates Corporation of North America
$ 4,000,000 5.25% 09/01/98 ................................ 3,979,560
International Paper
3,000,000 6.87% 06/17/99 ................................ 3,041,520
Pepsico, Inc.
3,000,000 7.625% 11/01/98 ............................... 3,037,350
---------
TOTAL CORPORATE BONDS
(Cost $10,066,710) ........................................ 10,058,430
----------
GOVERNMENT AGENCIES--14.06%
Federal National Mortgage Association
2,000,000 5.35% 01/16/98 ................................ 1,994,916
Federal National Mortgage Association
2,000,000 5.35% 02/17/98 ................................ 1,985,280
Federal National Mortgage Association
2,000,000 5.36% 03/17/98 ................................ 1,976,524
Federal National Mortgage Association
14,775,000 5.56% 03/25/98 ................................ 14,583,319
Federal National Mortgage Association
10,000,000 5.61% 01/05/98 ................................ 9,992,111
Federal National Mortgage Association
11,939,000 5.67% 01/12/98 ................................ 11,916,197
Federal Home Loan Mortgage
40,000,000 5.71% 01/09/98 ................................ 39,942,700
Federal National Mortgage Association
30,410,000 5.74% 01/30/98 ................................ 30,265,045
----------
TOTAL GOVERNMENT AGENCIES
(Amortized cost $112,675,553) ............................. 112,656,092
-----------
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
<TABLE>
<CAPTION>
Principal Issuer, Coupon and Maturity Date Value
- --------- -------------------------------- -----
<S> <C> <C>
COMMERCIAL PAPER--5.99%
General Electric Capital Corp.
$10,000,000 5.70% 02/10/98 ....................... $ 9,933,717
McCormick & Co, Inc
16,000,000 6.65% 01/02/98 ....................... 15,995,050
SBC Communications Inc
22,100,000 6.60% 01/02/98 ....................... 22,093,162
------------
TOTAL COMMERCIAL PAPER
(Amortized cost $48,029,659) .............................. 48,021,929
------------
TOTAL MARKETABLE SECURITIES
(Cost $270,910,952) ....................................... 280,002,042
------------
TOTAL INVESTMENTS--100.00%
(Cost $781,006,967) ....................................... $801,286,133
============
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE>
TIAA REAL ESTATE ACCOUNT
PROFORMA CONDENSED
STATEMENT OF ASSETS AND LIABILITIES (Unaudited)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Proforma
Historical Adjustments Proforma
--------------- ---------------------- ---------------
<S> <C> <C> <C>
ASSETS
Investments, at value:
Real estate properties ..................... $521,284,091 $ 29,701,668(a) $550,985,759
Marketable securities ...................... 280,002,042 (29,701,668)(a) 250,300,374
Cash ........................................ 407,598 -- 407,598
Other ....................................... 14,067,094 -- 14,067,094
------------ -------------- ------------
TOTAL ASSETS ............................. 815,760,825 -- 815,760,825
------------ -------------- ------------
LIABILITIES
Payable for securities transactions ......... 10,463 -- 10,463
Accrued real estate property level
expenses and taxes ......................... 10,343,593 -- 10,343,593
Security deposits held ...................... 1,305,958 -- 1,305,958
------------ -------------- ------------
TOTAL LIABILITIES ........................ 11,660,014 -- 11,660,014
------------ -------------- ------------
MINORITY INTEREST ............................ 18,282,096 -- 18,282,096
------------ -------------- ------------
NET ASSETS
Accumulation Fund ........................... 772,059,676 -- 772,059,676
Annuity Fund ................................ 13,759,039 -- 13,759,039
------------ -------------- ------------
TOTAL NET ASSETS ......................... $785,818,715 -- $785,818,715
============ ============== ============
</TABLE>
See notes to proforma condensed financial statements.
F-18
<PAGE>
TIAA REAL ESTATE ACCOUNT
PROFORMA CONDENSED
STATEMENT OF OPERATIONS (Unaudited)
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Proforma
Historical Adjustments Proforma
-------------- -------------------- --------------
<S> <C> <C> <C>
INVESTMENT INCOME
Income:
Real estate income, net:
Rental income ..................... $44,342,342 $ 23,497,770(b) $67,840,112
----------- ------------- -----------
Real estate property level expenses and taxes:
Operating expenses ............... 9,024,240 6,219,853(b) 15,244,093
Real estate taxes ................ 4,472,311 2,679,721(b) 7,152,032
----------- ------------- -----------
Total real estate property level
expenses and taxes ............... 13,496,551 8,899,574 22,396,125
----------- ------------- -----------
Real estate income, net ............ 30,845,791 14,598,196 45,443,987
Interest and dividends ............. 16,486,279 (9,887,373)(c) 6,598,906
----------- ------------- -----------
TOTAL INCOME ......................... 47,332,070 4,710,823 52,042,893
EXPENSES ............................. 3,526,545 216,000(d) 3,742,545
----------- ------------- -----------
INVESTMENT INCOME-NET ................ 43,805,525 4,494,823 48,300,348
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS ................. 18,147,053 -- 18,147,053
----------- ------------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS
BEFORE MINORITY INTEREST ............ 61,952,578 4,494,823 66,447,401
MINORITY INTEREST IN NET
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ........... (1,881,178) -- (1,881,178)
----------- ------------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ........... $60,071,400 $ 4,494,823 $64,566,223
=========== ============= ===========
</TABLE>
See notes to proforma condensed financial statements.
F-19
<PAGE>
TIAA REAL ESTATE ACCOUNT
NOTES TO PROFORMA CONDENSED
FINANCIAL STATEMENTS
Note 1--Purpose and Assumptions
As required by the Securities and Exchange Commission under Regulation S-X
Article 11-01(5), these proforma condensed financial statements of the TIAA Real
Estate Account ("Account") have been prepared because the Account has made
significant purchases of real estate properties during the period January 1,
1997 through the date of this prospectus. Various assumptions have been made in
order to prepare these proforma condensed financial statements. The proforma
condensed statement of assets and liabilities has been prepared assuming real
estate properties purchased during the period January 1, 1998 through the date
of this prospectus were purchased as of December 31, 1997. The proforma
condensed statement of operations has been prepared assuming all real estate
properties purchased during the period January 1, 1997 through the date of this
prospectus were purchased as of January 1, 1997.
Note 2--Proforma Adjustments
The following proforma adjustments were made in preparing the proforma condensed
financial statements to reflect the purpose described in Note 1.
Proforma Condensed Statement of Assets and Liabilities:
(a) To record the cost of the property (The Legends at Chase Oaks) purchased on
March 31, 1998 in the amount of $29,701,668, assuming such property was
purchased as of December 31, 1997.
Proforma Condensed Statement of Operations:
(b) To record the rental income and real estate property level expenses of the
21 real estate properties purchased during the period January 1, 1997 through
the date of this prospectus, assuming such properties were owned for the period
January 1, 1997 through December 31, 1997.
(c) To record the decrease in the interest and dividend income from having less
cash to invest in marketable securities, assuming the real estate properties
purchased during the period January 1, 1997 through the date of this prospectus
had been purchased as of January 1, 1997.
(d) To record investment advisory charges which would have been incurred during
1997, assuming the real estate properties purchased during the period January 1,
1997 through the date of this prospectus had been purchased as of January 1,
1997.
F-20
<PAGE>
[ERNST & YOUNG o 1211 Avenue of the Americas o Phone: 212 773 4900
LLP Logo] New York, New York 10036 Fax: 212 773 4501
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
TIAA Real Estate Account
We have audited the statement of revenues and certain expenses of Columbia
Centre III for the year ended December 31, 1997. This financial statement is the
responsibility of 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 the 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.
The accompanying 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 Form S-1 of the TIAA Real Estate Account
and is not intended to be a complete presentation of Columbia Centre III
revenues and expenses.
In our opinion, the financial statement referred to above present fairly, in all
material respects, the revenues and certain expenses of Columbia Centre III, as
described in Note 2, for the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
February 26, 1998
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
F-21
<PAGE>
COLUMBIA CENTRE III
Statement of Revenues and Certain Expenses
Year Ended December 31, 1997
<TABLE>
<S> <C>
Revenues:
Rental income ................................. $5,329,409
Other income .................................. 103,305
----------
Total revenues ............................... 5,432,714
----------
Certain expenses:
Property operating and maintenance ............ 837,393
Real estate taxes ............................. 1,098,696
Management fees ............................... 293,991
General and administrative .................... 25,735
----------
Total expenses ............................... 2,255,815
----------
Revenues in excess of certain expenses ......... $3,176,899
==========
</TABLE>
See accompanying notes.
F-22
<PAGE>
COLUMBIA CENTRE III
Notes to Statement of Revenues and Certain Expenses
December 31, 1997
1. Business
The accompanying statement of revenues and certain expenses relates to the
operations of Columbia Centre III (the "Property"). The Property was acquired in
December, 1997 by the TIAA Real Estate Account.
2. Summary of Significant Accounting Policies
Basis of Presentation: The accompanying statement of revenues and certain
expenses has been prepared in accordance with the applicable rules and
regulations of the Securities and Exchange Commission for the acquisition of
real estate properties. Accordingly, the financial statement excludes certain
expenses that may not be comparable to those expected to be incurred by the TIAA
Real Estate Account in the future operations of the aforementioned property.
Expenses excluded consist of interest, depreciation and amortization.
Use of Estimates: The preparation of the statement of revenues and certain
expenses in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the statement of revenues and certain expenses and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition: The Property is leased to tenants under operating leases.
Rental revenue is recognized on a straight-line basis over the terms of the
respective leases.
3. Management Agreement
Management services for the Property are provided by Hamilton Partners. Fees
paid for such services are generally based on 5% of gross collections as defined
in the Management Agreement.
4. Lease Agreements
The Property is leased to tenants under operating leases. The minimum rental
amounts due under the leases are generally either subject to scheduled fixed
increases or upward adjustments based on certain inflation indices. The leases
generally also require that the tenants reimburse increases in certain operating
costs and real estate taxes.
F-23
<PAGE>
[ERNST & YOUNG o 1211 Avenue of the Americas o Phone: 212 773 4900
LLP Logo] New York, New York 10036 Fax: 212 773 4501
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
TIAA Real Estate Account
We have audited the financial statement of The Arbours for the year ended
December 31, 1996. The financial statement is the responsibility of the
Property's management. Our responsibility is to express an opinion on the
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 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 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 Form S-1 of the TIAA Real Estate Account
and is not intended to be a complete presentation of the Property's revenues and
expenses.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the revenues and certain expenses of The Arbours, as
described in Note 2, for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
November 20, 1997
New York, New York
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
F-24
<PAGE>
THE ARBOURS (LINCOLN WOODS)
Statement of Revenues and Certain Expenses
Year Ended December 31, 1996
<TABLE>
<S> <C>
Revenues:
Rental income ................................. $2,374,426
Other income .................................. 39,817
----------
Total revenues ............................... 2,414,243
----------
Certain expenses:
Property operating and maintenance ............ 420,185
Real estate taxes ............................. 254,275
Management fees ............................... 96,306
General and administrative .................... 38,868
----------
Total expenses ............................... 809,634
----------
Revenues in excess of certain expenses ......... $1,604,609
==========
</TABLE>
See accompanying notes.
F-25
<PAGE>
THE ARBOURS (LINCOLN WOODS)
Notes to the Statement of Revenues and Certain Expenses
December 31, 1996
1. Business
The accompanying statement of revenues and certain expenses relates to the
operations of The Arbours (Lincoln Woods) (the "Property"). The Property was
acquired in October 1997 by the TIAA Real Estate Account.
2. Summary of Significant Accounting Policies
Basis of Presentation: The accompanying statement of revenues and certain
expenses was prepared in accordance with the applicable rules and regulations of
the Securities and Exchange Commission. Accordingly, the financial statement
excludes certain expenses that may not be comparable to those expected to be
incurred by the TIAA Real Estate Account in the future operations of the
aforementioned property. Expenses excluded consist of interest, depreciation and
amortization.
Use of Estimates: The preparation of the statement of revenues and certain
expenses in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the statement of revenues and certain expenses and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition: The property is leased to tenants under operating leases.
Rental revenue is recognized on a straight line basis over the terms of the
respective leases.
3. Management Agreement
Management services for the Property are provided by Lincoln Property Company.
Fees paid for such services are generally based on 4% of gross revenues as
defined in the Management Agreement.
4. Lease Agreements
The Property is leased to tenants under operating leases. The minimum rental
amounts due under the leases are generally either subject to scheduled fixed
increases or upward adjustments based on certain inflation indices. The leases
generally also require that the tenants reimburse increases in certain operating
costs and real estate taxes.
F-26
<PAGE>
[Deloitte &
Touche LLP ---------------------------------------------------------
Logo] Two 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 accompanying combined statement of revenues and certain
expenses of the properties known as Arapahoe Park East, Westcreek Apartments,
Parkview Plaza, Fairgate at Ballston, Two Newton Place and Longview Executive
Park, (collectively, the "Properties") for the year ended December 31, 1996.
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 financial statement presentation.
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 31, 1996 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
New York, New York
April 29, 1997
[Logo:
---------------
Deloitte Touche
Tohmatsu
International
---------------]
F-27
<PAGE>
ARAPAHOE PARK EAST
WESTCREEK APARTMENTS
PARKVIEW PLAZA
FAIRGATE AT BALLSTON
TWO NEWTON PLACE
LONGVIEW EXECUTIVE PARK
Combined Statement of Revenues and Certain Expenses
Year Ended December 31, 1996
<TABLE>
<S> <C>
Revenues:
Rental income ................................. $17,588,503
Other ......................................... 2,047,736
-----------
Total revenues ............................... 19,636,239
-----------
Certain Expenses:
Building operating expenses ................... 3,418,537
Real estate taxes ............................. 1,642,127
Management fees ............................... 385,726
-----------
Total expenses ............................... 5,446,390
-----------
Revenues in excess of certain expenses ......... $14,189,849
===========
</TABLE>
See notes to combined statement of revenues and certain expenses.
F-28
<PAGE>
ARAPAHOE PARK EAST
WESTCREEK APARTMENTS
PARKVIEW PLAZA
FAIRGATE AT BALLSTON
TWO NEWTON PLACE
LONGVIEW EXECUTIVE PARK
Notes to Combined Statement of Revenues and Certain Expenses
Year Ended December 31, 1996
Note 1--Description of Properties
The combined statement of revenues and certain expenses relates to the
properties known as Arapahoe Park East ("Arapahoe"), Westcreek Apartments
("Westcreek"), Parkview Plaza ("Parkview"), Fairgate at Ballston ("Fairgate"),
Two Newton Place ("Newton") and Longview Executive Park ("Longview")
(collectively, the "Properties"). Arapahoe, located in Boulder Colorado, was
acquired by TIAA Real Estate Account (the "Account") on October 21, 1996.
Westcreek, located in Westlake Village, California, was acquired by the Account
on January 2, 1997. Fairgate, located in Arlington Virginia, Newton, located in
Newton Massachusetts, and Longview, located in Hunt Valley, Maryland were
acquired by the Account on April 21, 1997. Parkview, located in Oakbrook
Terrace, Illinois, was acquired by the Account on April 29, 1997.
Note 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 actual operations for the year
ended December 31, 1996 as certain expenses, which may not be comparable to the
expenses expected to be incurred in 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.
Note 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-29
<PAGE>
Note 4--Leases
At December 31, 1996, future minimum base rentals, excluding short term
residential leases, to be received for years ending 1997 through 2001, and the
aggregate amount thereafter, under noncancellable operating leases in effect,
are as follows:
<TABLE>
<S> <C>
1997 ................................ $17,267,000
1998 ................................ 16,301,000
1999 ................................ 13,435,000
2000 ................................ 12,092,000
2001 ................................ 10,380,000
Aggregate amount thereafter ......... 29,550,000
-----------
$99,025,000
===========
</TABLE>
Certain leases provide for additional rental amounts based upon the recovery of
actual operating expenses in excess of specified base amounts.
F-30
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
Condensed Unaudited Statutory-Basis Financial Statements
(These condensed unaudited statutory-basis financial statements have
been derived from audited financial statements which are available
upon request)
TIAA Condensed Statutory-Basis Balance Sheets
(amounts in thousands)
<TABLE>
<CAPTION>
December 31,
ASSETS 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Bonds $63,469,596 $56,092,131
Mortgages 18,901,926 20,074,002
Real Estate 6,434,359 6,704,889
Stocks 965,295 355,093
Other long-term investments 1,018,052 500,351
Cash and short-term investments 178,852 615,082
Investment income due and accrued 1,230,046 1,140,956
Separate Account assets 1,340,154 663,458
Other assets 257,038 211,516
----------- -----------
Total Assets $93,795,318 $86,357,478
=========== ===========
LIABILITIES
- ------------------------------------------------------------------------------------
Policy and contract reserves $81,149,016 $75,909,906
Dividends declared for the following year 1,778,732 1,636,738
Asset Valuation Reserve 2,338,643 2,134,921
Interest Maintenance Reserve 781,272 729,090
Separate Account liabilities 1,265,447 559,754
Other liabilities 705,633 636,364
----------- -----------
Total Liabilities 88,018,743 81,606,773
----------- -----------
CAPITAL AND CONTINGENCY RESERVES
- ------------------------------------------------------------------------------------
Capital 2,500 2,500
----------- -----------
Contingency reserves:
For group life insurance 9,846 8,739
For investment losses, annuity and insurance
mortality, and other risks 5,764,229 4,739,466
----------- -----------
Total Contingency Reserves 5,774,075 4,748,205
----------- -----------
Total Capital and Contingency Reserves 5,776,575 4,750,705
----------- -----------
Total Liabilities, Capital and Contingency Reserves $93,795,318 $86,357,478
=========== ===========
</TABLE>
F-31
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
Condensed Unaudited Statutory-Basis Financial Statements
(These condensed unaudited statutory-basis financial statements have been
derived from audited financial statements which are available
upon request)
TIAA Condensed Statutory-Basis Statements of Operations and
Changes in Contingency Reserves
(amounts in thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
INCOME 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Insurance and annuity premiums and deposits $ 2,844,792 $ 2,781,827
Transfers from CREF, net 686,373 366,920
Annuity dividend additions 2,284,029 2,131,890
Net investment income 6,902,123 6,525,529
Supplementary contract consideration 227,936 203,770
----------- -----------
Total Income $12,945,253 $12,009,936
=========== ===========
DISTRIBUTION OF INCOME
- -----------------------------------------------------------------------------------------
Policy and contract benefits $ 2,138,424 $ 1,916,597
Dividends 3,617,551 3,399,581
Increase in policy and contract reserves 5,234,590 5,097,213
Operating expenses 272,584 249,000
Transfers to Separate Accounts, net 543,891 395,686
Federal income taxes 24,194 13,154
Other, net 307 1,112
Increase in contingency reserves from operations 1,113,712 937,593
----------- -----------
Total Distribution of Income $12,945,253 $12,009,936
=========== ===========
CHANGES IN CONTINGENCY RESERVES:
- -----------------------------------------------------------------------------------------
From operations $ 1,113,712 $ 937,593
Net realized capital gain on investments 249,412 163,950
Net unrealized capital gain (loss) on investments (2,482) 30,452
Transfer to the Interest Maintenance Reserve (136,512) (167,086)
Transfers from (to) the Asset Valuation Reserve:
Required formula contribution (205,450) (246,181)
Net capital (gains) losses absorbed (117,961) (27,872)
Adjustment down to maximum 119,690 --
Decrease (increase) in non-admitted assets other than
investments 1,200 (4,764)
Change in valuation basis of policy reserves (4,657) --
Other, net 8,918 8,433
----------- -----------
Net Change in Contingency Reserves 1,025,870 694,525
Contingency Reserves at Beginning of Year 4,748,205 4,053,680
----------- -----------
Contingency Reserves at End of Year $ 5,774,075 $ 4,748,205
=========== ===========
</TABLE>
F-32
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
Supplemental Information to
Condensed Unaudited Statutory-Basis 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 amortized cost or market value. For
loan-backed bonds and structured securities, amortized cost is determined using
actual and anticipated cash flows under the prospective method for interest-only
securities and under the retrospective method for all other securities.
Mortgages are stated at amortized cost, and directly-owned real estate at
depreciated cost (net of encumbrances). Investments in wholly-owned
subsidiaries, real estate limited partnerships and securities limited
partnerships are stated at TIAA's equity in the net admitted assets of the
underlying entities. Policy loans are stated at outstanding principal amounts.
Seed money investments in the TIAA-CREF Mutual Funds and in new accounts
established by College Retirement Equities Fund ("CREF"), a companion
organization, are stated at market value. 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>
1997 1996
------ -----
<S> <C> <C>
As a percentage of total bond investments:
Below investment grade bonds 5% 5%
As a percentage of total mortgage investments:
Below investment grade mortgage loans 2% 4%
Total mortgage investments in California 20% 22%
Total mortgage investments in office buildings 40% 41%
Total mortgage investments in shopping centers 31% 29%
As a percentage of total real estate investments:
Total real estate investments in Minnesota 11% 12%
Total real estate investments in California 11% 10%
Total real estate investments in office buildings 62% 63%
</TABLE>
Derivative Positions: TIAA makes limited use of derivatives to reduce interest
rate risks and foreign currency risks associated with certain investments. TIAA
is exposed to the risk of default of the counterparties, although TIAA does not
anticipate non-performance by such counterparties. In order to minimize the risk
associated with potential counterparty default, TIAA monitors the credit quality
of its counterparties. At December 31, 1997 and 1996, TIAA had outstanding
foreign currency swap contracts with a total notional value of approximately
$485,274,000 and $337,404,000, respectively, foreign currency forward contracts
with a notional value of approximately $2,274,000 and $12,522,000, respectively,
interest rate swap contracts with a total notional value of approximately
$267,755,000 and $187,355,000, respectively, swap options with a notional value
of approximately $170,700,000 and $58,000,000, respectively and interest rate
caps with a notional value of approximately $5,978,970,000 and $32,520,000,
respectively.
F-33
<PAGE>
Appendix A
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, 65.
President Emeritus, Pomona College. Formerly, President, Pomona College and
American Secretary, Rhodes Scholarship Trust.
Marcus Alexis, 66.
Board of Trustees Professor of Economics and Professor of Management and
Strategy, J.L. Kellogg Graduate School of Management, Northwestern University.
Willard T. Carleton, 63.
Karl L. Eller Professor of Finance, College of Business and Public
Administration, University of Arizona.
Robert C. Clark, 54.
Dean and Royall Professor of Law, Harvard Law School, Harvard University.
Estelle A. Fishbein, 63.
Vice President and General Counsel of The Johns Hopkins University.
Frederick R. Ford, 62.
Executive Vice President and Treasurer, Purdue University.
Martin J. Gruber, 60.
Nomura Professor of Finance, New York University Stern School of Business.
Formerly, Chairman, Department of Finance, New York University Stern School of
Business.
Ruth Simms Hamilton, 60.
Professor, Department of Sociology, and Director, African Diaspora Research
Project, Michigan State University.
Dorothy Ann Kelly, O.S.U., 68.
Chancellor, College of New Rochelle. Formerly, President, College of New
Rochelle.
Robert M. O'Neil, 63.
Professor of Law, University of Virginia and Director, The Thomas Jefferson
Center for the Protection of Free Expression.
Leonard S. Simon, 61.
Vice Chairman, Charter One Financial Inc. Formerly, Chairman, President and
Chief Executive Officer, RCSB Financial, Inc., until September 1997, and
Chairman and Chief Executive Officer, The Rochester Community Savings Bank,
until September 1995.
Ronald L. Thompson, 48.
Chairman of the Board and Chief Executive Officer, Midwest Stamping Co.
Formerly, Chairman of the Board and President, The GR Group, until 1993.
A-1
<PAGE>
Paul R. Tregurtha, 62.
Chairman, Chief Executive, and Director, Mormac Marine Group, Inc.; Vice
Chairman and Director, The Interlake Steamship Company; Chairman and Director,
Moran Transportation Company and Meridian Aggregates, L.P.; Vice Chairman, Lakes
Shipping Company.
William H. Waltrip, 60.
Chairman, 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.
Rosalie J. Wolf, 56.
Treasurer and Chief Investment Officer, The Rockefeller Foundation since 1994.
Formerly, Executive Vice President, Sithe Energies, Inc. from January 1994 to
June 1994, and Managing Director--Merchant Banking, Bankers Trust Company, from
1989 to 1993.
Officer-Trustees
John H. Biggs, 61.
Chairman, President and Chief Executive Officer, TIAA and CREF.
Martin L. Leibowitz, 61.
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 J. Adamski, 55.
Vice President and Treasurer, TIAA and CREF.
Richard L. Gibbs, 51.
Executive Vice President, Finance and Planning, TIAA and CREF.
Albert J. Wilson, 65.
Vice President and Chief Counsel, Corporate Secretary, TIAA and CREF.
A-2
<PAGE>
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