As filed with the Securities and Exchange Commission
on April 27, 1998
Registration No. 333-22809
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
TIAA REAL ESTATE ACCOUNT
------------------------
(Exact name of registrant as specified in its charter)
New York
--------
(State or other jurisdiction of incorporation or organization)
(Not applicable)
----------------
(Primary Standard Industrial Classification Code Number)
(Not applicable)
----------------
(I.R.S. Employer Identification No.)
c/o Teachers Insurance and Annuity Association of America
730 Third Avenue
New York, New York 10017-3206
(212) 490-9000
--------------------------------------------------
(Address including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Peter C. Clapman, Esquire
Teachers Insurance and Annuity Association of America
730 Third Avenue
New York, New York 10017-3206
(212) 490-9000
--------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Paul J. Mason, Esquire
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2415
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of the registration statement.
<PAGE>
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ] _______
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ] _______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
Pursuant to Rule 429 under the Securities Act, the prospectus contained herein
also relates to and constitutes a post-effective amendment to Securities Act
registration statements 33-92990 and 333-13477.
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
Showing Location of Information Required by Form S-1
in Part I (Prospectus) of the Registration Statement
Item of Form S-1 Caption or Location in Prospectus
- ---------------- ---------------------------------
1. Forepart of the Registration Outside Front Cover Page
Statement and Outside Front Cover
Page of Prospectus
2. Inside Front Cover and Outside Inside Front and Outside Back Cover Page
Back Cover Pages of Prospectus
3. Summary Information, Risk Factors Summary; The Real Estate Account
and Ratio of Earnings to Fixed and TIAA; Risk Factors
Charges
4. Use of Proceeds (Not Applicable)
5. Determination of Offering Price (Not Applicable)
6. Dilution (Not Applicable)
7. Selling Security Holders (Not Applicable)
8. Plan of Distribution Distribution of the Contracts
9. Description of Securities Summary; The Accumulating Annuity
to Be Registered Contracts; Income-Paying Annuity
Contracts
10. Interests of Named Experts (Not Applicable)
and Counsel
11. Information with Respect to the Summary; The Real Estate Account and
Registrant TIAA; Investment Practices of the
Account; General Investment and
Operating Policies; Description of
Properties; Risk Factors; Role of TIAA;
Conflicts of Interest; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Valuation of Assets; Management and
Investment Advisory Arrangements;
Federal Income Taxes; State Regulation;
Legal Matters; Experts; Legal
Proceedings; Financial Statements
- ii -
<PAGE>
Item of Form S-1 Caption or Location in Prospectus
- ---------------- ---------------------------------
12. Disclosure of Commission Position (Not Applicable)
on Indemnification for Securities
Act Liabilities
- iii -
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
<PAGE>
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
[Logo of TIAA]
<PAGE>
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 18.
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
<PAGE>
TABLE OF CONTENTS
Page
----
DEFINITIONS.................................................................. 4
SUMMARY .................................................................... 7
THE REAL ESTATE ACCOUNT AND TIAA............................................. 11
INVESTMENT PRACTICES OF THE ACCOUNT.......................................... 12
GENERAL INVESTMENT AND OPERATING POLICIES.................................... 17
RISK FACTORS................................................................. 18
ROLE OF TIAA................................................................. 24
CONFLICTS OF INTEREST........................................................ 27
DESCRIPTION OF PROPERTIES.................................................... 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................. 33
VALUATION OF ASSETS.......................................................... 37
MANAGEMENT AND INVESTMENT ADVISORY ARRANGEMENTS.............................. 40
EXPENSE DEDUCTIONS........................................................... 41
THE ACCUMULATING ANNUITY CONTRACTS........................................... 42
INCOME-PAYING ANNUITY CONTRACTS.............................................. 50
DEATH BENEFITS............................................................... 56
FEDERAL INCOME TAXES......................................................... 58
GENERAL MATTERS.............................................................. 62
DISTRIBUTION OF THE CONTRACTS................................................ 64
STATE REGULATION............................................................. 64
LEGAL MATTERS................................................................ 65
EXPERTS .................................................................... 65
- 2 -
<PAGE>
LEGAL PROCEEDINGS........................................................... 65
ADDITIONAL INFORMATION...................................................... 65
FINANCIAL STATEMENTS........................................................ 66
INDEX TO FINANCIAL STATEMENTS............................................... F-1
APPENDIX A--MANAGEMENT OF TIAA.............................................. A-1
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.
- 3 -
<PAGE>
DEFINITIONS
Throughout the prospectus, "TIAA," "we," and "our" refer to Teachers
Insurance and Annuity Association of America. "You" and "your" mean any
participant or any prospective participant.
Account - The TIAA Real Estate Account, a separate account of TIAA.
Accumulation - The total value of your accumulation units in the
Real Estate Account.
Accumulation Fund - The assets of the Real Estate Account not
dedicated to current retirement benefits or other liabilities.
Accumulation Period - The period that begins with your first premium
and continues until the entire accumulation has been applied to purchase annuity
income, transferred from the Account, or paid to you or a beneficiary.
Accumulation Unit - A share of participation in the Real Estate
Account for someone in the accumulation period.
Annuity Fund - The assets in the Account that fund current
retirement benefits. 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.
- 4 -
<PAGE>
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.
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.
- 5 -
<PAGE>
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.
- 6 -
<PAGE>
SUMMARY
The following summary of prospectus information should be read
together with the detailed information contained elsewhere in this prospectus.
The TIAA Real Estate Account
- ----------------------------
This prospectus describes the TIAA Real Estate Account, a separate
investment account of TIAA. Its investment objective is a favorable rate of
return over the long term, primarily through rental income and capital
appreciation from real estate investments owned by the Account. The majority of
the Account's real estate investments will be ownership interests in
income-producing office, industrial, retail, and multi-family residential
properties. The Account can make other real estate-related investments,
including mortgage loans and purchasing shares of real estate investment trusts
and other entities engaged primarily in real estate-related activities. The
Account will also invest in publicly-traded securities and other instruments to
maintain liquidity to make distributions and cover capital expenditures and
expenses. TIAA will provide additional liquidity to the Account as needed,
according to its arrangement with the U.S. Department of Labor, as described on
page 25. 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 40.
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 18. 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.
- 7 -
<PAGE>
Because it invests in real estate, the Account is also exposed to
risks relating to environmental matters. For instance, if an investment property
does not comply with certain environmental protection regulations, the liability
for clean-up costs could exceed the Account's investment in the property (or the
principal amount loaned by the Account as a mortgage lender).
Conflicts of Interest
- ---------------------
The Account is managed by TIAA employees. TIAA employees who manage
the Account's real estate-related investments may also manage real
estate-related investments of TIAA's general account. Similarly, the part of the
Account invested in securities and other instruments not related to real estate
is managed by employees who may also manage investments of TIAA's general
account and other accounts that are not related to real estate. These employees
could therefore face various conflicts of interest (see "Conflicts of Interest,"
page 27).
TIAA's guarantee to provide liquidity for the Account under certain
circumstances could also raise conflicts of interest (see "Liquidity Guarantee,"
page 24).
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 50.
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 45,
"Allocation of Premiums," page 45, "Possible Restrictions on Acceptance of
Premiums and Transfers," page 46, and "Federal Income Taxes," page 58.
Expense Deductions. We make daily deductions from the net assets of
the Real Estate Account to pay the Account's operating and investment management
expenses. The Account also pays TIAA for bearing mortality and expense risks and
for providing liquidity guarantees. The current annual expense deductions from
the net assets of the Account total 0.60%: 0.28% for investment
- 8 -
<PAGE>
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 41.
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. 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 58.
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.
- 9 -
<PAGE>
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.
July 3, 1995
(commencement
of operations)
Year Ended Year Ended to
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
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
============ ============ ============
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
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
============ ============ ============
- 10 -
<PAGE>
THE REAL ESTATE ACCOUNT AND TIAA
On February 22, 1995, the Real Estate Account was established by
resolution of TIAA's Board of Trustees as a separate investment account of TIAA
under New York law. As part of TIAA, the Account is subject to regulation by the
State of New York Insurance Department ("NYID") and the insurance departments of
some other jurisdictions in which the contracts are offered (see "State
Regulation," page 64).
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).
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
- 11 -
<PAGE>
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.
- 12 -
<PAGE>
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
- 13 -
<PAGE>
other events). The Account can invest in leasebacks that are subordinated to
other interests in the land, buildings, and improvements. These interests
include a first mortgage, other mortgage, or lien. In that case, the leaseback
interest will be subject to greater risks.
Investments in Mortgages
- ------------------------
The Account can make mortgage loans or hold interests in mortgage
loans made by it or others, generally on the same types of properties it would
otherwise purchase. These will include commercial mortgage loans that may pay
fixed or variable rates of interest or have "participating" features (as defined
below). The Account's mortgage loans usually will be secured by properties that
have income-producing potential based on historical or projected data. Mortgage
loans usually will be non-recourse, which means they won't be the borrower's
personal obligations. They usually will not be insured or guaranteed by
government agencies or anyone else. We expect most of the Account's mortgage
loans to be secured by first mortgages on existing income-producing property.
First mortgage loans are secured by mortgages which have first-priority liens on
the real property. These loans may be amortized, or may provide for
interest-only payments, with a balloon payment at maturity.
Participating Mortgage Loans. The Account may also seek to make
mortgage loans which, in addition to charging interest, permit the Account to
share (have a "participation") in the income from or appreciation of the
underlying property. These participations let the Account receive additional
interest, calculated as a percentage of the revenues the borrower receives from
(i) operating the property and/or (ii) selling or refinancing the property or
otherwise. Participations can also involve 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.
- 14 -
<PAGE>
Before the Account acquires any direct ownership interest or makes a
mortgage loan, TIAA will analyze the fair market value of the underlying real
estate, taking into account the property's operating cash flow (derived from the
historical and expected levels of rental and occupancy rates, and the historical
and projected expenses of the property), supplemented by the general economic
conditions in the area where the property is located. Ordinarily, each mortgage
loan made by the Account will not exceed, when added to the amount of any
existing debt, 85% of the appraised value of the mortgaged property, unless the
Account is compensated for taking such additional risk.
Foreign Real Estate and Other Foreign Investments
- -------------------------------------------------
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
- 15 -
<PAGE>
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.
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 18 and "Risks of REIT Investments," page 23.
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.
- 16 -
<PAGE>
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.
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
- 17 -
<PAGE>
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 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 37),
conflicts of interest (see "Conflicts of Interest," page 27), 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),
- 18 -
<PAGE>
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.
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.
- 19 -
<PAGE>
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.
The unamortized principal amount due under a mortgage loan will be
payable in a lump sum payment at the end of the loan term. Unless the borrower
has large cash reserves, it may not be able to make this payment unless it can
refinance the mortgage loan with another lender.
If interest rates are volatile during the investment period, the
Account's variable-rate mortgage loans could have lower yields.
- 20 -
<PAGE>
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 27).
- 21 -
<PAGE>
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
- 22 -
<PAGE>
real estate investment if it were legally required to pay for cleaning up an
environmental hazard.
Various environmental regulations also require property owners or
operators to monitor business activities on their premises that affect the
environment. Failure to comply with those requirements could make it difficult
to lease or sell any affected property or subject the Account to monetary
penalties.
Risks of REIT Investments
- -------------------------
REITs invest in real property and mortgages, and therefore are
subject to many of the same general risks associated with direct real property
ownership. In particular, equity REITs may be affected by changes in the value
of the underlying property owned by the trust, while mortgage REITs may be
affected by the quality of any credit extended. In addition to these risks,
because REIT investments are securities, they may be exposed to market risk --
price volatility due to changing conditions in the financial markets and, in
particular, changes in overall interest rates.
Risks of Liquid Investments
- ---------------------------
The Account's investments in securities and other instruments are
subject to several types of risks. One is financial risk, which for debt
securities and other fixed income instruments comes from the possibility 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
- 23 -
<PAGE>
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 24.)
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 25),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.
- 24 -
<PAGE>
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 42.
TIAA's ERISA Fiduciary Status
- -----------------------------
To the extent that assets of a plan subject to ERISA are allocated
to the Account, TIAA will be acting as an "investment manager" (as that term is
defined under ERISA) and a fiduciary under ERISA with respect to those assets.
Role of the Independent Fiduciary
- ---------------------------------
TIAA's purchase and sale of liquidity units raises certain technical
issues under ERISA. TIAA therefore 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.
- 25 -
<PAGE>
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 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.
- 26 -
<PAGE>
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 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.
- 27 -
<PAGE>
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.
[The following will be printed in pie chart form]
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.
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 1989 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 1988 1997 66,526 99% $12.20 $ 7,900,000
Northmark Business Center(3) Blue Ash, OH 1985 1997 106,552 92% $10.10 $ 9,873,570
Metro Center Office Park(3) Sacramento, CA 1986 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
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
</TABLE>
- 28 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
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 . 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.
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.
- 29 -
<PAGE>
Major Tenants. The following table lists the Account's major
commercial tenants based on the total space they occupy in the Account's
properties.
Percentage of
Total Rentable
Area of
Occupied Account's
Square Non-Residential Property
Major Tenant Feet Properties Type
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
- 30 -
<PAGE>
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.
Office Properties
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
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 44.5%
Industrial Properties
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
1998 7 133,580 3.2%
1999 3 59,730 1.4%
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%
Retail Properties
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
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%
- 31 -
<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
Number Unit Size Avg. Rent Percent
Property Location of Units (Square Feet) Per Unit/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 of 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.
- 32 -
<PAGE>
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 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.
- 33 -
<PAGE>
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 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.
- 34 -
<PAGE>
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.
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.
- 35 -
<PAGE>
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.
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.
- 36 -
<PAGE>
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 41).
Our valuation procedures are described below. The independent
fiduciary approves these procedures and any changes to them (see page 25).
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.
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
- 37 -
<PAGE>
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-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
- 38 -
<PAGE>
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 independent fiduciary consents. Changes in TIAA's
valuation methods could change the Account's net asset value. This, in turn,
could change the values at which participants purchase or redeem Account
interests.
- 39 -
<PAGE>
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.
- 40 -
<PAGE>
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 25). TIAA also provides all 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
- 41 -
<PAGE>
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 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
- 42 -
<PAGE>
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 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 48).
- 43 -
<PAGE>
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 58.
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 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 58.
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
- 44 -
<PAGE>
institution. The IRC limits the amount you can contribute each year, and
contributions must be from qualified income (see above). See "Federal Income
Taxes," page 58.
Remitting Premiums
- ------------------
We'll issue you a TIAA contract as soon as we receive your completed
application or enrollment form. If you already have a TIAA contract, you will
receive a rider permitting you to allocate premiums to the Real Estate Account.
You may remit premiums to the Account under RAs, GRAs, or GSRAs only if
permitted under your employer's plan. Your premiums will be credited to the Real
Estate Account as of the business day we receive them.
If we receive premiums from your employer before your application or
enrollment form, we'll credit the premiums to the CREF Money Market Account
until we receive your form. We'll transfer and credit the amount you've
specified to the Real Estate Account as of the business day we receive your
completed 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 58).
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.
- 45 -
<PAGE>
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), realized and unrealized capital
gains and losses, as well as expense charges against the Account's assets (see
page 41). 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.
- 46 -
<PAGE>
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 25).
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 63).
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 51).
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).
- 47 -
<PAGE>
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," page 48, "Tax Issues," page 49 and "Federal Income Taxes," page 58.
Currently, TIAA does not charge you for transfers to other companies
or for cash withdrawals.
Rules on transfers and cash withdrawals vary depending on an
institution's plan, so consult your past, current and potential future
employer(s) for more detailed information.
Systematic Withdrawals and Transfers
- ------------------------------------
You can arrange to have TIAA execute withdrawals and transfers for
you automatically, 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,
- 48 -
<PAGE>
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" below and
page 58.
Ordinarily, you can't withdraw any part of an accumulation from
which you've already begun receiving annuity income.
Cash withdrawals and transfers are effective at the end of the
business day we receive your 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
62.
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 58.
Texas ORP Restrictions
- ----------------------
If you're in the Texas Optional Retirement Program, section 36.15 of
the Texas Education Code says you (or your beneficiary) can redeem some or all
of your accumulation only if you retire, die, or leave your job in the state's
public institutions of higher education. You're also subject to other
distribution restrictions outlined elsewhere in this prospectus.
- 49 -
<PAGE>
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 53); (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 50). 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.
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 52. 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.
- 50 -
<PAGE>
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 53. 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
62). 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 income option you've picked. (For
more information, contact TIAA -- see page 63.) 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.
- 51 -
<PAGE>
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 54) 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 53).
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 50.
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.
- 52 -
<PAGE>
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 61). (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 63.
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 48).
The retirement transition benefit will be subject to current federal
income tax requirements and possible early distribution penalties. See "Federal
Income Taxes," page 58, as well as "Spousal Rights," page 50.
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.
- 53 -
<PAGE>
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.
- 54 -
<PAGE>
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.
- 55 -
<PAGE>
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.
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 25).
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.
- 56 -
<PAGE>
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;
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
- 57 -
<PAGE>
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 63. For tax issues concerning death benefits,
especially those paid as single sums, see "Taxation of Annuity Benefits," page
59.
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 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
- 58 -
<PAGE>
not subject to the ten percent 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 $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.
- 59 -
<PAGE>
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;
(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
- 60 -
<PAGE>
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 percent tax on excess retirement distributions and accumulations.
Death Benefits
- --------------
Ordinarily, death benefits are subject to federal estate tax (see
"Tax Advice," page 62).
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 53.)
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 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.
- 61 -
<PAGE>
Tax Advice
- ----------
What we tell you here about federal and other taxes isn't
comprehensive and is for general information only. It doesn't cover every
situation. Taxation varies depending on the circumstances, and state and local
taxes may also be involved. For complete information on your personal tax
situation, check with a qualified tax advisor.
GENERAL MATTERS
Choices and Changes
- -------------------
As long as your contract permits, you (or your annuity partner,
beneficiary, or any other payee) can choose or change any of the following: (1)
an annuity starting date; (2) an income option; (3) a transfer; (4) a 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.
- 62 -
<PAGE>
Contacting TIAA
- ---------------
We won't consider any notice, form, request, or payment to have been
received by TIAA until it reaches our home office: Teachers Insurance and
Annuity Association, 730 Third Avenue, New York, 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 and would like a
paper copy, please call 800 842-2733, extension 5509, and we will send it to
you. Under certain circumstances where we are legally required to deliver a
prospectus to you, we cannot send you a prospectus electronically unless you've
consented.
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.
- 63 -
<PAGE>
Benefits Based on Incorrect Information
- ---------------------------------------
If the amounts of benefits provided under a contract were based on
information that is incorrect, benefits will be recalculated on the basis of the
correct data. If any overpayments or underpayments have been made by the
Account, appropriate adjustments will be made.
Proof of Survival
- -----------------
We reserve the right to require satisfactory proof that anyone named
to receive benefits under a contract is living on the date payment is due. If
this proof is not received after a request in writing, the Account will have the
right to make reduced payments or to withhold payments entirely until such proof
is received.
DISTRIBUTION OF THE CONTRACTS
The contracts are offered continuously by 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.
- 64 -
<PAGE>
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 LLP'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.
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.
- 65 -
<PAGE>
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.
- 66 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS Page
----
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-13
Proforma Condensed Financial Statements:
Proforma Condensed Statement of Assets
and Liabilities.......................................................... F-16
Proforma Condensed Statement of Operations................................. F-17
Notes to Proforma Condensed Financial Statements........................... F-18
COLUMBIA CENTRE III:
Report of Independent Auditors............................................. F-19
Statement of Revenues and Certain Expenses................................. F-20
Notes to Statement of Revenues
and Certain Expenses..................................................... F-21
THE ARBOURS (LINCOLN WOODS):
Report of Independent Auditors............................................. F-23
Statement of Revenues and Certain Expenses................................. F-24
Notes to Statement of Revenues
and Certain Expenses..................................................... F-25
ARAPAHOE PARK EAST, WESTCREEK APARTMENTS,
PARKVIEW 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-30
Supplemental Information to Condensed Unaudited Statutory-Basis
Financial Statements..................................................... F-32
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 LLP 1211 Avenue of the Americas Phone: 212 773-4900
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
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
December 31, December 31,
1997 1996
------------ ------------
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
======= =======
See notes to consolidated financial statements.
F - 4
<PAGE>
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
For the Years Ended July 3, 1995
December 31, (Commencement
-------------------------- of Operations) to
1997 1996 December 31, 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 Period
For the Years Ended July 3, 1995
December 31, (Commencement
--------------------------- of Operations) to
1997 1996 December 31, 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
------------ ------------ ------------
Premiums ...................................................................... 52,344,830 9,665,306 500,421
TIAA seed money 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 Period
For the Years Ended July 3, 1995
December 31, (Commencement
-------------------------- of Operations) to
1997 1996 December 31, 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 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 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.
F - 8
<PAGE>
Note 2--Significant Accounting Policies - (Concluded)
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 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.
F - 9
<PAGE>
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. 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:
Years Ending
December 31,
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
============
Certain leases provide for additional rental amounts based upon the recovery of
actual operating expenses in excess of specified base amounts.
F - 10
<PAGE>
Note 6--Condensed Consolidated Financial Information
Selected condensed consolidated financial information for an Accumulation Unit
of the Account is presented below.
July 3, 1995
For the Years Ended (Commencement
December 31, of Operations)
------------------- to December 31,
1997 1996 1995(1)
-------- -------- ---------------
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
(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 - 11
<PAGE>
Note 7--Accumulation Units
Changes in the number of Accumulation Units outstanding were as follows:
July 3, 1995
(Commencement)
For the Years Ended of Operations)
December 31, to
-------------------- December 31,
1997 1996 1995
--------- --------- --------------
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
========= ========= =========
F - 12
<PAGE>
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
December 31, 1997
REAL ESTATE PROPERTIES--65.06%
Location Description Value
-------- ----------- -----
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)
Pennsylvania:
Lafayette Hill Apartments ............................ 21,476,050
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
-----------
(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.
F - 13
<PAGE>
MARKETABLE SECURITIES--34.94%
Shares Issuer Value
------ ------ -----
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
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
-----------
CORPORATE BONDS-- 1.25%
Principal Issuer, Coupon and Maturity Date
- --------- --------------------------------
$ 4,000,000 Associates Corporation of North America
5.25% 09/01/98 ..................................... 3,979,560
3,000,000 International Paper
6.87% 06/17/99 ..................................... 3,041,520
3,000,000 Pepsico, Inc.
7.625% 11/01/98 .................................... 3,037,350
-----------
TOTAL CORPORATE BONDS (Cost $10,066,710) ......................... 10,058,430
-----------
F - 14
<PAGE>
GOVERNMENT AGENCIES--14.06%
Principal Issuer, Coupon and Maturity Date
--------- --------------------------------
$ 2,000,000 Federal National Mortgage Association
5.35% 01/16/98 ..................................... $ 1,994,916
2,000,000 Federal National Mortgage Association
5.35% 02/17/98 ..................................... 1,985,280
2,000,000 Federal National Mortgage Association
5.36% 03/17/98 ..................................... 1,976,524
14,775,000 Federal National Mortgage Association
5.56% 03/25/98 ..................................... 14,583,319
10,000,000 Federal National Mortgage Association
5.61% 01/05/98 ..................................... 9,992,111
11,939,000 Federal National Mortgage Association
5.67% 01/12/98 ..................................... 11,916,197
40,000,000 Federal Home Loan Mortgage
5.71% 01/09/98 ..................................... 39,942,700
30,410,000 Federal National Mortgage Association
5.74% 01/30/98 ..................................... 30,265,045
-----------
TOTAL GOVERNMENT AGENCIES (Amortized cost $112,675,553) ......... 112,656,092
-----------
COMMERCIAL PAPER--5.99%
10,000,000 General Electric Capital Corp.
5.70% 02/10/98 ..................................... 9,933,717
16,000,000 McCormick & Co, Inc
6.65% 01/02/98 ..................................... 15,995,050
22,100,000 SBC Communications Inc
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
============
See notes to consolidated financial statements.
F - 15
<PAGE>
<TABLE>
<CAPTION>
TIAA REAL ESTATE ACCOUNT
PROFORMA CONDENSED
STATEMENT OF ASSETS AND LIABILITIES (Unaudited)
DECEMBER 31, 1997
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
============ ============ ============
See notes to proforma condensed financial statements.
</TABLE>
F - 16
<PAGE>
<TABLE>
<CAPTION>
TIAA REAL ESTATE ACCOUNT
PROFORMA CONDENSED
STATEMENT OF OPERATIONS (Unaudited)
FOR THE YEAR ENDED DECEMBER 31, 1997
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
=========== ============ ===========
See notes to proforma condensed financial statements.
</TABLE>
F - 17
<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 - 18
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP]
[LOGO OF ERNST & YOUNG LLP]
o 1211 Avenue of the Americas o Phone 212 773-4900
New York, New York, 10036 o 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
ERNST & YOUNG LLP
New York, New York
February 26, 1998
F - 19
<PAGE>
Columbia Centre III
Statement of Revenues and Certain Expenses
Year Ended December 31, 1997
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
==========
See accompanying notes.
F - 20
<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.
F - 21
<PAGE>
Columbia Centre III
Notes to the Statement of Revenues and Certain Expenses (continued)
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 - 22
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP]
[LOGO OF ERNST & YOUNG LLP]
o 1211 Avenue of the Americas o Phone 212 773-4900
New York, New York, 10036 o 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
ERNST & YOUNG LLP
November 20, 1997
New York, New York
F - 23
<PAGE>
The Arbours (Lincoln Woods)
Statement of Revenues and Certain Expenses
Year Ended December 31, 1996
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
==========
See accompanying notes.
F - 24
<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.
F - 25
<PAGE>
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>
[letterhead]
Deloitte &
Touche LLP [LOGO] Two World Financial Center Telephone: (212) 436-2000
New York, New York 10281-1414 Facsimile: (212) 436-5000
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of
Teachers Insurance and Annuity Association of America:
We have audited the 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
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
===========
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.
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:
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
===========
Certain leases provide for additional rental amounts based upon the recovery of
actual operating expenses in excess of specified base amounts.
F - 29
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
Condensed Unaudited Statutory-Basis Financial Statements
(These condensed unaudited statutory-basic financial statements have been
derived from audited financial statements which are available upon request)
<TABLE>
<CAPTION>
TIAA Condensed Statutory-Basis Balance Sheets
(amounts in thousands)
December 31,
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
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-30
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
<TABLE>
<CAPTION>
TIAA Condensed Statutory-Basis Statements of Operations and
Changes in Contingency Reserves
(amounts in thousands)
For the Years Ended December 31,
1997 1996
------------ ------------
<S> <C> <C>
INCOME
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-31
<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.
<TABLE>
<CAPTION>
Additional Information:
<S> <C> <C>
1997 1996
---- ----
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-32
<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.
A-1
<PAGE>
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.
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>
REPROS--5/98
[Recycled Paper Logo] Printed on recycled paper
<PAGE>
PART II
INFORMATION NOT REQUIRED IN A PROSPECTUS
<PAGE>
Item 13. Other Expenses of Issuance and Distribution.
-------------------------------------------
SEC Registration Fees $ 0.00
Costs of printing and engraving $500,000.00*
Legal fees $ 2,500.00*
Accounting fees $ 5,000.00*
-----------
TOTAL $507,500.00*
- -----------------
* - Approximate
Item 14. Indemnification of Directors and Officers.
-----------------------------------------
Trustees, officers, and employees of TIAA may be indemnified against
liabilities and expenses incurred in such capacity pursuant to Article Six of
TIAA's bylaws (see Exhibit 3(B)). Article Six provides that, to the extent
permitted by law, TIAA will indemnify any person made or threatened to be made a
party to any action, suit or proceeding by reason of the fact that such person
is or was a trustee, officer, or employee of TIAA or, while a trustee, officer,
or employee of TIAA, served any other organization in any capacity at TIAA's
request. To the extent permitted by law, such indemnification could include
judgments, fines, amounts paid in settlement, and expenses, including attorney's
fees. TIAA has in effect an insurance policy that will indemnify its trustees,
officers, and employees for liabilities arising from certain forms of conduct.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers, or employees of
TIAA, pursuant to the foregoing provision or otherwise, TIAA has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in that Act and is
therefore unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment of expenses incurred or paid by a
trustee, officer, or employee in the successful defense of any action, suit or
proceeding) is asserted by a trustee, officer, or employee in connection with
the securities being registered, TIAA will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in that Act and will be governed by the final
adjudication of such issue.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
---------------------------------------
On July 3, 1995, the Account issued 1,000,000 accumulation units to
TIAA, at $100 per unit, in consideration of TIAA's $100,000,000 seed money
investment. This transaction was exempt from registration under Section 4(2) of
the Securities Act of 1933.
Item 16. Exhibits and Financial Statement Schedules.
-------------------------------------------
(a) Exhibits
--------
(1) Distribution and Administrative Services Agreement by and between
TIAA and TIAA-CREF Individual & Institutional Services, Inc. (as
amended)*
(3) (A) Charter of TIAA (as amended)*
(B) Bylaws of TIAA (as amended)**
(4) (A) Forms of RA, GRA, GSRA, SRA, and IRA Real Estate Account
Contract Endorsements*
(B) Forms of Income-Paying Contracts*
(5) Opinion and Consent of Charles H. Stamm, Esquire
(10) (A) Independent Fiduciary Agreement by and among TIAA, the
Registrant, and Institutional Property Consultants, Inc. (as
amended)***
(B) Custodial Services Agreement by and between TIAA and Morgan
Guaranty Trust Company of New York with respect to the Real
Estate Account*
(23) (A) Opinion and Consent of Charles H. Stamm, Esquire (filed as
Exhibit 5)
(B) Consent of Sutherland, Asbill & Brennan, LLP
(C) Consent of Ernst & Young LLP
(D) Consent of Deloitte & Touche LLP
(27) Financial Data Schedule of the Account's Financial Statements for
the year ended December 31, 1997
- -------------------------------
* - Previously filed and incorporated herein by reference to Post-Effective
Amendment No. 2 to the Account's previous Registration Statement on Form S-1
filed April 30, 1996 (File No. 33-92990).
II-2
<PAGE>
** - Previously filed and incorporated herein by reference to the Account's Form
10-Q Quarterly Report for the period ended September 30, 1997, filed November
13, 1997 (File No. 33-92990).
*** - Previously filed and incorporated herein by reference to Pre-Effective
Amendment No. 1 to the Account's registration statement on Form S-1, filed April
29, 1997 (File No. 333-22809)
(b) Financial Statement Schedules
-----------------------------
Schedule III -- Real Estate Owned
All other Schedules have been omitted because they are not required under
the related instructions or are inapplicable.
Item 17. Undertakings.
------------
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
II-3
<PAGE>
(4) To provide the full financial statements of TIAA promptly upon
written or oral request.
Following are the full audited financial statements of TIAA.
II-4
<PAGE>
[LOGO OF TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA]
CHAIRMAN'S LETTER
To the Policyholders of
Teachers Insurance and Annuity
Association of America:
We are pleased to provide you with the accompanying audited statutory-basis
financial statements of Teachers Insurance and Annuity Association of America
("TIAA") for the year-ended December 31, 1997. As you review these statements,
it is also important to note that TIAA continues to maintain the highest
possible financial strength ratings from each of the four nationally recognized
independent rating organizations. We continue to manage TIAA in a prudent manner
with the goal of maximizing our long-term performance within reasonable risk
parameters for the long-term benefit of our policyholders.
The report of management responsibility, on the following page, demonstrates our
ongoing commitment to conduct TIAA's activities in a well-controlled management
environment. Additionally, the accompanying audit report indicates an
unqualified opinion regarding TIAA's statutory financial statements from the
independent auditing firm of Ernst & Young LLP. These statements have been
prepared consistently in accordance with statutory accounting practices, a
comprehensive basis of accounting comprised of accounting practices prescribed
or permitted by the New York State Insurance Department ("Department").
There is also a reference in the auditors' report to generally accepted
accounting principles ("GAAP"). GAAP is an overall accounting methodology that,
while similar in many respects to statutory accounting practices, is a separate
basis of accounting. Statutory accounting is generally more conservative than
GAAP, and these statutory-basis financial statements are not intended to be in
conformity with GAAP. Even though we have not changed the way in which we
prepare our financial statements, this reference to GAAP is required by the
auditors' professional standards.
Statutory accounting is the only basis of accounting recognized by the
Department for regulatory purposes. It is the only basis of accounting used by
the Department in measuring the financial condition and results of operations of
an insurance company. It is also the basis for determining insurance company
solvency under the New York Insurance Law. While we could prepare a separate set
of GAAP financial statements, there is no legal requirement for us to do so.
Additionally, TIAA does not believe at this time that it would be a worthwhile
expenditure to maintain another separate set of financial records, particularly
since it would provide little added value for our policyholders. Accordingly, we
believe that it is prudent for us to continue to manage and report on the
operations of TIAA under the conservative statutory accounting methodology that
we have always utilized.
/s/ John H. Biggs
-----------------------------------
Chairman, President and
Chief Executive Officer
II-5
<PAGE>
[LOGO OF TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA]
REPORT OF MANAGEMENT RESPONSIBILITY
To the Policyholders of
Teachers Insurance and Annuity
Association of America:
The accompanying statutory-basis financial statements of Teachers Insurance and
Annuity Association of America ("TIAA") are the responsibility of management.
They have been prepared on the basis of statutory accounting practices, a
comprehensive basis of accounting comprised of accounting practices prescribed
or permitted by the New York State Insurance Department. The financial
statements of TIAA have been presented fairly and objectively in accordance with
such statutory accounting practices.
TIAA has established and maintains a strong system of internal controls designed
to provide reasonable assurance that assets are properly safeguarded and
transactions are properly executed in accordance with management's
authorization, and to carry out the ongoing responsibilities of management for
reliable financial statements. In addition, TIAA's internal audit personnel
provide a continuing review of the internal controls and operations of TIAA, and
the internal Auditor regularly reports to the Audit Committee of the TIAA Board
of Trustees.
The accompanying statutory-basis financial statements of TIAA 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 statutory 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. In addition to the annual
audit of the TIAA financial statements, the New York State Insurance Department
and other state insurance departments regularly examine the financial statements
of TIAA as part of the periodic corporate examinations.
/s/ John H. Biggs
-----------------------------------
Chairman, President and
Chief Executive Officer
/s/ Richard L. Gibbs
-----------------------------------
Executive Vice President and
Principal Accounting Officer
II-6
<PAGE>
[LOGO OF ERNST & YOUNG LLP] o 767 Seventh Avenue o Phone 212 773 3000
New York, New York 10019
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees of
Teachers Insurance and Annuity
Association of America:
We have audited the accompanying statutory-basis balance sheet of Teachers
Insurance and Annuity Association of America ("TIAA") as of December 31, 1997,
and the related statutory-basis statements of operations, changes in contingency
reserves, and cash flows for the year then ended. These financial statements are
the responsibility of TIAA's management. Our responsibility is to express an
opinion on these financial statements based on our audit. TIAA's financial
statements as of December 31, 1996 and for the two years then ended were audited
by other auditors whose report dated March 11, 1997, expressed an adverse
opinion as to their conformity with generally accepted accounting principles,
because the financial statements were presented in accordance with statutory
accounting practices prescribed or permitted by the New York State Insurance
Department, and an unqualified opinion as to their conformity with such
statutory accounting practices.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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.
As described in Note 2 to the financial statements, TIAA prepares its financial
statements in conformity with statutory accounting practices, which practices
differ from generally accepted accounting principles. The differences between
such statutory accounting practices and generally accepted accounting principles
and the effects on the accompanying financial statements are described in Note
2.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the 1997 statutory-basis financial statements referred to above do
not present fairly, in conformity with generally accepted accounting principles,
the financial position of TIAA at December 31, 1997 or the results of its
operations or its cash flows for the year then ended.
However, in our opinion, the 1997 statutory-basis financial statements referred
to above present fairly, in all material respects, the financial position of
TIAA at December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with statutory accounting practices
prescribed or permitted by the New York State Insurance Department.
/s/ Ernst & Young LLP
March 10, 1998
II-7
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
STATUTORY-BASIS BALANCE SHEETS
(amounts in thousands)
December 31,
-------------------------
1997 1996
----------- -----------
ASSETS
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, CAPITAL AND CONTINGENCY RESERVES
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: 2,500 shares of $1,000 par
value common stock
issued and outstanding ......................... 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
=========== ===========
See notes to statutory-basis financial statements.
II-8
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
STATUTORY-BASIS STATEMENTS OF OPERATIONS
(amounts in thousands)
For the Years Ended December 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
INCOME
Insurance and annuity premiums
and deposits ..................... $ 2,844,792 $ 2,781,827 $ 2,854,600
Transfers from CREF, net ............ 686,373 366,920 351,869
Annuity dividend additions .......... 2,284,029 2,131,890 1,943,614
Net investment income ............... 6,902,123 6,525,529 6,108,497
Supplementary contract
considerations ................... 227,936 203,770 150,976
----------- ----------- -----------
TOTAL INCOME $12,945,253 $12,009,936 $11,409,556
=========== =========== ===========
DISTRIBUTION OF INCOME
Policy and contract benefits ........ $ 2,138,424 $ 1,916,597 $ 1,718,597
Dividends ........................... 3,617,551 3,399,581 3,098,931
Increase in policy and
contract reserves ................. 5,234,590 5,097,213 5,329,040
Operating expenses .................. 272,584 249,000 241,795
Transfers to Separate Accounts, net . 543,891 395,686 92,995
Federal income taxes ................ 24,194 13,154 9,488
Other, net .......................... 307 1,112 (4,380)
Increase in contingency reserves
from operations .................. 1,113,712 937,593 923,090
----------- ----------- -----------
TOTAL DISTRIBUTION OF INCOME $12,945,253 $12,009,936 $11,409,556
=========== =========== ===========
See notes to statutory-basis financial statements.
II-9
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
STATUTORY-BASIS STATEMENTS OF CHANGES IN CONTINGENCY RESERVES
(amounts in thousands)
For the Years Ended December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
CHANGES IN CONTINGENCY RESERVES:
From operations ......................... $1,113,712 $ 937,593 $ 923,090
Net realized capital gain (loss)
on investments ....................... 249,412 163,950 (56,265)
Net unrealized capital gain (loss)
on investments ....................... (2,482) 30,452 52,706
Transfer to the Interest
Maintenance Reserve .................. (136,512) (167,086) (114,840)
Transfers from (to) the Asset
Valuation Reserve:
Required formula contribution ........ (205,450) (246,181) (302,388)
Net capital (gains) losses
absorbed .......................... (117,961) (27,872) 106,215
Adjustment down to maximum ........... 119,690 -- --
Decrease (increase) in
non-admitted assets
other than investments ............... 1,200 (4,764) (803)
Change in valuation basis
of policy reserves ................... 4,657) -- --
Other, net .............................. 8,918 8,433 10,641
---------- ---------- ----------
NET CHANGE IN CONTINGENCY RESERVES 1,025,870 694,525 618,356
CONTINGENCY RESERVES AT BEGINNING OF YEAR 4,748,205 4,053,680 3,435,324
---------- ---------- ----------
CONTINGENCY RESERVES AT END OF YEAR $5,774,075 $4,748,205 $4,053,680
========== ========== ==========
See notes to statutory-basis financial statements.
II-10
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
STATUTORY-BASIS STATEMENTS OF CASH FLOWS
(amounts in thousands)
For the Years Ended December 31,
----------------------------------------
1997 1996 1995
----------- ----------- -----------
CASH PROVIDED
By operating activities:
Insurance and annuity premiums,
deposits and considerations ... $ 3,053,452 $ 2,973,899 $ 2,999,426
Transfers from CREF, net ......... 686,373 366,920 351,869
Annuity dividend additions ....... 2,284,029 2,131,890 1,943,614
Investment income, net ........... 6,777,023 6,485,403 5,998,016
----------- ----------- -----------
Total Receipts 12,800,877 11,958,112 11,292,925
----------- ----------- -----------
Policy and contract benefits ..... 2,143,927 2,084,122 1,715,727
Dividends ........................ 3,475,557 3,251,329 2,987,867
Operating expenses ............... 269,041 247,251 240,323
Federal income taxes ............. 27,277 14,985 8,511
Transfers to Separate
Accounts, net ................. 543,933 396,239 92,270
Separate Account seed money
investment contributed
(withdrawn), net .............. (37,915) (7,387) 66,748
Other, net ....................... (46,076) 48,215 6,824
----------- ----------- -----------
Total Disbursements 6,375,744 6,034,754 5,118,270
----------- ----------- -----------
Cash Provided by Operating Activities 6,425,133 5,923,358 6,174,655
----------- ----------- -----------
By investing activities:
Sales and redemptions of bonds
and stocks .................... 4,716,915 4,480,206 3,863,413
Repayment of mortgage principal .. 3,773,723 3,481,965 1,166,625
Sales of real estate ............. 1,030,385 834,010 1,084,223
Other, net ....................... 258,489 276,394 135,661
----------- ----------- -----------
Cash Provided by Investing Activities 9,779,512 9,072,575 6,249,922
----------- ----------- -----------
TOTAL CASH PROVIDED 16,204,645 14,995,933 12,424,577
----------- ----------- -----------
DISBURSEMENTS FOR NEW INVESTMENTS
Investments acquired:
Bonds and stocks ................. 12,711,227 11,577,235 8,696,169
Mortgages ........................ 3,152,563 2,761,897 2,352,232
Real estate ...................... 310,159 488,543 866,389
Other, net ....................... 466,926 266,227 228,182
----------- ----------- -----------
TOTAL DISBURSEMENTS
FOR NEW INVESTMENTS 16,640,875 15,093,902 12,142,972
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS (436,230) (97,969) 281,605
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF YEAR 615,082 713,051 431,446
----------- ----------- -----------
CASH AND SHORT-TERM INVESTMENTS
AT END OF YEAR $ 178,852 $ 615,082 $ 713,051
=========== =========== ===========
See notes to statutory-basis financial statements.
II-11
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
Note 1 - Organization
Teachers Insurance and Annuity Association of America ("TIAA") was established
as a legal reserve life insurance company under the insurance laws of the State
of New York in 1918. TIAA was formed by the Carnegie Foundation for the
Advancement of Teaching for the express purpose of aiding and strengthening
nonprofit educational and research organizations by providing retirement and
insurance benefits for their faculties and other staff members, and by
counseling these organizations and their employees on benefit plans and other
measures of economic security. All of the outstanding common stock of TIAA is
collectively held by the TIAA Board of Overseers, a nonprofit corporation
created solely for the purpose of holding the stock of TIAA.
Note 2 - Significant Accounting Policies
TIAA's statutory-basis financial statements have been prepared on the basis of
statutory accounting practices prescribed or permitted by the New York State
Insurance Department ("Department"), a comprehensive basis of accounting that
differs from generally accepted accounting principles ("GAAP"). (Refer to the
separate sections, entitled "Generally Accepted Accounting Principles" and
"Permitted Statutory Accounting Practices", within this note.)
The preparation of TIAA's financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. Actual results could differ from those
estimates. The following is a summary of the significant accounting policies
consistently followed by TIAA.
Valuation of Investments: Bonds and short-term investments (debt securities with
maturities of one year or less at the time of acquisition) not in default are
generally stated at amortized cost; medium to highest quality preferred stocks
at cost; common stocks at market value; and all other bond, short-term and
preferred stock investments at the lower of amortized cost or market value. 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.
Accounting for Investments: Investment transactions are accounted for as of the
date the investments are purchased or sold (trade date) for publicly traded
common stocks and as of the date the investment transactions are settled
(settlement date) for all other investments. Realized capital gains and losses
on investment transactions are accounted for under the specific identification
method.
Foreign Currency Transactions and Translation: Investments denominated in
foreign currencies and foreign currency contracts are valued in U.S. dollars,
based on exchange rates at the end of the period. Investment transactions in
foreign currencies are recorded at the exchange rates prevailing on the
respective transaction dates. All other asset and liability accounts that are
denominated in foreign currencies are adjusted to reflect exchange rates at the
end of the period. Realized and unrealized gains and losses due to foreign
exchange transactions, and those due to translation adjustments, are not
separately reported and are reflected in realized and unrealized capital gains
and losses, respectively.
Securities Lending: TIAA has a securities lending program whereby it loans
securities to qualified brokers in exchange for cash collateral, generally at
least equal to 102% of the market value of the securities loaned. When
securities are loaned, TIAA receives additional income on the collateral and
continues to receive income on the securities loaned. The collateral liability
is netted against the balance sheet caption, "Cash and short-term investments".
TIAA may bear the risk of delay in recovery of, or loss of rights in, the
securities loaned should a borrower of securities fail to return the securities
in a timely manner.
II-12
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (Continued)
Note 2 - Significant Accounting Policies - (Continued)
Foreign Currency Swap Contracts: TIAA enters into foreign currency swap
contracts to exchange fixed and variable amounts of foreign currency at
specified future dates and at specified rates (in U.S. dollars) to hedge against
currency risks on investments denominated in foreign currencies. Changes in the
value of the contracts related to foreign currency exchange rates are recognized
at the end of the period as unrealized gains or losses. Foreign currency swap
contracts incorporate a series of swap transactions which result in the exchange
of TIAA's fixed and variable foreign currency cash flows into fixed amounts of
U.S. dollar cash flows. Foreign currency swap contracts are entered into
directly with a counterparty and TIAA is exposed to the risk of default of such
counterparty, although TIAA does not anticipate non-performance by any of its
counterparties. The maximum potential loss from such risk is equal to the change
in the value of the foreign currency swap during the term of the contract. In
order to minimize the risk associated with potential counterparty default, TIAA
monitors the credit quality of its counterparties.
Foreign Currency Forward Contracts: TIAA enters into foreign currency forward
contracts to exchange fixed amounts of foreign currency at specified future
dates and at specified rates (in U.S. dollars) to hedge against currency risks
on investments denominated in foreign currencies. Changes in the value of the
contracts related to foreign currency exchange rates are recognized at the end
of the period as unrealized gains or losses. Forward contracts incorporate one
swap transaction which results in the exchange of TIAA's fixed foreign currency
cash flow into a fixed amount of U.S. dollar cash flow. A foreign exchange
premium (discount) is recorded at the time the contract is opened, and it is
calculated based on the difference between the forward exchange rate and the
spot rate. TIAA amortizes the foreign exchange premium (discount) into
investment income over the life of the forward contract, or at the settlement
date if the forward contract is less than a year. TIAA is subject to
counterparty credit risk upon entering into foreign currency forward contracts
and monitors that risk, as discussed above for foreign currency swap contracts.
Interest Rate Swap Contracts: TIAA enters into interest rate swap contracts to
hedge against the effect of interest rate fluctuations on certain variable
interest rate bonds. These contracts allow TIAA to lock in a fixed interest rate
and to transfer the risk of higher or lower interest rates. TIAA also enters
into interest rate swap contracts to exchange the cash flows on certain fixed
interest rate bonds into variable interest rate cash flows in connection with
certain interest sensitive products. Payments received and payments made under
interest rate swap contracts are reflected in net investment income. Interest
rate swap contracts subject TIAA to credit risk should the counterparties not
perform according to the terms of the contracts. However, the maximum potential
loss from such credit risk is much smaller than the par value of the related
notes, and TIAA does not anticipate non-performance by any of its
counterparties. In order to minimize the risk associated with potential
counterparty default, TIAA monitors the credit quality of its counterparties.
Swap Options: TIAA writes (sells) swap options on selected bonds to hedge
against the effect of interest rate fluctuations as part of TIAA's asset and
liability management program. Swap options give the holder the right, but not
the obligation, to enter into an interest rate swap contract with TIAA where
TIAA would pay a fixed interest rate and would receive a variable interest rate
on a specified notional amount. When a swap option is written, the premium
received is recorded as a liability. Because the swap options expire within one
year of their inception date, the premium is recognized as investment income at
the earlier of the exercise date or the expiration of the swap option. TIAA
would be exposed to counterparty credit risk upon entering into an interest rate
swap contract and monitors that risk, as discussed above.
Interest Rate Cap Contracts: TIAA purchases interest rate cap contracts to hedge
against the risk of a rising interest rate environment as part of TIAA's asset
and liability management program. Under the terms of the interest rate cap
contracts, the selling entity makes payments to TIAA on a specified notional
amount if an agreed-upon index exceeds a predetermined strike rate. Such
payments received under interest rate cap contracts are recognized as investment
income. When an interest rate cap contract is purchased, the premium paid is
recorded as an asset, and the premium is amortized into investment expense from
the date of purchase of the cap to the maturity of the hedged item or program.
Upon expiration of the cap, any unamortized premium will be treated as a loss
subject to the Interest Maintenance Reserve ("IMR"). TIAA would be subject to
counterparty credit risk if the index exceeds the predetermined strike rate,
causing a payment to be payable to TIAA. In order to minimize the risk
associated with potential counterparty default, TIAA monitors the credit quality
of its counterparties.
II-13
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (Continued)
Note 2 - Significant Accounting Policies - (Continued)
Investment Income Due and Accrued: Investment income due and accrued excludes
non-admitted amounts of approximately $251,063,000 and $291,742,000 at December
31, 1997 and 1996, respectively.
Non-Admitted Assets Other than Investments: Certain non-investment assets, such
as furniture and fixtures and various receivables, are designated as
non-admitted assets by the Department and, as such, cannot be included in life
insurance company balance sheets filed with the Department. Such non-admitted
assets approximated $178,181,000 at December 31, 1997 and $179,363,000 at
December 31, 1996. Changes in such non-admitted assets are charged or credited
directly to contingency reserves.
Policy and Contract Reserves: TIAA offers a range of group and individual
retirement annuities and group and individual life and other insurance products.
Policy and contract reserves for such products are determined in accordance with
standard valuation methods approved by the Department. Reserves are generally
stated at account balances for annuities in the accumulation phase, at the
present value of all future guaranteed benefits for annuities in the payout
phase and, for insurance policies, are computed in accordance with standard
actuarial formulas. The reserves established utilize assumptions for interest
(at an average rate of approximately 3%), mortality and other risks insured.
Such reserves establish a sufficient provision for all contractual benefits
guaranteed under policy and contract provisions.
Dividends Declared for the Following Year: Dividends on insurance policies and
pension annuity contracts in the payout phase are generally declared by the TIAA
Board of Trustees ("Board") in November of each year, and such dividends are
credited to policyholders in the following calendar year. Dividends on pension
annuity contracts in the accumulation phase are generally declared by the Board
in February of each year and such dividends on the various existing vintages of
pension annuity contracts in the accumulation phase are credited to
policyholders during the ensuing twelve month period beginning March 1.
Asset Valuation Reserve: The Asset Valuation Reserve ("AVR"), which covers all
invested asset classes, is an explicit liability reserve required by the
National Association of Insurance Commissioners ("NAIC") and is intended to
provide for potential future credit and equity losses. Reserve components of the
AVR are maintained for bonds, stocks, mortgages, real estate and other invested
assets. Realized and unrealized credit and equity capital gains and losses, net
of capital gains taxes, are credited to or charged against the related
components of the AVR. Formula calculations determine the required contribution
amounts for each component, and insurance companies may also make voluntary
contributions to any component; however, the resulting ending balance can not
exceed the computed maximum reserve for that component. Any computed excess
amounts are eliminated through transfers to other components or adjustments down
to the maximum reserve amounts. At December 31, 1997, each component of TIAA's
AVR was at the maximum reserve level. Contributions and adjustments to the AVR
are reported as transfers to or from contingency reserves.
Interest Maintenance Reserve: The IMR is a liability reserve required by the
NAIC which accumulates realized capital gains and losses resulting from interest
rate fluctuations. Such capital gains and losses are amortized out of the IMR as
an adjustment to net investment income over the remaining lives of the assets
sold.
Contingency Reserves: By charter, TIAA operates without profit to the
corporation or its sole shareholder, the TIAA Board of Overseers. As a result,
all contingency reserves are held solely for the benefit of TIAA's
policyholders.
Income and Expenses: Premiums, investment income and expenses are reported as
incurred.
Federal Income Taxes: TIAA is a nonprofit educational organization and, through
December 31, 1997, was exempt from federal income taxation under the Internal
Revenue Code. However, any non-pension related income was subject to federal
income taxation as unrelated business income. The federal income tax provision
in the accompanying statements of operations is based on taxes actually paid or
anticipated to be paid with the tax return filing. Effective January 1, 1998, as
a result of recent legislation, TIAA will no longer be exempt from federal
income taxation and will be taxed as a stock life insurance company.
II-14
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (Continued)
Note 2 - Significant Accounting Policies - (Concluded)
Generally Accepted Accounting Principles: The Financial Accounting Standards
Board ("FASB") issued FASB Interpretation No. 40, entitled "Applicability of
Generally Accepted Accounting Principles to Mutual Life Insurance and Other
Enterprises" ("Interpretation"), in April 1993. The Interpretation clarified
that financial statements that are intended to be in conformity with GAAP should
follow all authoritative accounting pronouncements except to the extent that a
pronouncement explicitly exempts a particular type of enterprise or that the
enterprise does not have the transaction, event, or circumstance addressed in
the pronouncement. The Interpretation, as amended, was effective for financial
statements issued for fiscal years beginning after December 15, 1995. The effect
of the Interpretation is that, TIAA (and mutual life insurance and other
enterprises) can not refer to financial statements prepared in accordance with
statutory accounting practices as having been prepared in accordance with GAAP.
The differences between generally accepted accounting principles and statutory
accounting practices would have a material effect on TIAA's financial
statements, and the primary differences can be summarized as follows. Under
GAAP:
o The AVR is eliminated and valuation allowances are established as contra
assets based on asset-specific analyses rather than the formula-based AVR
being reflected as a liability reserve;
o The IMR is eliminated and realized gains and losses resulting from interest
rate fluctuations are reported as a component of net income rather than being
accumulated in and subsequently amortized out of the IMR;
o Dividends on insurance policies and annuity contracts are accrued as the
necessary earnings emerge from operations rather than being accrued in the
year when they are declared;
o The "non-admitted" asset designation is not utilized;
o Policy acquisition costs are deferred and amortized over the lives of the
policies issued rather than being charged to operations as incurred;
o Policy and contract reserves are based on estimates of expected mortality and
interest rather than being based on statutory mortality and interest
requirements;
o Investments in wholly-owned subsidiaries are consolidated in the parent's
financial statements rather than being carried at the parent's equity in the
net assets of the subsidiaries;
o Long-term bond investments considered to be "available for sale" are carried
at fair value rather than at amortized cost.
Management believes that the effects of these differences on TIAA's financial
statements would increase TIAA's total capital if GAAP were implemented.
Permitted Statutory Accounting Practices: Statutory accounting practices
prescribed by the Department include accounting practices reflected in New York
State Insurance Laws and Regulations as well as in NAIC publications. Permitted
statutory accounting practices encompass all accounting practices which are
allowed by the Department but have not been prescribed. TIAA does not utilize
any statutory accounting practices which depart from prescribed statutory
accounting practices; however, TIAA does follow certain permitted statutory
accounting practices. The following permitted statutory accounting practices
have been approved by the Department: inclusion of real estate subsidiaries and
real estate limited partnerships in the "Real estate" caption in the
accompanying balance sheets; recognition of permanent impairments; and netting
of securities lending collateral against the "Cash and short-term investments"
caption.
Reclassifications: Certain amounts in the 1996 financial statements have been
reclassified to conform with the 1997 presentation.
II-15
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (Continued)
Note 3 - Investments
Securities Investments: At December 31, 1997 and 1996, the carrying values
(balance sheet amounts) and estimated market values of long-term bond
investments, and gross unrealized gains and losses with respect to such market
values, are shown below:
<TABLE>
<CAPTION>
Gross Gross
Carrying Unrealized Unrealized Estimated
December 31, 1997 Value Gains Losses Market Value
- ----------------- --------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations ..................... $ 765,179,973 $ 187,633,872 $952,813,845
Debt securities issued by foreign
governments ................................... 1,591,333,014 258,518,816 $ 23,329,983 1,826,521,847
Corporate securities ........................... 31,671,902,704 2,564,486,392 78,849,935 34,157,539,161
Mortgage-backed securities ..................... 19,667,177,051 1,069,124,042 107,193,640 20,629,107,453
Asset-backed securities ........................ 9,774,003,292 350,882,825 50,168,914 10,074,717,203
--------------- -------------- ------------ ---------------
Total ........................................ $63,469,596,034 $4,430,645,947 $259,542,472 $67,640,699,509
=============== ============== ============ ===============
December 31, 1996
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations ..................... $ 708,002,451 $ 58,453,457 $101,219,004 $ 665,236,904
Debt securities issued by foreign
governments ................................... 1,318,580,240 160,530,266 5,770,226 1,473,340,280
Corporate securities ........................... 29,838,430,523 1,723,358,249 236,333,975 31,325,454,797
Mortgage-backed securities ..................... 18,880,847,006 1,360,640,261 224,627,980 20,016,859,287
Asset-backed securities ........................ 5,346,270,607 539,946,158 78,199,108 5,808,017,657
--------------- -------------- ------------ ---------------
Total ........................................ $56,092,130,827 $3,842,928,391 $646,150,293 $59,288,908,925
=============== ============== ============ ===============
</TABLE>
At December 31, 1997 and 1996, approximately 94.6% and 95.4%, respectively, of
the long-term bond portfolio was comprised of investment grade securities. At
December 31, 1997, outstanding forward commitments for future long-term bond and
equity investments approximated $2,666,747,000. Of this, $2,383,654,000 is
scheduled for disbursement in 1998, $131,688,000 in 1999, and $151,405,000 in
later years. The funding of bond commitments is contingent upon the continued
favorable financial performance of the potential borrowers. Debt securities
amounting to approximately $2,749,000 and $2,610,000 at December 31, 1997 and
1996, respectively, were on deposit with governmental authorities or trustees as
required by law.
The carrying values and estimated market values of long-term bond investments at
December 31, 1997, by contractual maturity, are shown below:
Carrying Estimated
Value Market Value
--------------- ---------------
Due in one year or less .................. $ 326,227,149 $ 330,395,581
Due after one year through five years .... 5,139,896,348 5,457,592,151
Due after five years through ten years ... 11,544,053,978 12,106,979,418
Due after ten years ...................... 17,018,238,216 19,041,907,703
--------------- ---------------
Subtotal ................................. 34,028,415,691 36,936,874,853
Mortgage-backed securities ............... 19,667,177,051 20,629,107,453
Asset-backed securities .................. 9,774,003,292 10,074,717,203
--------------- ---------------
Total .................................. $63,469,596,034 $67,640,699,509
=============== ===============
Bonds not due at a single maturity date have been included in the preceding
table based on the year of final maturity. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations, although prepayment premiums may be applicable.
II-16
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (Continued)
Note 3 - Investments - (Continued)
At December 31, 1997 and 1996, the carrying values of long-term bond investments
were diversified by industry classification as follows:
1997 1996
------ ------
Mortgage-backed securities ......................... 31.0% 31.8%
Asset-backed securities ............................ 15.4 11.4
Manufacturing ...................................... 11.9 13.0
Public utilities ................................... 11.1 12.9
Finance and financial services ..................... 9.0 8.3
Government ......................................... 4.3 4.8
Retail and wholesale trade ......................... 3.8 4.3
Communications ..................................... 3.8 3.7
Oil and gas ........................................ 3.4 4.0
Other .............................................. 6.3 5.8
------ ------
Total ............................................ 100.0% 100.0%
====== ======
The approximate carrying values and market values of debt securities loaned, and
the cash collateral received in connection therewith, were as follows:
Carrying Market Cash
Value Value Collateral
-------------- -------------- --------------
December 31, 1997 ........... $1,634,267,000 $1,742,556,000 $1,790,560,000
December 31, 1996 ........... $1,625,029,000 $1,678,166,000 $1,746,346,000
At December 31, 1997 and 1996, TIAA had interest rate swap contracts outstanding
with a total notional value of $267,755,000 and $187,355,000, respectively.
At December 31, 1997 and 1996, TIAA had foreign currency swap contracts
outstanding with a total notional value of approximately $485,274,000 and
$337,404,000, respectively The unrealized gains (losses) on foreign currency
swap contracts outstanding at year-end was approximately $25,864,000,
$1,367,000, and $(1,099,000) at December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, TIAA had foreign currency forward contracts
outstanding with a total notional value of approximately $2,274,000 and
$12,522,000, respectively, and the unamortized value of the premiums was
approximately $29,000 and $188,000, respectively. The unrealized gains on the
forward contracts outstanding at year-end were approximately $65,000 and $28,000
at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, TIAA had swap options outstanding with a total
notional value of $170,700,000 and $58,000,000, respectively, and the
unamortized value of the premiums was approximately $677,000 and $434,000,
respectively. The interest rate swap contracts created from the exercise of swap
options are reflected in the aggregate totals for the interest rate swap
contracts disclosed in the related paragraph above.
At December 31, 1997 and 1996, TIAA had interest rate cap contracts outstanding
with a total notional value of $5,978,970,000 and $32,520,000, respectively, and
the unamortized value of the premiums was approximately $37,758,000 and
$507,000, respectively. Interest rate cap contracts with a notional value of
$5,860,000,000 and representing $36,586,000 of the unamortized premiums at
December 31, 1997 expired in January 1998.
II-17
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (Continued)
Note 3 - Investments - (Continued)
Mortgage Loan and Real Estate Investments: TIAA makes mortgage loans,
principally collateralized by commercial real estate, and direct investments in
real estate. TIAA's mortgage underwriting standards generally limit mortgage
investments to first mortgage liens on completed income-producing properties for
which the loan-to-value ratio at the time of closing generally ranges between
65% and 75%. TIAA employs a system to monitor the effects of current and
expected market conditions and other factors on the collectability of mortgage
loans and the realizability of real estate investments. This system is utilized
to identify and quantify any permanent impairments in value.
At December 31, 1997 and 1996, the carrying values of mortgage loan investments
were diversified by property type and geographic region as follows:
Property Type 1997 1996
- ------------- ------ ------
Office buildings ............................... 40.0% 41.3%
Shopping centers ............................... 30.7 29.4
Mixed-use projects ............................. 10.2 10.7
Apartments ..................................... 6.9 7.3
Industrial buildings ........................... 5.6 5.4
Hotels ......................................... 4.3 4.2
Other .......................................... 2.3 1.7
------ ------
Total ........................................ 100.0% 100.0%
====== ======
Geographic Region
West ........................................... 26.7% 28.1%
Northeast ...................................... 22.3 22.5
Southeast ...................................... 20.0 18.6
Midwest ........................................ 18.1 20.5
Southwest/Plains ............................... 12.9 10.3
------ ------
Total ........................................ 100.0% 100.0%
====== ======
At December 31, 1997 and 1996, approximately 20% and 22%, respectively, of the
mortgage portfolio was invested in California and is included in the West region
shown above.
At December 31, 1997, the contractual maturity schedule of mortgage loans is
shown below:
Carrying Value
---------------
Due in one year or less ................................. $ 1,195,809,221
Due after one year through five years ................... 2,980,445,752
Due after five years through ten years .................. 9,523,895,421
Due after ten years ..................................... 5,201,775,611
---------------
Total ................................................. $18,901,926,005
===============
Actual maturities may differ from contractual maturities because borrowers may
have the right to prepay mortgage loans, although prepayment premiums may be
applicable.
At December 31, 1997, outstanding forward commitments for future mortgage loan
investments approximated $1,066,014,000, including commitments under litigation.
Of this, $811,086,000 is scheduled for disbursement in 1998, $105,504,000 in
1999 and $149,424,000 in later years. The funding of mortgage loan commitments
is contingent upon the underlying properties meeting specified construction,
leasing, occupancy and other requirements.
II-18
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (Continued)
Note 3 - Investments - (Concluded)
At December 31, 1997, 1996 and 1995, the aggregate carrying values of mortgages
with restructured or modified terms, as defined by generally accepted accounting
principles, were approximately $552,070,000, $621,056,000 and $872,377,000,
respectively. For the years ended December 31, 1997, 1996 and 1995, the
investment income earned on such mortgages was approximately $39,945,000,
$43,408,000 and $57,142,000, respectively, which would have been approximately
$56,034,000, $68,371,000 and $96,625,000, respectively, if they had performed in
accordance with their original terms. When restructuring mortgage loans, TIAA
generally requires participation features, yield maintenance stipulations,
and/or the establishment of property specific escrow accounts funded by the
borrowers.
At December 31, 1997 and 1996, the carrying values of real estate investments
were diversified by property type and geographic region as follows:
Property Type 1997 1996
------ ------
Office buildings ......................................... 61.6% 63.2%
Shopping centers ......................................... 17.8 16.3
Mixed-use projects ....................................... 7.9 7.3
Income-producing land underlying improved real estate .... 3.3 3.5
Industrial buildings ..................................... 3.0 3.5
Land held for future development ......................... 1.9 1.8
Apartments ............................................... 0.3 0.4
Other .................................................... 4.2 4.0
------ ------
Total .................................................. 100.0% 100.0%
====== ======
Geographic Region
Midwest .................................................. 32.1 34.6%
Southeast ................................................ 27.2 26.0
West ..................................................... 14.6 14.4
Northeast ................................................ 13.4 14.5
Southwest/Plains ......................................... 10.2 10.5
Other .................................................... 2.5 0.0
------ ------
Total .................................................. 100.0% 100.0%
====== ======
At December 31, 1997 and 1996, approximately 11% and 12%, respectively, of the
real estate portfolio was invested in Minnesota and included in the Midwest
region shown above. At December 31, 1997 and 1996, approximately 11% and 10%,
respectively, of the real estate portfolio was also invested in California and
included in the West region shown above.
At December 31, 1997, outstanding forward commitments for future real estate
investments approximated $203,974,000. Under these commitments, it is estimated
that $185,802,000 will be disbursed in 1998 and $18,172,000 in later years. The
funding of real estate investment commitments is contingent upon the properties
meeting specified construction, leasing, occupancy and other requirements.
Depreciation expense on real estate investments for the years ended December 31,
1997, 1996 and 1995, was approximately $147,494,000, $135,982,000 and
$98,198,000, respectively; the amount of accumulated depreciation at December
31, 1997 was approximately $440,659,000.
Asset Valuation Reserves: The AVR balances at December 31, 1997 and 1996 were
comprised of the following asset-specific reserves:
1997 1996
-------------- --------------
Bonds and preferred stock .............. $ 545,863,951 $ 692,863,748
Mortgages .............................. 975,041,395 647,666,546
Real estate ............................ 756,720,622 707,054,921
Common stock ........................... 27,266,124 53,869,704
Other invested assets .................. 33,750,538 33,466,350
-------------- --------------
Total ................................ $2,338,642,630 $2,134,921,269
============== ==============
II-19
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (Continued)
Note 4 - Investment Income and Capital Gains and Losses
Net Investment Income: For the years ended December 31, 1997, 1996 and 1995, the
components of net investment income were as follows:
1997 1996 1995
-------------- -------------- --------------
Gross Investment Income:
Bonds ...................... $4,919,147,802 $4,397,330,653 $4,113,077,743
Mortgages .................. 1,561,650,688 1,704,612,536 1,688,836,730
Real estate (net of
property expenses,
taxes and depreciation) .. 282,710,437 349,550,153 279,016,562
Stocks ..................... 45,018,729 14,512,747 24,460,434
Other long-term investments 49,877,245 16,299,166 16,706,459
Cash and short-term
investments .............. 81,908,105 64,600,106 52,050,980
Other ...................... 1,863,273 30,748,262 8,500,640
-------------- -------------- --------------
Total ...................... 6,942,176,279 6,577,653,623 6,182,649,548
Less investment expenses ..... (124,382,062) (111,487,052) (112,287,010)
-------------- -------------- --------------
Net investment income before
amortization of net IMR gains 6,817,794,217 6,466,166,571 6,070,362,538
Plus amortization of net
IMR gains .................. 84,329,279 59,362,364 38,134,446
-------------- -------------- --------------
Net investment income ........ $6,902,123,496 $6,525,528,935 $6,108,496,984
============== ============== ==============
Participation income received on securities, mortgages and real estate included
in the above table was approximately $20,894,000, $21,121,000 and $28,088,000 in
1997, 1996 and 1995, respectively.
The net earned rates of investment income on total invested assets (computed as
net investment income before amortization of net IMR gains divided by mean
invested assets) were 7.99%, 8.17% and 8.29% in 1997, 1996 and 1995,
respectively.
Future rental income expected to be received during the next five years under
existing real estate leases in effect as of December 31, 1997 is approximately
$529,413,000 in 1998, $479,110,000 in 1999, $414,668,000 in 2000, $354,387,000
in 2001 and $252,531,000 in 2002.
Realized Capital Gains and Losses: For the years ended December 31, 1997, 1996
and 1995, the net realized capital gains (losses) on sales, redemptions and
writedowns of investments computed under the specific identification method were
as follows:
1997 1996 1995
------------ ------------- -------------
Bonds .......................... $ 99,205,212 $ 83,521,853 $ 32,698,203
Mortgages ...................... (18,206,968) (120,569,347) (204,033,034)
Real estate .................... 172,463,239 62,836,567 99,207,556
Stocks ......................... 651,273 123,374,256 9,808,562
Other long-term investments .... (2,552,791) 27,068,040 7,885,199
Cash and short-term investments (121,752) (13,797,036) (758,274)
Other .......................... -- 14,400 1,360,695
------------ ------------- -------------
Total realized gains (losses)
before capital gains tax .... 251,438,213 162,448,733 (53,831,093)
Capital gains (tax) benefit .... (2,026,003) 1,501,742 (2,433,800)
------------ ------------- -------------
Total ........................ $249,412,210 $ 163,950,475 $ (56,264,893)
============ ============= =============
Proceeds from sales and redemptions of long-term bond investments during 1997,
1996 and 1995 were approximately $4,652,635,000, $4,329,771,000 and
$3,822,394,000, respectively. Gross gains of approximately $111,635,000,
$133,807,000 and $122,093,000 and gross losses of approximately $10,931,000,
$45,397,000 and $49,736,000 were realized on these sales and redemptions during
1997, 1996 and 1995, respectively.
II-20
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (Continued)
Note 4 - Investment Income and Capital Gains and Losses - (Concluded)
Unrealized Capital Gains and Losses: For the years ended December 31, 1997, 1996
and 1995, the net changes in unrealized capital gains (losses) on investments,
resulting in a net increase (decrease) in the valuation of investments, were as
follows:
1997 1996 1995
------------ ------------ ------------
Bonds ............................. $(68,528,047) $ 3,982,108 $ 51,534,565
Mortgages ......................... 1,232,724 2,393,812 (1,807,561)
Real estate ....................... 4,315,196 20,766,890 (42,391,326)
Stocks ............................ 30,350,946 (26,004,886) 26,290,762
Other long-term investments ....... 20,169,489 10,306,026 22,455,069
Cash and short-term investments ... (21,987) 8,605 --
Other ............................. -- 18,999,590 (3,375,400)
------------ ------------ ------------
Total ...................... $ (2,481,679) $ 30,452,145 $ 52,706,109
============ ============ ============
Note 5 - Disclosures About Fair Value of Financial Instruments
The estimated fair value amounts of financial instruments presented in the
following tables have been determined by TIAA using market information available
as of December 31, 1997 and 1996 and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret market data
in developing the estimates of fair value for financial instruments for which
there are no available market value quotations. The estimates presented are not
necessarily indicative of the amounts TIAA could have realized in a market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
Notional Carrying Estimated
December 31, 1997 Value Value Fair Value
- ----------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Assets
Bonds ..................................................... $63,469,596,034 $67,640,699,509
Mortgages ................................................. 18,901,926,005 20,197,917,668
Common stocks ............................................. 81,903,321 81,903,321
Preferred stocks .......................................... 883,392,062 912,783,530
Cash and short-term investments ........................... 178,851,723 178,851,723
Policy loans .............................................. 245,941,298 245,941,298
Seed money investments .................................... 304,563,735 304,563,735
Liabilities
Teachers Personal Annuity - Fixed Account ................. 867,671,667 867,671,667
Other financial instruments
Foreign currency swap contracts ........................... $ 485,274,391 25,012,137 8,717,339
Foreign currency forward
contracts ................................................. 2,273,584 94,430 89,302
Interest rate swap contracts .............................. 267,755,000 -- 13,599,458
Swap options .............................................. 170,700,000 (676,870) (839,432)
Interest rate cap contracts ............................... 5,978,970,000 37,757,743 642,577
Stock warrants ............................................ -- 5,795,468
December 31, 1996
Assets
Bonds ..................................................... $56,092,130,827 $59,288,908,925
Mortgages ................................................. 20,074,002,277 20,605,405,622
Common stocks ............................................. 82,887,418 82,887,418
Preferred stocks........................................... 272,205,960 268,493,100
Cash and short-term investments ........................... 615,082,177 615,082,177
Policy loans .............................................. 187,636,651 187,636,651
Liabilities
Teachers Personal Annuity - Fixed Account ................. 700,580,748 700,580,748
Other financial instruments
Foreign currency swap contracts ........................... $ 337,403,818 (6,031,762) (26,524,318)
Foreign currency forward
contracts .............................................. 12,522,424 216,215 30,162
Interest rate swap contracts .............................. 187,355,000 -- 8,463,177
Swap options .............................................. 58,000,000 (433,554) (308,108)
Interest rate cap contracts ............................... 32,520,000 506,579 443,878
Stock warrants ............................................ -- --
</TABLE>
II-21
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (Continued)
Note 5 - Disclosures About Fair Value of Financial Instruments - (Continued)
Bonds: The fair values for publicly traded long-term bond investments are
determined using quoted market prices. For privately placed long-term bond
investments without a readily ascertainable market value, such values are
determined with the assistance of an independent pricing service utilizing a
discounted cash flow methodology based on coupon rates, maturity provisions and
assigned credit ratings. The aggregate carrying values and estimated fair values
of publicly traded and privately placed bonds at December 31, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Publicly traded bonds ....... $37,479,723,007 $40,216,394,144 $33,088,013,741 $34,773,725,991
Privately placed bonds ...... 25,989,873,027 27,424,305,365 23,004,117,086 24,515,182,934
--------------- --------------- --------------- ---------------
Total ..................... $63,469,596,034 $67,640,699,509 $56,092,130,827 $59,288,908,925
=============== =============== =============== ===============
</TABLE>
Mortgages: The fair values of mortgages are determined with the assistance of an
independent pricing service utilizing a discounted cash flow methodology based
on coupon rates, maturity provisions and assigned credit ratings.
Common Stocks, Cash and Short-Term Investments, Policy Loans, and Seed Money
Investments: The carrying values are reasonable estimates of fair values.
Preferred Stocks: The fair values of preferred stocks are determined using
quoted market prices or valuations from the NAIC.
Teachers Personal Annuity - Fixed Account: The carrying values of the
liabilities are reasonable estimates of fair values.
Foreign Currency Swap Contracts: The fair values of foreign currency swap
contracts, which are used for hedging purposes, are the estimated net gains or
(losses) that TIAA would record if the foreign currency swaps were liquidated at
year-end. The fair values of foreign currency swap contracts are estimated
internally based on future cash flows and anticipated exchange relationships,
and such values are reviewed for reasonableness with values from external
parties, including TIAA's counterparties.
Foreign Currency Forward Contracts: The fair values of foreign currency forward
contracts, which are used for hedging purposes, are the estimated net gains or
(losses) that TIAA would record if the foreign currency forward contracts were
liquidated at year-end. The fair values of the foreign currency forward
contracts are estimated internally based on future cash flows and anticipated
exchange relationships, and such values are reviewed for reasonableness with
estimates from external parties, including TIAA's counterparties.
Interest Rate Swap Contracts: The fair values of interest rate swap contracts,
which are used for hedging purposes, are the estimated net gains or (losses)
that TIAA would record if the interest rate swaps were liquidated at year-end.
The swap agreements have no carrying value. The fair values of interest rate
swap contracts are estimated internally based on anticipated interest rates and
estimated future cash flows, and such values are reviewed for reasonableness
with estimates from external parties, including TIAA's counterparties.
Swap Options: The fair values of swap options, which are used for hedging
purposes, are the estimated amounts that TIAA would receive or (pay) if the swap
options were liquidated at year-end. The fair values of the swap options are
estimated by external parties, including TIAA's counterparties, and such values
are reviewed internally for reasonableness based on anticipated interest rates
and estimated future cash flows.
Interest Rate Cap Contracts: The fair values of interest rate cap contracts,
which are used for hedging purposes, are the estimated amounts that TIAA would
receive or (pay) if the interest rate cap contracts were liquidated at year-end.
The fair values of the interest rate cap contracts are estimated by external
parties, including TIAA's counterparties, and such values are reviewed
internally for reasonableness based on anticipated interest rates and estimated
future cash flows.
II-22
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (Continued)
Note 5 - Disclosures About Fair Value of Financial Instruments - (Concluded)
Stock Warrants: The fair values of stock warrants represent the excess, if any,
of the market values of the related stocks over the exercise prices associated
with the stock warrants. The stock warrants have no carrying value.
Commitments to Extend Credit or Purchase Investments: TIAA does not charge
commitment fees on these agreements, and the related interest rates reflect
market levels at the time of the commitments.
Insurance and Annuity Contracts: TIAA's insurance and annuity contracts, other
than the Teachers Personal Annuity - Fixed Account disclosed above, entail
mortality risks and are, therefore, exempt from the fair value disclosure
requirements related to financial instruments.
Note 6 - Management Agreements
All services necessary for the operation of CREF are provided, at cost, by two
subsidiaries of TIAA, TIAA-CREF Investment Management, LLC ("Investment
Management") and TIAA-CREF Individual & Institutional Services, Inc.
("Services"), which provide investment advisory, administrative and distribution
services for CREF. Such services are provided in accordance with an Investment
Management Services Agreement between CREF and Investment Management, and in
accordance with a Principal Underwriting and Administrative Services Agreement
between CREF and Services. Investment Management is registered with the
Commission as an investment adviser; Services is registered with the Commission
as a broker-dealer and is a member of the National Association of Securities
Dealers, Inc. Investment Management and Services receive management fee payments
from each CREF account on a daily basis according to formulas established each
year with the objective of keeping the management fees as close as possible to
each account's actual expenses. Any differences between actual expenses and the
management fees are adjusted quarterly. Such fees and the equivalent allocated
expenses, which amounted to approximately $340,898,000, $274,447,000 and
$226,645,000 in 1997, 1996 and 1995, respectively, are not included in the
statements of operations and had no effect on TIAA's operations.
All services necessary for the operation of the TIAA Real Estate Account ("REA")
are provided, at cost, by TIAA and Services. TIAA provides investment management
services for REA, while distribution and administrative services are provided by
Services in accordance with a Distribution and Administrative Services Agreement
between REA and Services. TIAA also provides a liquidity guarantee to REA, for a
fee, to ensure that funds are available to meet participant transfer and cash
withdrawal requests in the event that REA's cash flows and liquid investments
are insufficient to fund such requests. TIAA also receives a fee for assuming
certain mortality and expense risks. Fee payments are made from REA on a daily
basis to TIAA and Services according to formulas established annually. Any
differences between actual expenses and daily charges are adjusted quarterly.
Teachers Advisors, Inc. ("Advisors"), a subsidiary of TIAA Holdings, Inc.
("THI"), which is itself a wholly-owned subsidiary of TIAA, provides investment
advisory services for the TIAA Separate Account VA-1 ("VA-1") in accordance with
an Investment Management Agreement between TIAA, Advisors and VA-1. TIAA
provides all administrative services for VA-1 in accordance with an
Administrative Services Agreement with VA-1 and also receives a fee for assuming
certain mortality and expense risks. Teachers Personal Investors Services, Inc.
("TPIS"), a subsidiary of THI, distributes contracts for VA-1. Expense
deductions are made from VA-1 on a daily basis. Advisors is registered with the
Commission as an investment adviser; TPIS is registered with the Commission as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc.
Note 7 - Pension Plan and Postretirement Benefits
TIAA maintains a qualified, noncontributory defined contribution pension plan
covering substantially all employees. All pension plan liabilities are fully
funded through individually owned retirement annuity contracts. Contributions
are made semi-monthly to each participant's contract based on a percentage of
salary, with the applicable percentage varying by attained age. All
contributions are fully vested after five years of service. Forfeitures arising
from terminations prior to vesting are used to reduce future employer
contributions. The accompanying statements of operations include contributions
to the pension plan of approximately $20,862,000, $20,808,000 and $19,467,000 in
1997, 1996 and 1995, respectively.
II-23
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (Continued)
Note 7 - Pension Plan and Postretirement Benefits - (Concluded)
In addition to the pension plan, TIAA provides certain other postretirement life
and health insurance benefits to eligible retired employees who meet prescribed
age and service requirements. The cost of such benefits reflected in the
accompanying statements of operations were approximately $ 3,398,000, $3,022,000
and $2,273,000 for 1997, 1996 and 1995, respectively. TIAA also maintains a
deferred compensation plan for non-employee trustees and members of the TIAA
Board of Overseers. Prior to January 2, 1998, this plan provided each eligible
trustee or member with a single-sum payment upon leaving the board equal to 50%
of the annual stipend then in effect multiplied by years of service, up to a
maximum of 20 years. Effective January 2, 1998, the plan provides a total award
each year equal to 50% of the basic annual stipend. Each award is invested in
company-owned annuity contracts. Payout of accumulations in the company-owned
contracts is normally made as a lump sum following the trustee's or member's
separation from the Board.
Note 8 - Unconsolidated Subsidiaries and Other Affiliates
TIAA's wholly-owned subsidiaries primarily involve real estate investment
activities and are primarily included in real estate assets on the accompanying
balance sheets. At December 31, 1997 and 1996, the carrying values of TIAA's
investments in real estate subsidiaries and other affiliates were approximately
$3,423,910,000 and $4,234,818,000, respectively. Subsidiary total assets,
liabilities and gross rental income of real estate subsidiaries, as of and for
the years ended December 31, 1997 and 1996, were approximately as follows:
1997 1996
-------------- --------------
Assets ....................................... $4,387,482,000 $5,149,487,000
Liabilities .................................. 792,142,000 933,678,000
Gross rental income .......................... 688,963,000 760,704,000
Earnings of approximately $156,648,000, $238,313,000 and $164,676,000 in 1997,
1996 and 1995, respectively, primarily from real estate subsidiaries are
included in net investment income in the accompanying statements of operations.
Some of the real estate subsidiaries referred to above are partners in joint
ventures. At December 31, 1997 and 1996, the carrying values of TIAA real estate
subsidiaries that are partners in joint ventures were approximately
$1,382,378,000 and $2,242,791,000. Joint venture total assets, liabilities and
gross rental income, as of and for the years ended December 31, 1997 and 1996,
were approximately as follows:
1997 1996
-------------- --------------
Assets ....................................... $2,075,352,000 $3,099,467,000
Liabilities .................................. 997,969,000 1,116,222,000
Gross rental income .......................... 377,919,000 484,657,000
The subsidiaries' equity share in these total assets, liabilities and gross
rental income were approximately as follows:
1997 1996
-------------- --------------
Assets ....................................... $1,960,400,000 $2,981,156,000
Liabilities .................................. 577,826,000 778,312,000
Gross rental income .......................... 349,770,000 455,196,000
Net income earned by the subsidiaries from joint venture investments was
approximately $56,362,000, $130,887,000 and $60,689,000 in 1997, 1996 and 1995,
respectively. Some of the real estate joint ventures have loans from TIAA. At
December 31, 1997 and 1996, the unpaid principal of such loans was approximately
$437,932,000 and 491,817,000 respectively.
II-24
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (Continued)
Note 9 - Annuity Reserves
At December 31, 1997, TIAA's general account annuity reserves are summarized as
follows:
Amount Percent
--------------- -------
Subject to discretionary withdrawal:
At book value without adjustment ................. $ 7,856,442,214 9.8%
At market value .................................. -- --
Not subject to discretionary withdrawal ............ 72,437,186,123 90.2%
--------------- -----
Total annuity reserves ............................. 80,293,628,337 100.0%
--------------- -----
Reconciliation to total policy and contract reserves
shown on the balance sheet:
Reserves on other life policies and contracts .... 348,411,715
Reserves on accident and health policies ......... 506,976,271
---------------
Total policy and contract reserves ................. $81,149,016,323
===============
Note 10 - Separate Accounts
TIAA currently has two separate accounts.
VA-1 is a segregated investment account and was organized on February 16, 1994
under the insurance laws of the State of New York for the purpose of issuing and
funding variable annuity contracts. VA-1 was registered with the Securities and
Exchange Commission ("Commission") effective November 1, 1994 as an open-end,
diversified management investment company under the Investment Company Act of
1940. Currently, VA-1 consists of a single investment portfolio, the Stock Index
Account ("SIA"), which invests in a diversified portfolio of equity securities
selected to track the overall United States stock market. SIA was established on
October 3, 1994 with a $25,000,000 seed money investment by TIAA. TIAA purchased
1,000,000 Accumulation Units of SIA and such units shared in the pro rata
investment experience of SIA and were subject to the same valuation procedures
and expense deductions as all other Accumulation Units in SIA. On November 14,
1994, TIAA began to offer Accumulation Units of SIA to participants other than
TIAA. TIAA redeemed all of its SIA units by the end of 1996.
REA is a segregated investment account and was organized on February 22, 1995
under the insurance laws of the State of New York for the purpose of funding
variable annuity contracts. REA was registered with the Commission under the
Securities Act of 1933 effective October 2, 1995. REA's target is to invest
between 70% and 80% of its assets directly in real estate or in real
estate-related investments, with the remainder of its assets invested in
publicly-traded securities to maintain adequate liquidity. REA was established
on July 3, 1995 with a $100,000,000 seed money investment by TIAA. TIAA
purchased 1,000,000 Accumulation Units of REA and such units share in the pro
rata investment experience of REA and are subject to the same valuation
procedures and expense deductions as all other Accumulation Units in REA. On
October 2, 1995, TIAA began to offer Accumulation Units of REA to participants
other than TIAA. At December 31, 1997 and 1996, the number of units retained by
TIAA in REA were 610,864 and 933,333, respectively, with a total value of
approximately $74,706,520 and $103,704,000, respectively.
The balance sheet captions for Separate Account assets and liabilities (which
include participant account values) are stated at market value. The Separate
Accounts' operating results are reflected in the changes to these assets and
liabilities. Annuities offered through VA-1 include a nominal guaranteed minimum
death benefit. For the REA, TIAA guarantees that actual mortality experience
will not reduce payments after they have started. TIAA makes no further
guarantees to policyholders on any of its separate accounts. Both accounts offer
full or partial withdrawal at market value with no surrender charge.
II-25
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (Concluded)
Note 11 - Mutual Funds
On July 17, 1997, TIAA made a $250,000,000 seed money investment to launch the
TIAA-CREF Mutual Funds ("the Funds"), a Delaware business trust that was
organized on January 13, 1997 and is registered with the Commission under the
Investment Company Act of 1940 as an open-end management investment company. The
Funds consist of six series (each referred to as a "Fund"), each of which
commenced operations on July 17, 1997. TIAA invested $48,000,000 in the Money
Market Fund; $32,000,000 in the Bond Plus Fund; $38,000,000 in the Growth &
Income Fund; $38,000,000 in the Growth Equity Fund; $44,000,000 in the
International Equity Fund; and $50,000,000 in the Managed Allocation Fund.
Shortly after being seeded, the Managed Allocation Fund invested its seed money
and its earnings to date in the other Funds. On September 2, 1997, the Funds
began to publicly offer their shares, without a sales load, through their
distributor, TPIS. Advisors provides investment management services for the
Funds and is also responsible for providing, or obtaining at its own expense,
the services reasonably necessary for the ordinary operation of the Funds. At
December 31, 1997, TIAA's investment in the Funds totaled approximately
$252,327,000 and such amount is reflected in the "Other long-term investments"
caption in the accompanying balance sheet.
Note 12 - Termination of Business in Canada
Effective January 1, 1996, TIAA ceased conducting insurance and annuity
operations in Canada and reinsured all existing business with an independent
third party insurer under an assumption reinsurance agreement. Under this
agreement, TIAA transferred approximately $129 million (U.S.) of assets to the
independent third party insurer, and, under the reinsurance agreement, this
transfer released all of TIAA's Canadian policy reserves and other liabilities.
The financial effect of TIAA's withdrawal from Canada is reflected in the 1996
statement of operations, and the transaction had no material effect on TIAA's
financial results. TIAA has no continuing material obligation associated with
its withdrawal from the Canadian insurance market.
Note 13 - Contingencies
It is the opinion of management that any liabilities which might arise from
litigation, state guaranty fund assessments, and other matters, over and above
amounts already provided for in the financial statements, are not considered
material in relation to TIAA's financial position or the results of its
operations.
II-26
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, the
registrant, TIAA Real Estate Account, has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in New York, New York, on the 22nd day of April, 1998.
TIAA REAL ESTATE ACCOUNT
By: TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
By: /s/ Peter C. Clapman
------------------------------
Peter C. Clapman
Senior Vice President and
Chief Counsel, Investments
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons, trustees and
officers of Teachers Insurance and Annuity Association of America, in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ John H. Biggs John H. Biggs 4-22-98
- ---------------------------- Chairman of the Board,
President and Chief Executive
Officer (Principal Executive
Officer) and Trustee
/s/ Martin L. Leibowitz Vice Chairman, Chief 4-22-98
- ---------------------------- Investment Officer and Trustee
Martin L. Leibowitz
/s/ Richard L. Gibbs Executive Vice President 4-22-98
- ---------------------------- (Principal Financial and
Richard L. Gibbs Accounting Officer)
II-27
<PAGE>
Signature of Trustee Date Signature of Trustee Date
- -------------------- ---- -------------------- ----
/s/ David Alexander 4-22-98 /s/ Dorothy Ann Kelly 4-22-98
- ------------------------- -------------------------
David Alexander Dorothy Ann Kelly, O.S.U.
/s/ Marcus Alexis 4-22-98 /s/Robert M. O'Neil 4-22-98
- ------------------------- -------------------------
Marcus Alexis Robert M. O'Neil
/s/ Willard T. Carleton 4-22-98 /s/ Leonard S. Simon 4-22-98
- ------------------------- -------------------------
Willard T. Carleton Leonard S. Simon
/s/ Robert C. Clark 4-22-98
- ------------------------- -------------------------
Robert C. Clark Ronald L. Thompson
/s/ Estelle A. Fishbein 4-22-98
- ------------------------- -------------------------
Estelle A. Fishbein Paul R. Tregurtha
/s/ Frederick R. Ford 4-22-98 /s/ William H. Waltrip 4-22-98
- ------------------------- -------------------------
Frederick R. Ford William H. Waltrip
/s/ Martin J. Gruber 4-22-98 /s/ Rosalie J. Wolf 4-22-98
- ------------------------- -------------------------
Martin J. Gruber Rosalie J. Wolf
/s/ Ruth Simms Hamilton 4-22-98
- -------------------------
Ruth Simms Hamilton
<PAGE>
<TABLE>
<S> <C> <C>
[LOGO OF Ernst & Young LLP] 1211 Avenue of the Americas Telephone: (212) 773-4900
New York, New York 10036 Fax: (212) 773-4501
</TABLE>
REPORT OF INDEPENDENT AUDITORS
To the Participants of the TIAA Real Estate Account and the Board of
Trustees of Teachers Insurance and Annuity Association of America:
We have audited the financial statements of the TIAA Real Estate Account
("Account") of Teachers Insurance and Annuity Association of America ("TIAA") as
of December 31, 1997 and have issued our report thereon dated February 6, 1998.
Our audit also included the financial statement schedule - Schedule III - Real
Estate Owned. This financial statement schedule is the responsibility of the
TIAA's management. Our responsibility is to express an opinion based on our
audit. In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
New York, New York
February 6, 1998
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
S-1
<PAGE>
TIAA REAL ESTATE ACCOUNT
Schedule III - Real Estate Owned
December 31, 1997
<TABLE>
<CAPTION>
Costs Capitalized
Subsequent to
Acquisition
Initial Cost (Including Value at Year
Encum- to Acquire Unrealized Gains December 31, Construction Date
Description brances Property and Losses) 1997 Completed Acquired
----------- ------- -------- ----------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C>
River Road Distribution Center $-0- $ 4,166,787 $ 58,213 $ 4,225,000 1995 11/22/95
Industrial Building
Fridley, Minnesota
The Greens At Metrowest -0- 12,490,895 909,105 13,400,000 1990 12/15/95
Apartments
Orlando, Florida
Butterfield Industrial Park -0- 4,431,166 268,834 4,700,000 1981 12/22/95
Industrial Building
El Paso, Texas (1)
Brixworth Apartments -0- 15,574,647 525,353 16,100,000 1989 12/28/95
Atlanta, Georgia
Plantation Grove Shopping Center -0- 7,326,170 (126,170) 7,200,000 1995 12/28/95
Shopping Center
Ocoee, Florida
Southbank Business Park -0- 10,069,898 630,102 10,700,000 1995 02/27/96
Office Building
Phoenix, Arizona
Millbrook Collection -0- 6,774,711 225,289 7,000,000 1988 03/29/96
Shopping Center
Raleigh, North Carolina
Lynnwood Collection -0- 6,708,120 391,880 7,100,000 1988 03/29/96
Shopping Center
Raleigh, North Carolina
S-2
<PAGE>
<CAPTION>
Costs Capitalized
Subsequent to
Acquisition
Initial Cost (Including Value at Year
Encum- to Acquire Unrealized Gains December 31, Construction Date
Description brances Property and Losses) 1997 Completed Acquired
----------- ------- -------- ----------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Monte Vista Apartments -0- 17,664,247 1,335,753 19,000,000 1995 06/21/96
Apartments
Littleton, Colorado
River Oaks Shopping Center -0- 13,036,153 (275,318) 12,760,835 1995 07/12/96
Shopping Center
Woodbridge, Virginia
Arapahoe Park East -0- 9,920,680 79,320 10,000,000 1982 10/31/96
Industrial Building
Boulder, Colorado
Royal St. George Apartments -0- 16,072,275 (272,275) 15,800,000 1995 12/20/96
Apartments
West Palm Beach, Florida
Interstate Crossing -0- 6,485,249 (85,249) 6,400,000 1995 12/31/96
Industrial Building
Eagan, Minnesota
West Creek Apartments -0- 13,488,279 211,721 13,700,000 1988 1/2/97
Apartments
Westlake Village, California
Interstate Acres -0- 13,610,294 203,614 13,813,908 1988 1/24/97
Industrial Building
Urbandale, Iowa
The Crest of Shadow Mountain -0- 9,192,389 67,611 9,260,000 1992 1/31/97
Apartments
El Paso, Texas
Westinghouse Facility -0- 6,089,473 10,527 6,100,000 1997 2/5/97
Industrial Building
Coral Springs, Florida
S-3
<PAGE>
<CAPTION>
Costs Capitalized
Subsequent to
Acquisition
Initial Cost (Including Value at Year
Encum- to Acquire Unrealized Gains December 31, Construction Date
Description brances Property and Losses) 1997 Completed Acquired
----------- ------- -------- ----------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Rolling Meadows -0- 12,930,463 69,537 13,000,000 1957 5/28/97
Shopping Center
Rolling Meadows, Illinois
Saks Distribution Center -0- 26,908,401 791,599 27,700,000 1997 5/15/97
Industrial Building
Aberdeen, Maryland
Eastgate Distribution Center -0- 11,941,992 258,008 12,200,000 1996 5/29/97
Industrial Building
San Diego, California
Five Centerpointe -0- 15,429,105 770,895 16,200,000 1988 4/21/97
Office Building
Lake Oswego, Oregon
Longview Executive Park -0- 23,249,805 250,195 23,500,000 1988 4/21/97
Office Building
Longview, Maryland
Metro Center Office Park -0- 21,085,210 414,790 21,500,000 1986 4/21/97
Office Building
Sacramento, California
Northmark Business Center III -0- 8,591,636 1,281,934 9,873,570 1985 4/21/97
Office Building
Blue Ash, Ohio
USF&G Building -0- 6,195,142 1,704,858 7,900,000 1988 4/21/97
Office Building
Salt Lake City, Utah
S-4
<PAGE>
<CAPTION>
Costs Capitalized
Subsequent to
Acquisition
Initial Cost (Including Value at Year
Encum- to Acquire Unrealized Gains December 31, Construction Date
Description brances Property and Losses) 1997 Completed Acquired
----------- ------- -------- ----------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Two Newton Place -0- 16,368,169 531,831 16,900,000 1987 4/21/97
Office Building
Newton, Massachusetts
Fairgate at Ballston -0- 26,790,792 769,208 27,560,000 1988 4/21/97
Office Building
Arlington, Virginia
Parkview Plaza -0- 49,139,012 2,475,721 51,614,733 1990 4/29/97
Office Building
Oakbrook Terrace, Illinois
Lincoln Woods Apartments -0- 21,476,050 -0- 21,476,050 1991 10/20/97
Lafayette Hill, Pennsylvania
Corporate Center at Sawgrass -0- 12,956,957 -0- 12,956,957 1997 12/2/97
Office Building
Sunrise, Florida
371 Hoes Lane -0- 15,499,306 -0- 15,499,306 1986 12/15/97
Office Building
Piscataway, New Jersey
Columbia Centre III -0- 38,580,850 -0- 38,580,850 1989 12/23/97
Office Building
Rosemont, Illinois
The Lodge at Willow Creek -0- 27,562,882 -0- 27,562,882 1997 12/24/97
Apartments
Douglas County, Colorado
---- ------------ ----------- ------------
$-0- $507,807,205 $13,476,886 $521,284,091
==== ============ =========== ============
</TABLE>
(1) Leasehold interest only
S-5
<PAGE>
Reconciliation of investment property owned:
Balance at beginning of period $131,803,204
Acquisitions 377,086,207
Capital improvements and carrying costs 12,394,680
(including unrealized gains and losses)
------------
Balance at end of period $521,284,091
============
S-6
<PAGE>
Exhibit Index
---------------
(5) Opinion and Consent of Charles H. Stamm, Esquire
(23)(B) Consent of Sutherland, Asbill & Brennan LLP
(C) Consent of Ernst & Young LLP
(D) Consent of Deloitte & Touche LLP
(27) Financial Data Schedule
[TIAA LOGO] Teacher Insurance and Annuity Association
730 Third Avenue
New York, New York 10017-3206
212 490-9000
April 21, 1998
Board of Trustees of
Teachers Insurance and Annuity Association
730 Third Avenue
New York, New York 10017-3206
Ladies and Gentlemen:
This opinion is furnished in connection with Post-Effective
Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-22809)
(the "Registration Statement") of the TIAA Real Estate Account (the "Account")
being filed with the Securities and Exchange Commission under the Securities Act
of 1933. Interests in the Account are offered through endorsements to certain
individual, group and tax-deferred annuity contracts and through income-paying
contracts (collectively, the "Contracts") issued by Teachers Insurance and
Annuity Association of America ("TIAA").
I have examined the Charter, Bylaws and other corporate records
of TIAA, including TIAA's Plan of Operations for Separate Account Business, and
other organizational records of the Account, and the relevant statutes and
regulations of the State of New York. On the basis of such examination, it is my
opinion that:
1. TIAA is a nonprofit life insurance company duly organized
and validly existing under the laws of the State of New
York.
2. The Account is a "separate account" of TIAA within the
meaning of Section 4240 of the New York Insurance Law, duly
established by a resolution of TIAA's Board of Trustees and
validly existing under the laws of the State of New York.
3. The Contracts have been duly authorized by TIAA and, when
issued as contemplated by the Registration Statement,
constitute legal, validly issued and binding obligations of
TIAA enforceable in accordance with their terms.
<PAGE>
April 21, 1998
Page -2-
I hereby consent to the use of this opinion as an exhibit to the
Registration Statement, and to the reference to my name under the heading "Legal
Matters" in the Registration Statement.
Sincerely,
/s/ Charles H. Stamm
--------------------
Charles H. Stamm
Executive Vice President
and General Counsel
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
STEVEN B. BOEHM
DIRECT LINE: (202) 383-0176 TEL: (202) 383-0100
Internet: [email protected] FAX: (202) 637-3593
April 24, 1998
Teachers Insurance and Annuity Association of America
730 Third Avenue
New York, New York 10017-3206
Re: Registration of Individual, Group and Tax-Deferred Variable
Annuity Contracts on Form S-1 for the TIAA Real Estate
Account (File No. 333-22809)
------------------------------------------------------------
Ladies and Gentlemen:
We hereby consent to the reference to our name under the
caption "Legal Matters" in the Prospectus filed as a part of the
above-referenced registration statement on Form S-1 for the TIAA Real Estate
Account. In giving this consent, we do not admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933.
Sincerely,
SUTHERLAND, ASBILL & BRENNAN LLP
By: /s/ Steven B. Boehm
--------------------------
Steven B. Boehm
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference in this Post Effective Amendment No. 2 for the TIAA
Real Estate Account Registration Statement (Form S-1 No. 333-22809) and related
Prospectus to our firm under the caption "Experts" and to the use of our report
dated February 6, 1998 relating to the TIAA Real Estate Account, and our report
dated February 26, 1998 relating to Columbia Centre III, and our report dated
November 20, 1997 relating to The Arbours, appearing in the Propectus which is
part of this Registration Statement, and our report dated February 6, 1998
relating to the financial statement schedule, Schedule III -- Real Estate Owned,
appearing elsewhere in this Registration Statement.
We also consent to the use of our report on Teachers Insurance and Annuity
Association of America ("TIAA") dated March 10, 1998 included in this
Registration Statement. Such report expresses our opinion that TIAA's statutory-
basis financial statements present fairly, in all material respects, the
financial position of TIAA at December 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
statutory accounting practices prescribed or permitted by New York State
Insurance Department and not in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
New York, New York
April 24, 1998
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 2 to Registration
Statement No. 333-22809 of the TIAA Real Estate Account on Form S-1 of our
report dated February 6, 1997 relating to the financial statements of the TIAA
Real Estate Account, and our report dated April 29, 1997 relating to the
properties known as Arapahoe Park East, Westcreek Apartments, Parkview Plaza,
Fairgate at Ballston, Two Newton Place, and Longview Executive Park, appearing
in the Prospectus, which is a part of such Registration Statement.
We also consent to the use in such Amendment to such Registration
Statement of our report dated March 11, 1997 relating to the financial
statements of Teachers Insurance and Annuity Association of America ("TIAA").
Such report expresses our opinion that the financial statements present fairly
the financial position, results of operations, changes in contingency reserves
and cash flows of TIAA in conformity with statutory accounting practices, a
comprehensive basis of accounting described in Note 2 of those financial
statements, and not in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
New York, New York
April 24, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000946155
<NAME> TIAA REAL ESTATE ACCOUNT
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 781,006,967
<INVESTMENTS-AT-VALUE> 801,286,133
<RECEIVABLES> 0
<ASSETS-OTHER> 14,067,094
<OTHER-ITEMS-ASSETS> 407,598
<TOTAL-ASSETS> 815,760,825
<PAYABLE-FOR-SECURITIES> 10,463
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 29,931,647
<TOTAL-LIABILITIES> 29,942,110
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 6,313,015
<SHARES-COMMON-PRIOR> 3,295,786
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 785,818,715
<DIVIDEND-INCOME> 4,406,679
<INTEREST-INCOME> 12,079,600
<OTHER-INCOME> 28,964,613
<EXPENSES-NET> (3,526,545)
<NET-INVESTMENT-INCOME> 41,924,347
<REALIZED-GAINS-CURRENT> 1,076,725
<APPREC-INCREASE-CURRENT> 17,070,328
<NET-CHANGE-FROM-OPS> 60,071,400
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,017,229
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 416,123,662
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,647,689
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,526,545
<AVERAGE-NET-ASSETS> 604,133,990
<PER-SHARE-NAV-BEGIN> 111.111
<PER-SHARE-NII> 7.199
<PER-SHARE-GAIN-APPREC> 3.987
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 122.297
<EXPENSE-RATIO> .580
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
