As filed with the Securities and Exchange Commission
on April 27, 1999
Registration No. 333-22809
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
TIAA REAL ESTATE ACCOUNT
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(Exact name of registrant as specified in its charter)
New York
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(State or other jurisdiction of incorporation or organization)
(Not applicable)
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(Primary Standard Industrial Classification Code Number)
(Not applicable)
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(I.R.S. Employer Identification No.)
c/o Teachers Insurance and Annuity Association of America
730 Third Avenue
New York, New York 10017-3206
(212) 490-9000
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(Address including zip code, and telephone
number, including area code, of registrant's principal
executive offices)
Peter C. Clapman, Esquire
Teachers Insurance and Annuity Association of America
730 Third Avenue
New York, New York 10017-3206
(212) 490-9000
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Steven B. Boehm, 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.
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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.
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PART I
INFORMATION REQUIRED IN PROSPECTUS
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[cover]
May 1, 1999
TIAA Real Estate Account
Prospectus
A Variable Annuity Offered Through
Individual, Group and Tax-Deferred
Annuity Contracts
[TIAA
LOGO]
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About the Real Estate Account and TIAA
The TIAA Real Estate Account was established in February 1995 as a separate
account of Teachers Insurance and Annuity Association of America (TIAA). TIAA
is a life insurance company founded in 1918 by the Carnegie Foundation for the
Advancement of Teaching. Its home office is at 730 Third Avenue, New York, NY
10017-3206 and its telephone number is (212) 490-9000. In addition to issuing
variable annuities, whose returns depend upon the performance of certain
specified investments, TIAA also offers traditional fixed annuities.
With its 50 years in the real estate business and interests in properties
located across the U.S., TIAA is one of the nation's largest and most
experienced investors in mortgages and real estate equity interests. As of
December 31, 1998, TIAA's general account had a mortgage portfolio of $20.3
billion and a real property portfolio of $6.1 billion.
TIAA is the companion organization of the College Retirement Equities Fund
(CREF), the first company in the United States to issue a variable annuity.
Together, TIAA and CREF form the principal retirement system for the nation's
education and research communities and the largest retirement system in the
U.S., based on assets under management. TIAA-CREF serves approximately 2.1
million people at over 8,800 institutions. As of December 31, 1998, TIAA's
assets were approximately $102 billion; the combined assets for TIAA and CREF
totalled approximately $248 billion.
The Real Estate Account offered by this prospectus is only being offered in
those jurisdictions where it is legal to do so. No person may make any
representation to you or give you any information about the offering that is
not in the prospectus. If anyone provides you with information about the
offering that is not in the prospectus, you shouldn't rely on it.
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TIAA Real Estate Account
A Tax-Deferred Variable Annuity Option
Offered By
Teachers Insurance and Annuity
Association of America (TIAA)
May 1, 1999
This prospectus tells you about the TIAA Real Estate Account, an investment
option offered through individual and group variable annuity contracts issued
by TIAA. Please read it carefully before investing and keep it for future
reference.
The Real Estate Account invests primarily in real estate and real
estate-related investments. TIAA, one of the largest and most experienced
mortgage and real estate investors in the nation, manages the Account's assets.
The value of your investment in the Real Estate Account will go up or down
depending on how the Account performs and you could lose money. The Account's
performance depends mainly on the value of the Account's real estate and other
real estate-related investments, and the income generated by those investments.
The Account's returns could go down if, for example, real estate values or
rental and occupancy rates decrease due to general economic conditions or a
weak market for real estate generally. Property operating costs and government
regulations, such as zoning or environmental laws, could also affect a
property's profitability. TIAA does not guarantee the investment performance of
the Account, and you bear the entire investment risk. For a detailed discussion
of the specific risks of investing in the Account, see "Risks," page 8.
We take deductions daily from the Account's net assets for the Account's
operating and investment management expenses. The Account also pays TIAA for
bearing mortality and expense risks and for providing a liquidity guarantee.
The current annual expense deductions from Account's net assets total 0.625%.
The Real Estate Account is designed as an option for retirement and
tax-deferred savings plans for employees of colleges, universities, and other
educational and research institutions. TIAA offers the Real Estate Account
under the following annuity contracts:
o RA and GRAs (Retirement and Group Retirement
Annuities)
o SRAs (Supplemental Retirement Annuities) and
GSRAs (Group Supplemental Retirement
Annuities)
o Classic and Roth IRAs (Individual Retirement
Annuities)
o GAs (Group Annuities)
o Keoghs (available pending regulatory
approval)
The Securities and Exchange Commission (SEC) has not approved or disapproved
these securities or passed upon the adequacy of the information in this
prospectus. Any representation to the contrary is a criminal offense.
An investment in the Real Estate Account is not a bank deposit and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
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Table of Contents
3 The Account's Investment Objective and Strategy
4 About the Account's Investments--In General
6 General Investment and Operating Policies
8 Risks
12 Establishing and Managing the Account--
the Role of TIAA
16 Description of Properties
23 Selected Financial Data
24 Management's Discussion and Analysis
of Account's Financial Condition and
Operating Results
28 Valuing the Account's Assets
31 Expense Deductions
33 The Contracts
36 How to Transfer and Withdraw Your Money
39 Receiving Annuity Income
44 Death Benefits
45 Taxes
47 General Matters
49 Distributor
49 State Regulation
49 Legal Matters
50 Experts
50 Additional Information
51 Financial Statements
F-1 Index to Financial Statements
A-1 Appendix A--Management of TIAA
B-1 Appendix B--Glossary
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The Account's Investment Objective and Strategy
Investment Objective: The Real Estate Account seeks favorable long term
returns primarily through rental income and appreciation of real estate
investments owned by the Account. The Account also will invest in
publicly-traded securities and other investments that are easily converted to
cash to make redemptions, purchase or improve properties or cover other
expenses.
Investment Strategy: The Account seeks to invest between 70 percent to 95
percent of its assets directly in real estate or real estate-related
investments. The Account's principal strategy is to purchase 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 (CMOs).
The Account will invest the remaining portion of its assets in government and
corporate debt securities, money market instruments and other cash equivalents,
and, at times, 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. This could
happen if the Account receives a large inflow of money in a short period of
time, there is a lack of attractive real estate investments available on the
market, or the Account anticipates a need to have more cash available.
The amount the Account invests in real estate and real estate-related
investments at a given time will vary depending on market conditions and real
estate prospects, among other factors. On December 31, 1998, the Account had
76.7 percent of its assets invested in real estate and real estate-related
investments (including REITs).
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About the Account's Investments--In General
Direct Investments in Real Estate
Direct Purchase: The Account will generally buy direct ownership interests in
existing or newly constructed income-producing properties, including office,
industrial, retail, and multi-family residential properties. The Account will
invest mainly in established properties with existing rent and expense
schedules or in newly-constructed properties with predictable cash flows or in
which a seller agrees to provide certain minimum income levels. On occasion the
Account might invest in real estate development projects.
Purchase-Leaseback Transactions: The Account can enter into purchase-leaseback
transactions (leasebacks) in which it typically will buy land and
income-producing improvements on the land (such as buildings), and
simultaneously lease the land and improvements to a third party (the lessee).
Leasebacks are generally for very long terms. Usually, the lessee is
responsible for operating the property and paying all operating costs,
including taxes and mortgage debt. The Account can also give the lessee an
option to buy the land and improvements.
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 revenues from the
building above a base amount. The Account can invest in leasebacks that are
subordinated to other interests in the land, buildings, and improvements (e.g.,
first mortgages); in that case, the leaseback interest will be subject to
greater risks.
Investments in Mortgages
General: The Account can originate or acquire interests in mortgage loans,
generally on the same types of properties it might otherwise buy. These
mortgage loans may pay fixed or variable interest rates or have "participating"
features (as described below). Normally the Account's mortgage loans will be
secured by properties that have income-producing potential. They usually will
not be insured or guaranteed by the U.S. government, its agencies or anyone
else. They usually will be non-recourse, which means they won't be the
borrower's personal obligations. Most will be first mortgage loans on existing
income-producing property, with first-priority liens on the 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 make mortgage loans which permit
the Account to share (have a "participation") in the income from or
appreciation of the
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underlying property. These participations let the Account receive additional
interest, usually calculated as a percentage of the revenues the borrower
receives from operating, selling or refinancing the property. The Account may
also have an option to buy an interest in the property securing the
participating loan.
Managing Mortgage Loan Investments: TIAA can manage the Account's mortgage
loans in a variety of ways, including:
o renegotiating and restructuring the terms of a mortgage loan
o extending the maturity of any mortgage loan made by the Account
o consenting to a sale of the property subject to a mortgage loan
o financing the purchase of a property by making a new mortgage loan in
connection with the sale
o selling them, or portions of them, before maturity
Other Real Estate-Related Investments
Real Estate Investment Trusts: The Account may invest in real estate
investment trusts (REITs), publicly-owned entities that lease, manage, acquire,
hold mortgages on, and develop real estate. Normally the Account will buy the
common or preferred stock of a REIT, although at times it may purchase REIT
debt securities. REITs seek to optimize share value and increase cash flows by
acquiring and developing new projects, upgrading existing properties or
renegotiating existing arrangements to increase rental rates and occupancy
levels. 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 particular REIT can be affected by such factors as
its need for cash flow, the skill of its management team, and defaults by its
lessees or borrowers.
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.
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 CMO holders according to the distribution
schedules of each CMO. CMO interest rates can be fixed or variable. 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
different than for other mortgage-related securities. CMOs may also be harder
to sell than other securities.
Non-Real Estate-Related Investments
The Account can also invest in:
o U.S. government or government agency securities
o Corporate debt or asset-backed securities of U.S. or foreign entities, or
debt securi-
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ties of foreign governments or multinational organizations, but only if
they're investment-grade and rated in the top four categories by a
nationally recognized rating organization (or, if not rated, deemed by
TIAA to be of equal quality)
o Money market instruments and other cash equivalents. These will usually be
high-quality short-term debt instruments, including U.S. government or
government agency securities, commercial paper, certificates of deposit,
bankers' acceptances, repurchase agreements, interest-bearing time
deposits, and corporate debt securities.
o Common or preferred stock of U.S. or foreign companies that aren't
involved in real estate, to a limited extent
Foreign Real Estate and Other Foreign Investments
The Account may invest in foreign real estate or real estate-related
investments. It might also invest in securities or other instruments of foreign
government or private issuers. While the percentage will vary, we expect that
foreign investments will be no more than 25 percent of the Account's portfolio.
Depending on investment opportunities, the Account's foreign investments could
at times be concentrated in one or two foreign countries. We will consider the
special risks involved in foreign investing before investing in foreign real
estate and won't invest unless our standards are met.
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General Investment and Operating Policies
Standards for Real Estate Investments
General Criteria for Buying Real Estate or Making Mortgage Loans: Before the
Account purchases real estate or makes a mortgage loan, TIAA will consider such
factors as:
o the location, condition, and use of the underlying property
o its operating history, its future income-producing capacity
o the quality, operating experience, and creditworthiness of the borrower.
TIAA will analyze the fair market value of the underlying real estate, taking
into account the property's operating cash flow (based on the historical and
projected levels of rental and occupancy rates, and expenses), as well as the
general economic conditions in the area where the property is located.
Diversification: We haven't placed percentage limitations on the type and
location of properties that the Account can buy. However, the Account seeks to
diversify its investments by type of property and geographic location. How much
the Account diversifies will depend upon whether suitable investments are
available and how much the Account has available to invest.
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Special Criteria for Making Mortgage Loans: Ordinarily, the Account will only
make a mortgage loan if the loan, when added to any existing debt, will not
exceed 85 percent of the appraised value of the mortgaged property when the loan
is made, unless the Account is compensated for taking additional risk.
Selling Real Estate Investments: The Account doesn't intend to buy and sell
its real estate investments simply to make short-term profits. But the Account
may sell investments if market conditions are favorable or to raise cash. The
Account will reinvest any sale proceeds that it doesn't need to pay operating
expenses or to meet redemption requests (e.g., cash withdrawals or transfers).
Other Real Estate-Related Policies
Appraisals: The Account will rely on TIAA's own analysis to appraise a
property when it first buys it. After that, normally the Account's properties
and participating mortgage loans will be appraised or valued once a year by an
independent state-certified appraiser who is a member of a professional
appraisal organization. While the Account usually won't receive an independent
appraisal before it buys real estate, it will get an independent appraisal when
it makes mortgage loans.
Borrowing: Usually, the Account won't borrow money to purchase real estate.
However, to meet short-term cash needs, the Account may obtain a line of credit
whose terms require that the Account secure a loan with one or more of its
properties. On a limited basis, the Account may place a mortgage on an Account
property held by one of its subsidiaries for tax planning or other purposes.
Joint Investments: The Account can hold property jointly through general or
limited partnerships, joint ventures, leaseholds, tenancies-in-common, or other
legal arrangements. However, the Account will not hold real property jointly
with TIAA or its affiliates.
Discretion to Evict or Foreclose: TIAA may, in its discretion, evict
defaulting tenants or foreclose on defaulting borrowers to maintain the value
of an investment, when it decides that it's in the Account's best interests.
Property Management and Leasing Services: The Account usually will hire a
local management company to perform the day-to-day management services for the
Account's properties, including supervising any on-site personnel, negotiating
maintenance and service contracts, and providing advice on major repairs and
capital improvements. The local manager will also 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 leasing
companies to perform or coordinate leasing and marketing services to fill any
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.
Insurance: 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.
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Other Policies
Liquid Assets: At times, a significant percentage of the Account may be
invested in liquid assets (which may or may not be real estate-related) while
we look for suitable real property investments. The Account can temporarily
increase the percentage of its liquid assets under some circumstances,
including the rapid inflow of participants' funds, lack of suitable real estate
investments, or a need for greater liquidity.
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 Investment
Company Act of 1940 (the 1940 Act). This will require monitoring the Account's
portfolio so that it won't have more than 40 percent of total assets, other
than U.S. government securities and cash items, in investment securities. As a
result, the Account may be unable to make some potentially profitable
investments.
Changing Operating Policies or Winding Down: TIAA can decide to change the
operating policies of the Account or wind it down. If the Account is wound down,
you may need 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 a significant policy or wind down the
Account.
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Risks
The value of your investment in the Account will go up and down based on the
value of the Account's assets and the income the assets generate. The Account's
assets and income (particularly its real estate assets and rental income) can
be affected by many factors, and you should consider the specific risks
presented below before investing in the Account.
Risks of Real Estate Investing
General Risks of Owning Real Property: The Account will be subject to the
risks inherent in owning real property, including:
o The Account's property values or rental and occupancy rates could go down
due to general economic conditions, a weak market for real estate
generally, changing supply and demand for certain types of properties, and
natural disasters or man-made events.
o A property may be unable to attract and retain tenants, which means that
rental income would decline.
o The Account could lose revenue if tenants don't pay rent, or if the
Account is forced to terminate a lease for nonpayment. Any disputes with
tenants could also involve costly litigation.
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o A property's profitability could go down if operating costs, such as
property taxes, utilities, maintenance and insurance costs, go up in
relation to gross rental income, or the property needs unanticipated
repairs and renovations.
General Risks of Selling Real Estate Investments: Among the risks of selling
real estate investments are:
o The sale price of an Account property might differ from its estimated or
appraised value, leading to losses or reduced profits to the Account.
o Because of the nature of real estate, the Account might not be able to
sell a property at a particular time for its full value, particularly in a
poor market. This might make it difficult to raise cash quickly and also
could lead to Account losses.
o The Account may need to provide financing if no cash buyers are available.
Regulatory Risks: Government regulation, including zoning laws, property
taxes, fiscal, environmental or other government policies, could operate or
change in a way that hurts the Account and its properties. For example,
regulations could raise the cost of owning and maintaining properties or make
it harder to sell, rent, finance, or refinance properties due to the increased
costs associated with regulatory compliance.
Environmental Risks: The Account may be liable for damage to the environment
caused by hazardous substances used or found on its properties. Under various
environmental regulations, the Account may also be liable, as a current or
previous property owner or mortgagee, for the cost of removing or cleaning-up
hazardous substances found on a property, even if it didn't know of and wasn't
responsible for the hazardous substances. If any hazardous substances are
present or the Account doesn't properly clean up any hazardous substances, or
if the Account fails to comply with regulations requiring it to actively
monitor the business activities on its premises, the Account may have
difficulty selling or renting a property or be liable for monetary penalties.
The cost of any required clean-up and the Account's potential liability for
environmental damage to a single real estate investment could exceed the value
of the Account's investment in a property, the property's value, or in an
extreme case, a significant portion of the Account's assets.
Casualty Losses: Certain catastrophic losses (e.g., from earthquakes, wars,
nuclear accidents, floods, or environmental or industrial hazards or accidents)
are uninsurable or so expensive to insure against that it doesn't make sense to
buy insurance for them. 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. In addition, some leases may permit a tenant to
terminate its obligations in certain 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.
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Risks of Developing Real Estate or Buying Recently-Constructed Properties: If
the Account chooses to develop a property or buys a recently-constructed
property, it may face the following risks:
o If developing real estate, there may be delays or unexpected increases in
the cost of property development and construction due to strikes, bad
weather, material shortages, increases in material and labor costs, or
other events.
o Because external factors may have changed from when the project was
originally conceived (e.g., slower growth in local economy, higher
interest rates, or overbuilding in the area), the property, if purchased
when unleased, may not operate at the income and expense levels first
projected or may not be developed in the way originally planned.
o The seller or other party may not be able to carry out any agreement to
provide certain minimum levels of income, or that agreement could expire,
which could reduce operating income and lower returns.
Risks of Joint Ownership: Investing in joint venture partnerships or other
forms of joint property ownership may involve special risks.
o The co-venturer may have interests or goals inconsistent with those of the
Account.
o 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.
o A co-venturer can make it harder for the Account to transfer its property
interest, particularly if the co-venturer has the right to decide whether
and when to sell the property.
o The co-venturer may become insolvent or bankrupt.
Risks with Purchase-Leaseback Transactions: The major risk of purchase-leaseback
transactions is that the third party lessee will not be able 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.
Appraisal Risks
Real estate appraisals are only estimates of property values based on a
professional's opinion and may not be accurate predictors of the amount the
Account would actually receive if it sold a property. If an appraisal is too
high, the Account's value could go down upon reappraisal or if the property is
sold for a lower price than the appraisal. If appraisals are too low, those who
redeem prior to an adjustment to the valuation or a property sale will have
received less than the true value of the Account's assets.
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Risks of Mortgage Loan Investments
General Risks of Mortgage Loans: The Account will be subject to the risks
inherent in making mortgage loans, including:
o The borrower may default, requiring that the Account foreclose on the
underlying property to protect the value of its mortgage loan. Since its
mortgage loans are usually non-recourse, the Account must rely solely on
the value of a property for its security. The larger the mortgage loan
compared to the value of the property securing it, the greater the loan's
risk. Upon default, the Account may not be able to sell the property for
its estimated or appraised value. Also, certain liens on the property,
such as mechanic's or tax liens, may have priority over the Account's
security interest.
o The borrower may not be able to make a lump sum principal payment due
under a mortgage loan at the end of the loan term, unless it can refinance
the mortgage loan with another lender.
o If interest rates are volatile during the loan period, the Account's
variable-rate mortgage loans could have lower yields.
Prepayment Risks: The Account's mortgage loan investments will usually be
subject to the risk that the borrower repays the loan early. Prepayments can
change the Account's return because we may be unable to reinvest the proceeds
at as high an interest rate as the original mortgage loan rate.
Interest Limitations: The interest rate we charge on mortgage loans may
inadvertently violate state usury laws that limit rates, if, for example, state
law changes during the loan term. If this happens, we could incur penalties or
may not be able to enforce payment of the loan.
Risks of Participations: Participating mortgages are subject to the following
additional risks:
o The participation element might generate insufficient returns to make up
for the higher interest rate the loan would have obtained without the
participation feature.
o In very limited circumstances, a court could possibly characterize the
Account's participation interest as a partnership or joint venture with
the borrower and the Account could lose the priority of its security
interest, or be liable for the borrower's debts.
Risks of REIT Investments
REITs 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.
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Risks of Liquid Investments
The Account's investments in securities and other liquid investments may be
subject to:
o financial risk--for debt securities, the possibility that the issuer won't
be able to pay principal and interest when due, and for common or
preferred stock, the possibility that the issuer's current earnings will
fall or that its overall financial soundness will decline, reducing the
security's value.
o market risk--price volatility due to changing conditions in the financial
markets and, particularly for debt securities, changes in overall interest
rates.
o interest rate volatility, which may affect current income from an
investment.
Risks of Foreign Investments
Foreign investments present the following special risks:
o Foreign real estate markets may have different liquidity and volatility
attributes than U.S. markets.
o The value of foreign investments or rental income can go up or down from
changes in currency rates, currency exchange control regulations, possible
expropriation or confiscatory taxation, political, social, and economic
developments, and foreign regulations.
o The Account may (but is not required to) seek to hedge its exposure to
changes in currency rates, which could involve extra costs. Hedging might
not be successful.
o It may be more difficult to obtain and collect a judgment on foreign
investments than on domestic ones.
Risk of Unspecified Investments
You won't have the opportunity to evaluate the economic merit of a property
purchase before the Account completes the purchase, so you will need to rely
solely on TIAA's judgment and ability to select investments consistent with the
Account's investment objective and policies.
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Establishing and Managing the Account--the Role of TIAA
Establishing and Seeding the Account
TIAA's Board of Trustees established the Real Estate Account as a separate
account of TIAA under New York law on February 22, 1995. The Account is
regulated by the State of New York Insurance Department (NYID) and the
insurance departments of some other jurisdictions in which the annuity
contracts are offered. Although TIAA owns the assets of the Real Estate
Account, and the Account's obligations are obligations of TIAA, the Account's
income, investment gains, and investment losses are credited to
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<PAGE>
or charged against the assets of the Account without regard to TIAA's other
income, gains, or losses. Under New York insurance law, we can't charge the
Account with liabilities incurred by any other TIAA business activities or any
other TIAA separate account.
In July 1995, TIAA made a $100 million seed money investment in the Account to
enable the Account to purchase a diverse portfolio of properties without having
to wait to receive premiums. TIAA had been redeeming this investment since 1996
according to a repayment schedule approved by the New York Insurance
Department. TIAA's investment was redeemed in full by the end of 1998.
Managing the Account
TIAA employees, under the direction and control of TIAA's Board of Trustees and
its Investment Committee, manage the investment of the Account's assets,
following investment management procedures TIAA adopted for the Account. TIAA's
investment management responsibilities include:
o identifying, recommending and purchasing appropriate real estate-related
and other investments
o providing all portfolio accounting, custodial, and related services for
the Account
o arranging for others 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 "Expense Deductions" page 31.
You don't have the right to vote for TIAA Trustees directly. See "Voting
Rights" page 47. For information about the Trustees and principal executive
officers of TIAA, see Appendix A to this prospectus.
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" and a fiduciary under ERISA with respect to those assets.
Liquidity Guarantee
TIAA provides the Account with a liquidity guarantee--TIAA ensures that the
Account has funds available to meet participant transfer or cash withdrawal
requests. If the Account can't fund participant requests from the Account,
TIAA's general account will fund them by purchasing Account accumulation units
(liquidity units). TIAA guarantees that you can redeem your accumulation units
at their then current daily net asset value. Of course, you can make a cash
withdrawal only if allowed by the terms of your plan. The Account pays TIAA for
the liquidity guarantee through a daily deduction from net assets. See "Expense
Deductions," page 31.
An independent fiduciary (described below) monitors the Account to ensure that
TIAA does not own too much of the Account and may require TIAA to redeem some
of its liquidity units, particularly when the Account has uninvested cash or
liquid investments
13
<PAGE>
available. The independent fiduciary may also propose properties for the
Account to sell so that TIAA can redeem liquidity units.
Conflicts of Interest
TIAA does not accept acquisition or placement fees for the services it provides
to the Account. However, TIAA employees who manage the Account's investments
may also manage TIAA's general account investments. It may therefore at times
face various conflicts of interest.
For example, TIAA's general account may sometimes compete with the Real Estate
Account in the purchase or sale of investments. We will seek to resolve any
conflict by determining 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 could also arise because some properties in TIAA's general account
may compete for tenants with the Account's properties. We will seek to resolve
this conflict by determining 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.
Role of the Independent Fiduciary
Because TIAA's purchase and sale of liquidity units raises certain technical
issues under ERISA, TIAA 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, with overall responsibility for reviewing Account transactions to
determine whether they are fair and in the Account's best interest.
Institutional Property Consultants, Inc., a registered investment adviser in
business since 1983, serves as the Account's independent fiduciary.
14
<PAGE>
The independent fiduciary's responsibilities include:
o reviewing and approving the Account's investment guidelines and monitoring
whether the Account's investments comply with those guidelines
o reviewing and approving valuation procedures
o 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
o reviewing and approving how we value accumulation and annuity units
o approving the appointment of all independent appraisers
o reviewing the purchase and sale of units by TIAA to ensure that we use the
correct unit values
o requiring appraisals besides those normally conducted, if the independent
fiduciary believes that any of the properties have changed materially, or
that an additional appraisal is necessary to assure the Account has
correctly valued a property
The independent fiduciary also must monitor TIAA's ownership in the Account and
supervise any winding down of the Account's operations. Its responsibilities
include:
o calculating the percentage of total accumulation units that TIAA's
ownership shouldn't exceed (the trigger point) and creating a method for
changing the trigger point
o approving any adjustment of TIAA's interest in the Account and requiring
an adjustment if TIAA's investment reaches the trigger point
o participating in any program to reduce TIAA's ownership in the Account or
to facilitate winding down the Account, including selecting properties for
sale, providing sales guidelines, and approving those sales that, in the
independent fiduciary's opinion, are desirable
TIAA appointed the independent fiduciary in 1995 for a five-year term, and has
established a special subcommittee of the Investment Committee of its Board of
Trustees that may renew the appointment, remove the independent fiduciary, or
appoint its successor. The independent fiduciary can be removed for cause by
the vote of a majority of subcommittee members or it can resign after at least
180 days' written notice. The independent fiduciary will not be reappointed
unless more than 60 percent of the subcommittee members approve.
TIAA pays the independent fiduciary directly. The investment management charge
paid to TIAA includes TIAA's costs for retaining the independent fiduciary. The
independent fiduciary will receive less than 5 percent of its annual income
(including payment for its services to the Account) from TIAA.
When you decide as a participant or plan fiduciary to invest in the Account,
after TIAA has provided you with full and fair disclosure including the
disclosure in this prospectus, you are also acknowledging that you approve and
accept Institutional Property Consultants, Inc. or any successor to serve as
the Account's independent fiduciary.
15
<PAGE>
Description of Properties
The Properties--In General
As of December 31, 1998, the Account had 46 properties in its real estate
portfolio. The following charts break down the Account's real estate assets by
region and property type.
[typeset representation of 2 pie charts]
West--32.2% Residential--33.2%
Midwest--25.0% Office--32.7%
East--24.5% Industrial--28.2%
South--18.3% Retail--5.9%
[end of pie chart information]
The percentages shown above exclude the interests owned by the Account's joint
venture partners in the portfolio properties.
In the table below you will find general information about each of the
Account's portfolio properties as of December 31, 1998.
<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
Parkview Plaza(3) Oakbrook, IL 1990 1997 263,912 100% $18.82 $ 52,106,591
Columbia Centre III Rosemont, IL 1989 1997 238,941 99% $19.30 $ 41,000,000
Metro Center Office Park(3)(4) Sacramento, CA 1986 1997 257,989 96% $16.24 $ 30,056,741
Fairgate at Ballston(3) Arlington, VA 1988 1997 143,564 100% $19.55 $ 28,725,524
Longview Executive Park(3) Hunt Valley, MD 1988 1997 257,944 98% $10.79 $ 27,400,000
Two Newton Place(3) Newton, MA 1987 1997 108,819 100% $18.35 $ 19,600,000
Five Centerpointe(3) Lake Oswego, OR 1988 1997 113,910 98% $19.19 $ 18,703,502
371 Hoes Lane Piscataway, NJ 1986 1997 136,088 100% $15.70 $ 15,614,856
Corporate Center at Sawgrass Sunrise, FL 1997 1997 91,113 100% $16.26 $ 14,000,000
Southbank Building Phoenix, AZ 1995 1996 122,535 100% $ 9.36 $ 13,000,000
Northmark Business Center(3) Blue Ash, OH 1985 1997 106,552 100% $12.17 $ 12,632,603
USF&G Building(3) Salt Lake City, UT 1988 1997 66,526 87% $19.26 $ 8,800,224
--------- ------------
Subtotal--Office Properties 1,907,893 $281,640,041
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Annual Avg.
Rentable Base Rent
Year Year Area Percent per Leased Market
Property Location Built Purchased (sq. ft.) Leased Sq. Ft.(1) Value(2)
- -------------------------------- --------------------- --------- ----------- ----------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
INDUSTRIAL PROPERTIES
IDI California Portfolio $ 35,668,791
Timberland Building Ontario, CA 1998 1998 414,435 100% $ 3.52 --
Park Mira Loma West Mira Loma, CA 1998 1998 557,500 100%(5) $ 3.18 --
Saks Distribution Facility Aberdeen, MD 1997 1997 470,707 100%(5) $ 5.61 $ 29,900,000
Park West Int'l Industrial Pk $ 24,651,154
Building C Hebron, KY 1998 1998 520,000 100% $ 2.90 --
Building D Hebron, KY 1998 1998 184,800 100% $ 2.99 --
Ontario Portfolio $ 24,433,584
5200 Airport Drive Ontario, CA 1997 1998 404,500 100% $ 3.48 --
1200 S. Etiwanda Ave. Ontario, CA 1998 1998 223,170 100% $ 3.36 --
Glen Pointe Business Park $ 15,400,000
Building V Chicago, IL 1997 1998 117,600 100% $ 5.89 --
Building VII Chicago, IL 1997 1998 92,543 100% $ 7.23 --
Interstate Acres Urbandale, IA 1981-88 1997 440,000 97% $ 3.18 $ 14,369,742
Eastgate Distribution Center San Diego, CA 1996 1997 200,000 100% $ 5.43 $ 12,700,000
Arapahoe Park E. Boulder, CO 1979-82 1996 129,425 100% $ 9.13 $ 11,500,000
UPS Distribution Facility Fernley, NV 1998 1998 256,000 100% $ 3.17 $ 10,989,393
Woodcreek Business Park Chicago, IL 1995 1998 149,907 100%(5) $ 4.32 $ 6,800,000
Rockrun Business Park Chicago, IL 1998 1998 258,000 100% $ 2.89 $ 9,325,000
FedEx Distribution Facility Crofton, MD 1998 1998 111,193 100% $ 5.64 $ 7,828,025
Westinghouse Coral Springs, FL 1997 1997 75,630 100% $ 7.29 $ 6,200,000
Interstate Crossing Eagan, MN 1995 1996 131,380 100% $ 4.90 $ 6,361,020
Butterfield Industrial Park El Paso, TX 1980-81 1995 183,510 100% $ 3.62 $ 4,850,000
River Road Distribution Center Fridley, MN 1995 1995 100,584 100% $ 5.97 $ 4,200,000
--------- ------------
Subtotal--Industrial Properties 5,020,884 $225,176,709
RETAIL PROPERTIES
Rolling Meadows Rolling Meadows, IL 1957(6) 1997 131,070 92% $ 10.09 $ 12,650,000
River Oaks Woodbridge, VA 1995 1996 90,885 92% $ 14.37 $ 12,600,000
Lynnwood Collection Raleigh, NC 1988 1996 86,362 100% $ 9.11 $ 7,500,000
Millbrook Collection Raleigh, NC 1988 1996 102,221 95% $ 7.88 $ 7,300,000
Plantation Grove Ocoee, FL 1995 1995 73,655 96% $ 9.73 $ 7,200,000
--------- ------------
Subtotal--Retail Properties 484,193 $ 47,250,000
--------- ------------
Subtotal--Commercial Properties 7,412,970 $554,066,750
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Annual Avg.
Rentable Base Rent
Year Year Area Percent per Leased Market
Property Location Built Purchased (sq. ft.) Leased Sq. Ft.(1) Value(2)
- ----------------------------- ---------------------- ------- ----------- ----------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
RESIDENTIAL PROPERTIES(7)
Bay Court at Harbour Pointe Mulkiteo, WA 1991 1998 NA 91% NA $ 35,164,373
The Legends at Chase Oaks Plano, TX 1997 1998 NA 90% NA $ 29,200,000
Lodge at Willow Creek Douglas County, CO 1997 1997 NA 96% NA $ 28,500,000
Golfview Apartments Lake Mary, FL 1998 1998 NA 89% NA $ 28,010,000
Lincoln Woods Lafayette Hill, PA 1991 1997 NA 95% NA $ 22,700,000
Monte Vista Littleton, CO 1995 1996 NA 90% NA $ 19,500,000
Indian Creek Apartments Farmington Hills, MI 1988 1998 NA 88% NA $ 17,003,388
Brixworth Atlanta, GA 1989 1995 NA 98% NA $ 16,800,000
Royal St. George W. Palm Beach, FL 1995 1996 NA 98% NA $ 16,500,000
Westcreek Westlake Village, CA 1988 1997 NA 99% NA $ 14,554,494
Bent Tree Apartments Columbus, OH 1987 1998 NA 85% NA $ 14,412,235
The Greens at Metrowest Orlando, FL 1990 1995 NA 93% NA $ 14,300,000
The Crest at Shadow Mt. El Paso, TX 1992 1997 NA 94% NA $ 9,500,000
--------- ------------
Subtotal--Residential Properties NA $266,144,490
--------- ------------
TOTAL--ALL PROPERTIES 7,412,970 $820,211,240
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on total rent (excluding tenant payments for real estate taxes and
operating expenses) on leases existing at December 31, 1998.
(2) Market value reflects the value determined in accordance with the
procedures described under "Valuation of Assets" in this prospectus. The
values shown here assume the Account owns 100% of the properties,
including those held jointly.
(3) Purchased through Light Street Partners, L.P., a partnership with Pegasus
Partners, Inc., a subsidiary of USF&G Corporation.
(4) Light Street Partners, L.P. sold the Metro Center on January 29, 1999 for a
purchase price of $31,750,000.
(5) A portion of the property is under master lease.
(6) Renovated in 1991 and 1995.
(7) For the average unit size and annual average rent per unit for each
residential property, see "Residential Properties" below.
18
<PAGE>
Commercial (Non-Residential) Properties
In General: At the end of 1998, the Account held 33 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.
At the end of 1998, the Account's office property portfolio consisted of 12
suburban office properties located in metropolitan areas throughout the United
States. The office properties together are approximately 98 percent leased to
168 tenants. At December 31, 1998, the Account had a 90 percent interest in
eight of the office properties, which were held in a partnership with Pegasus
Partners, Inc., a wholly-owned subsidiary of USF&G Corporation. (One of these
office properties was sold in 1999.) USF&G Realty Advisors, Inc. provided real
estate advisory services to the partnership and assisted in the overall
management of those properties. As of April 30, 1999, the Account, through a
wholly-owned subsidiary, purchased the partnership interest of Pegasus
Partners, and the partnership exercised its right to terminate without cause
its advisory arrangement with USF&G.
At the end of 1998, the Account's industrial property portfolio consisted of 16
properties used primarily for warehousing, distribution, or light manufacturing
activities. The Account's industrial properties together are 100 percent leased
to 66 tenants.
At the end of 1998, the Account's retail property portfolio consisted of five
neighborhood shopping centers, each of which is anchored by a supermarket
tenant. These retail properties together are approximately 95 percent leased to
76 tenants.
Major Tenants: The following table lists the Account's major commercial tenants
based on the total space they occupy in the Account's properties.
<TABLE>
<CAPTION>
Percentage of Total Rentable
Occupied Area of Account's
Major Tenant Square Feet Non-Residential Properties Property Type
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The GAP 520,000 7.0% Industrial
Saks & Company 470,707 6.3% Industrial
Meiko-America 463,235 6.2% Industrial
Timberland 414,435 5.6% Industrial
New Breed Transfer Company 404,500 5.5% Industrial
Petco 258,000 3.5% Industrial
UPS 256,000 3.5% Industrial
Louisville Bedding Company 223,170 3.0% Industrial
VanKampen American Capital 208,821 2.8% Office
PHH Vehicle Management Services 199,563 2.7% Office
- ------------------------------------------------------------------------------------------------------
</TABLE>
19
<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
<TABLE>
<CAPTION>
Rentable Area
Number of Subject to Percent of Total Rentable Area of
Leases Expiring Leases Account's Non-Residential Properties
Year of Lease Expiration Expiring (sq. ft.) Represented by Expiring Leases
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 20 102,711 5.5%
2000 26 165,451 8.9%
2001 29 243,661 13.0%
2002 36 342,766 18.4%
2003 28 501,865 26.9%
2004 and thereafter 29 510,281 27.3%
- --------------------------------------------------------------------------------------------------------
Total 168 1,866,735 100.0%
- --------------------------------------------------------------------------------------------------------
</TABLE>
Industrial Properties
<TABLE>
<CAPTION>
Rentable Area
Number of Subject to Percent of Total Rentable Area of
Leases Expiring Leases Account's Non-Residential Properties
Year of Lease Expiration Expiring (sq. ft.) Represented by Expiring Leases
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 5 147,748 3.0%
2000 11 232,016 4.6%
2001 7 198,319 4.0%
2002 6 151,014 3.0%
2003 17 1,302,834 26.0%
2004 and thereafter 20 2,978,004 59.4%
- --------------------------------------------------------------------------------------------------------
Total 66 5,009,935 100.0%
- --------------------------------------------------------------------------------------------------------
</TABLE>
Retail Properties
<TABLE>
<CAPTION>
Rentable Area
Number of Subject to Percent of Total Rentable Area of
Leases Expiring Leases Account's Non-Residential Properties
Year of Lease Expiration Expiring (sq. ft.) Represented by Expiring Leases
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 10 24,337 5.3%
2000 18 34,794 7.6%
2001 23 55,188 12.0%
2002 4 18,801 4.1%
2003 12 15,947 3.5%
2004 and thereafter 9 309,644 67.5%
- --------------------------------------------------------------------------------------------------------
Total 76 458,711 100.0%
- --------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
Residential Properties
At December 31, 1998, the Account's residential property portfolio consisted of
13 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.
In the table below you will find more detailed information regarding the
complexes in the Account's portfolio as of December 31, 1998.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average Avg. Rent
Number Unit Size Per Unit/ Percent
Property Location of Units (Square Feet) Per Month Leased
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bay Court at Harbour Pointe Mulkiteo, WA 420 970 $ 861 91%
The Legends at Chase Oaks Plano, TX 346 972 $1010 90%
Lodge at Willow Creek Douglas County, CO 316 1001 $ 964 96%
Golfview Apartments Lake Mary, FLA 276 1089 $1018 89%
Lincoln Woods Lafayette Hill, PA 216 773 $1090 95%
Monte Vista Littleton, CO 219 888 $ 998 92%
Indian Creek Apartments Farmington Hills, MI 196 1139 $ 940 88%
Brixworth Atlanta, GA 271 718 $ 809 98%
Royal St. George West Palm Beach, FL 224 870 $ 846 98%
Westcreek Westlake Village, CA 126 948 $1180 98%
Bent Tree Apartments Columbus, OH 256 928 $ 685 85%
The Greens at Metrowest Orlando, FL 200 920 $ 855 90%
The Crest at Shadow Mt. El Paso, TX 232 837 $ 627 96%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Recent Property Purchases and Sales
On January 29, 1999, the Metro Center office property, which the Account held
in partnership with USF&G, was sold for a purchase price of $31,750,000.
On February 23, 1999, the Account purchased the Biltmore Commerce Center, an
office building located in Phoenix, Arizona (close to downtown and the
airport), for a purchase price of approximately $37,250,000. The property is
not subject to a mortgage. The building, built in 1985, contains approximately
262,875 rentable square feet and is situated on 7.5 acres. The property has
1,152 on-site parking spaces and an arrangement to use 161 additional parking
spaces in a nearby lot. The building is 99% leased to various tenants with
rents averaging $17.91 per square foot. American Express currently occupies
approximately 54% of the building. Although the terms vary under each lease,
most of the expenses for operating the property are either borne or reimbursed
by the tenants.
21
<PAGE>
On April 14, 1999, the Account purchased The Colorado, a 35-story luxury
high-rise apartment building located in New York, New York (the upper east side
of Manhattan), for a purchase price of approximately $52,500,000. In addition
to rental units, the building contains a three level 22,203 square foot retail
space. The property is not subject to a mortgage. The Colorado was built in
1987 and contains 256 studio, one-bedroom and two-bedroom rental units,
averaging 631 square feet. The building has amenities such as a 24-hour
doorman, laundry facilities and a roof-top sundeck. It is currently 98% leased,
with monthly rents averaging $2,028 per unit. Rents are slightly below those of
competitive complexes, with 148 units currently subject to rent regulation. We
expect those units to be subject to market rent during 1999 as their leases
expire. 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.
22
<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.
<TABLE>
<CAPTION>
Year Ended December 31, July 3, 1995
------------------------------------------------------- (commencement
of operations) to
1998 1997 1996 December 31,1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Real estate income, net:
Rental income $ 81,009,203 $44,342,342 $10,951,183 $ 165,762
------------- ----------- ----------- -----------
Real estate property level
expenses and taxes:
Operating expenses 17,339,706 9,024,240 2,116,334 29,173
Real estate taxes 9,103,637 4,472,311 1,254,163 14,659
------------- ----------- ----------- -----------
Total real estate property
level expenses and taxes 26,443,343 13,496,551 3,370,497 43,832
------------- ----------- ----------- -----------
Real estate income, net 54,565,860 30,845,791 7,580,686 121,930
Dividends and interest 23,943,728 16,486,279 6,027,486 2,828,900
------------- ----------- ----------- -----------
Total investment income $ 78,509,588 $47,332,070 $13,608,172 $ 2,950,830
============= =========== =========== ===========
Net realized and unrealized
gain on investments $ 7,864,659 $18,147,053 $ 3,330,539 $ 35,603
============= =========== =========== ===========
Net increase in net assets
resulting from operations $ 76,611,662 $60,071,400 $15,782,915 $ 2,676,000
============= =========== =========== ===========
Net increase in net assets
resulting from participant
transactions $ 333,936,510 $356,052,262 $233,653,793 $117,582,345
============== ============ ============ ============
Net increase in net assets $ 410,548,172 $416,123,662 $249,436,708 $120,258,345
============== ============ ============ ============
<CAPTION>
December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total assets $1,229,603,431 $815,760,825 $426,372,007 $143,177,421
============== ============ ============ ============
Total liabilities and minority interest $ 33,236,544 $ 29,942,110 $ 56,676,954 $ 22,919,076
============== ============ ============ ============
Total net assets $1,196,366,887 $785,818,715 $369,695,053 $120,258,345
============== ============ ============ ============
Accumulation units outstanding 8,833,911 6,313,015 3,295,786 1,172,498
========= ========= ========= =========
Accumulation unit value $132.17 $122.30 $111.11 $102.57
======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
Management's Discussion and Analysis of Account's Financial Condition and
Operating Results
The Real Estate Account began operating on July 3, 1995 and interests in the
Account were first offered to participants on October 2, 1995. In a significant
achievement for its short existence, the Account passed the $1 billion mark in
net assets during 1998.
Through December 31, 1998, the Account had acquired a total of 46 real estate
properties, including 12 office properties, 16 industrial properties, 5
neighborhood shopping enters and 13 apartment complexes. As of December 31,
1998, these properties represented 67.71% of the Account's total investment
portfolio.
The Account purchased 8 industrial properties and 5 apartment properties during
1998. The Account has sold one office property and purchased an apartment
building and one additional office property since the beginning of 1999. 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, 1998, the Account also held investments in U.S. government
agencies, representing 13.97% of the portfolio, commercial paper, representing
9.09% of the portfolio, real estate investment trusts (REITs), representing
8.98% of the portfolio, and corporate bonds, representing .25% of the
portfolio.
As of December 31, 1998, the Account owned a controlling 90% interest in a
partnership which owns office buildings throughout the U.S. Consistent with
generally accepted accounting principles (GAAP), the Account's consolidated
financial statements and all financial data discussed in this report 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. As of the date of this prospectus, this
minority interest was purchased by the Account, through a wholly-owned
subsidiary.
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997:
The Account's total net return was 8.07% for the year ended December 31, 1998
and 10.07% for 1997. This decline was primarily due to the decline in value of
the Account's REIT holdings. The Account's net investment income, after
deduction of all expenses, was $72,234,994 for the year ended December 31, 1998
and $43,805,525 for the year ended December 31, 1997, a 65% increase. This
increase was the result of a 52% increase in net assets and an increase in the
Account's real estate holdings from
24
<PAGE>
December 31, 1997 to December 31, 1998. The Account had net realized and
unrealized gains on investments of $7,864,659 and $18,147,053 for the year
ended December 31, 1998 and December 31, 1997, respectively. This decrease was
primarily the result of the decline in price of the Account's REITs and other
marketable securities, as well as the losses incurred from the sale of certain
of those investments. These realized and unrealized losses on marketable
securities diminished the increase in unrealized appreciation on the Account's
real estate properties, which was $33,221,281 in 1998 compared with $10,234,316
in 1997. That increase was the result of the increased values assigned to many
of the properties after periodic revaluations from internal or independent
appraisals.
The Account's real estate holdings generated approximately 70% and 65% of the
Account's total investment income (before deducting Account level expenses)
during the year ended December 31, 1998 and December 31, 1997, respectively.
The remaining portion of the Account's total investment income was generated by
investments in marketable securities.
Gross real estate rental income was $81,009,203 for the year ended December 31,
1998 and $44,342,342 for the same period in 1997. This increase was primarily
due to the increase in the number of properties owned by the Account--from 33
properties at the end of 1997 to 46 properties at the end of 1998. Interest and
dividend income on the Account's marketable securities investments increased
from $16,486,279 for 1997 to $23,943,728 for 1998. This increase was due to the
fact that the actual amount of money the Account had invested in marketable
securities went up as the Account's net asset base grew.
Total property level expenses for the year ended December 31, 1998 were
$26,443,343 of which $17,339,706 was attributable to operating expenses and
$9,103,637 was attributable to real estate taxes. Total property level expenses
for the year ended December 31, 1997 were $13,496,551, of which $9,024,240
represented operating expenses and $4,472,311 was attributable to real estate
taxes. The increase in property level expenses during 1998 reflected the
increased number of properties in the Account.
The Account also incurred expenses for the year ended December 31, 1998 and
1997 of $2,999,113 and $1,647,689, respectively, for investment advisory
services, $2,498,376 and $1,368,501, respectively, for administrative and
distribution services, and $777,105 and $510,355, 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 for 1998 over
1997.
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,
25
<PAGE>
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, which increased 113% from December 31, 1996 to
December 31, 1997, and a greater concentration of real estate holdings during
the period. In addition, the Account had net realized and unrealized gains on
investments of $18,147,053 and $3,330,539 for the year ended December 31, 1997
and December 31, 1996, respectively. This increase was primarily the result of
the net increase in unrealized appreciation of $10,234,316 on the Account's
real estate and $6,836,012 on the Account's marketable securities. These
increases reflect the increased value assigned to many of the properties from
periodic revaluations and the increase in the value of REITs and other
marketable securities during the year.
The Account's real estate holdings generated approximately 65% and 56% of the
Account's total investment income (before deducting Account level expenses)
during the year ended December 31, 1997 and December 31, 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. This increase was primarily due to the increase
in the number of properties owned by the Account--from 13 properties at the end
of 1996 to 33 properties at the end of 1997. Interest and dividend income on
the Account's marketable securities investments increased from $6,027,486 for
1996 to $16,486,279 for 1997. This increase in interest and dividend income was
due primarily to the increased size of the Account's marketable securities
holdings (REITs in particular) and the general growth of the Account's assets.
Notably, shares of REITs represented 4.95% of the Account's investments at the
end of 1996 and 13.64% of the Account investments at the end of 1997.
Total property level expenses for the year ended December 31, 1997 were
$13,496,551, of which $9,024,240 represented operating expenses and $4,472,311
was attributable to real estate taxes. Total property level expenses for the
year ended December 31, 1996 were $3,370,497 of which $2,116,334 represented
operating expenses and $1,254,163 was attributable to real estate taxes. The
increase in property level expenses during 1997 reflected the increased number
of properties in the Account.
The Account also incurred expenses for the year 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 for 1997 over 1996.
26
<PAGE>
Liquidity and Capital Resources
Since September 16, 1996, TIAA had been redeeming the accumulation units
related to its $100 million seed money investment in the Account in accordance
with a repayment schedule approved by the New York Insurance Department. By
December 31, 1998, the Account had redeemed its entire seed money investment.
The Account earned $72,234,994 in net investment income in 1998 and $43,805,525
in 1997. During 1998 the Account received $91,248,578 in premiums and
$337,568,064 in net participant transfers from other TIAA and CREF accounts,
while in 1997 the Account received $52,344,830 in premiums and $351,174,584 in
net participant transfers from other TIAA and CREF accounts. Real estate
properties costing $259,746,550 and $377,086,027 were purchased during 1998 and
1997, respectively. At the end of 1998, the Account's liquid assets (i.e., its
cash, REITs, short- and intermediate-term investments, and government
securities) had a value of $391,605,900, while at the end of 1997 those assets
were valued at $280,409,640. We anticipate that much of the Account's liquid
assets as of December 31, 1998, 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.
The Account spent approximately $5,426,497 in 1998 for capital (long-term)
expenses, including ongoing tenant improvements and leasing commissions at the
commercial properties which related to the renewal of existing tenants or
re-leasing of space to new tenants during the normal course of business. The
Account expects to increase this level of spending as the portfolio of
commercial 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.
Effects of Inflation
In recent years, inflation has been modest. To the extent that inflation may
increase property operating expenses in the future, we anticipate that
increases will generally be billed to tenants either through contractual lease
provisions in office, industrial, and retail properties or through rent
increases in apartment complexes. However, to the extent there is unrented
space in a property, the Account may not be able to recover the full amount of
such increases in operating expenses.
27
<PAGE>
Year 2000 Issues
TIAA and the Account depend on the smooth functioning of computer systems to
operate. The Account, the Account's properties, and participant services could
be affected if TIAA's computer systems, the Account's property computer
systems, or those of its external service providers fail or incorrectly process
or calculate date-related information on or after January 1, 2000.
TIAA is dedicated to providing uninterrupted, high-quality service before,
during, and after the Year 2000. To achieve this goal, we have developed and
have been actively carrying out an extensive Year 2000 plan to remediate, test
and certify all internal computer systems, and to verify, to the extent
possible, that external service providers will be ready for the Year 2000. We
currently expect to complete Year 2000 testing and initial certification of our
internal corporate systems by mid-1999. We are also in the process of testing
the critical interfaces we have with our major service providers, vendors, and
suppliers. In particular, TIAA has been actively working with all those
responsible for property computer systems, i.e., management companies and
certain tenants, to assure that they have developed and are implementing plans
to remediate and test property systems in a timely manner. In addition, we are
making contingency plans intended to lessen the effect unexpected systems
failures (internal and external) may have on operations.
While we have taken steps we believe reasonably address the Year 2000 problem,
we can't guarantee complete success or eliminate the possibility that
interaction with outside computer systems could affect Account operations. If
the systems the Account relies upon do fail or produce faulty data, there could
be delays in properly processing transactions, or we may be unable temporarily
to engage in normal business activities. Also, the Account's performance could
be affected if the properties, companies or government entities in which the
Account invests are negatively affected by the Year 2000.
- --------------------------------------------------------------------------------
Valuing the Account's Assets
We value the Account's assets as of the close of each valuation day by taking
the sum of:
o the value of the Account's cash, cash equivalents, and short-term and
other debt instruments
o the value of the Account's other securities investments and other assets
o the value of the individual real properties and other real estate-related
investments owned by the Account, determined as described below
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<PAGE>
o an estimate of the net operating income accrued by the Account from its
properties and other real estate-related investments
and then reducing it by the Account's liabilities, including the daily
investment management fee and certain other expenses attributable to operating
the Account. See "Expense Deductions," page 31.
Valuing Real Estate and Related Investments
Valuing Real Property: Individual real properties will be valued initially at
their purchase prices. (Prices include all expenses related to purchase, such
as acquisition fees, legal fees and expenses, and other closing costs.) We
could use a different value in appropriate circumstances.
After this initial valuation, an independent appraiser, approved by the
independent fiduciary, will value properties at least once a year. 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.
Because of the nature of real estate assets, the Account's net asset value
won't necessarily reflect the true or realizable value of those assets (i.e.,
what the Account would get if it sold them).
Valuing Conventional Mortgages: Individual mortgages will be valued initially
at their face amount. Thereafter, quarterly, we'll value the Account's fixed
interest mortgage loans by discounting payments of principal and interest to
their present value (using a rate at which commercial lenders would make
similar mortgage loans). We'll also use this method for foreign mortgages with
conventional terms. We can adjust the mortgage value more frequently if
circumstances require it.
Valuing Participating Mortgages: Individual mortgages will initially be valued
at their face amount. Thereafter, quarterly, we'll estimate the values of the
participating mortgages by making various assumptions about occupancy rates,
rental rates, expense levels, and other things. We'll use these assumptions to
project the cash flow and anticipated sale proceeds from each investment over
the term of the loan, or sometimes over a shorter period. To calculate sale
proceeds, we'll assume that the real property underlying each investment
29
<PAGE>
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. We'll then discount the
estimated cash flows and sale proceeds to their present value (using rates
appropriate to then-current market conditions).
Net Operating Income: The Account usually receives operating income from its
investments intermittently, not daily. In fairness to participants, we estimate
the Account's net operating income rather than applying it when we actually
receive it, and assume that the Account has earned (accrued) a proportionate
amount of that estimated amount daily. You bear the risk that, until we adjust
the estimates when we receive actual income reports, we could be under- or
overvaluing the Account.
Every year, we 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 add the appropriate fraction of the estimated net operating income for
the month to the Account's net asset value.
Every month, the Account receives a report of the actual operating results for
the prior month for each property (actual net operating income). We then
recognize the actual net operating income on the accounting records of the
Account and adjust the outstanding daily accrued receivable accordingly. As the
Account actually receives cash from a property, we'll adjust the daily accrued
receivable and other accounts appropriately.
Adjustments: We can adjust the value of an investment if we believe events or
market conditions (such as a borrower's or tenant's default) have affected how
much the Account could get if it sold the investment. We may not always be
aware of each event that might require a valuation adjustment, and because our
evaluation is based on subjective factors, we may not in all cases make
adjustments where changing conditions could affect the value of an investment.
The independent fiduciary will need to approve adjustments to any valuation of
one or more properties that
o is made within three months of the annual independent appraisal or
o results in an increase or decrease of:
o more than 6 percent of the value of any of the Account's properties
since the last independent annual appraisal
o more than 2 percent in the value of the Account since the prior
month or
o more than 4 percent in the value of the Account within any quarter.
Right to Change Valuation Methods: If we decide that a different valuation
method would reflect the value of a real estate-related 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
and change the values at which participants purchase or redeem Account
interests.
30
<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 (including REITs) 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.
- --------------------------------------------------------------------------------
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
31
<PAGE>
relatively low. TIAA guarantees that in the aggregate, the expense charges will
never be more than 2.50% of average net assets per year.
The current annual expense deductions are:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Percent of
Net Assets
Type of Expense Deduction Annually Services Performed
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment Management 0.30% For TIAA's investment advice, portfolio accounting,
custodial services, and similar services, including
independent fiduciary and appraisal fees
- ---------------------------------------------------------------------------------------------------------------
Administration 0.195% For Services' administrative services, such as allocating
premiums and paying annuity income
- ---------------------------------------------------------------------------------------------------------------
Distribution 0.03% For Services' expenses related to distributing the annuity
contracts
- ---------------------------------------------------------------------------------------------------------------
Mortality and Expense Risk 0.07% For TIAA's bearing certain mortality and expense risks.
Accumulations and annuity payments aren't affected
by changes in actual mortality experience or by TIAA's
actual expenses.
- ---------------------------------------------------------------------------------------------------------------
Liquidity Guarantee 0.03% For TIAA's liquidity guarantee. The actual liquidity expense
charged is computed as a percentage of the Account's
real estate assets.
- ---------------------------------------------------------------------------------------------------------------
Total Annual Expense Deduction 0.625% For total services to the Account
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
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. Since our at-cost deductions are based on
projections of Account assets and overall expenses, the size of any adjusting
payments will be directly affected by how different our projections are from
the Account's actual assets or expenses. While our projections of Account asset
size (and resulting expense fees) are based on our best estimates, the size of
the Account's assets can be affected by many factors, including premium growth,
participant transfers into or out of the Account, and any changes in the value
of portfolio holdings. Historically, the adjusting payments have generally been
small and have resulted in both upward and downward adjustments to the
Account's expense deductions for the following quarter.
TIAA's board can revise the deduction rates from time to time to keep
deductions as close as possible to actual expenses.
Currently there are no deductions from premiums or withdrawals, but we might
change this in the future. Property expenses, brokers' commissions, transfer
taxes, and other portfolio expenses are charged directly to the Account.
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<PAGE>
The Contracts
TIAA offers the Real Estate Account as a variable option for the annuity
contracts described below. Some employer plans may not offer the Real Estate
Account as an option for RA, GRA, GSRA, or Keogh contracts. The Account is not
available in California.
RA (Retirement Annuity) and GRA (Group Retirement Annuity)
RA and GRA contracts are used mainly for employee retirement plans. RA
contracts are issued directly to you. GRA contracts, which are group contracts,
are issued through an agreement between your employer and TIAA.
Depending on the terms of your plan, RA and GRA premiums can be paid by your
employer, you, or both. (You can't pay GRA premiums directly to TIAA; your
employer must send them for you.) If you're paying some of or the entire
periodic premium, your contributions can be in either pre-tax dollars by salary
reduction or after-tax dollars by payroll deduction. You can also transfer
funds from another investment choice under your employer's plan to your
contract. For RAs only, you can make contributions directly to TIAA. Ask your
employer for more information about these contracts.
SRA (Supplemental Retirement Annuity) and GSRA (Group Supplemental Retirement
Annuity)
These are for voluntary tax-deferred annuity (TDA) plans. SRA contracts are
issued directly to you. GSRA contracts, which are group contracts, are issued
through an agreement between your employer and TIAA. Your employer pays
premiums in pre-tax dollars through salary reduction. Although you can't pay
premiums directly, you can transfer amounts from other TDA plans.
Classic IRA
Classic IRAs are individual contracts issued directly to you. You and your
spouse can each open a Classic IRA with an annual contribution of up to $2,000
or by rolling over funds from another IRA or retirement plan, if you meet our
eligibility requirements. The combined limit for your contributions to a
Classic IRA and a Roth IRA for a single year is $2,000, excluding rollovers. We
can't issue you a joint contract.
[SIDEBAR]
IRA and Keogh Eligibility
You or your spouse can set up a TIAA Classic or Roth IRA or a Keogh if you're a
current or retired employee or trustee of an eligible institution, or if you
own a TIAA or CREF annuity or a TIAA individual insurance contract. With IRAs,
you can also roll over funds from an eligible institution's retirement plan or
from an IRA account that was set up with money originally in an eligible
institution's plan. Eligibility may be restricted by certain income limits on
opening Roth IRA contracts.
[END SIDEBAR]
33
<PAGE>
Roth IRA
Roth IRAs are also individual contracts issued directly to you. You or your
spouse can each open a Roth IRA with an annual contribution up to $2,000 or
with a rollover from another IRA or a Classic IRA issued by TIAA if you meet
our eligibility requirements. The combined limit for your contributions to a
Classic IRA and a Roth IRA for a single year is $2,000, excluding rollovers. We
can't issue you a joint contract.
GA (Group Annuity)
GA contracts are used exclusively for employee retirement plans and are issued
directly to your employer or your plan's trustee. Your employer pays premiums
directly to TIAA (you can't pay GA premiums directly to TIAA) and your employer
or the plan's trustee exclusively controls the allocation of contributions and
transfers to and from these contracts. Ask your employer for more information
if your plan is funded with a GA contract.
Keoghs
Pending regulatory approval, TIAA plans to offer contracts for Keogh plans. If
you own an unincorporated business, you'll be able to use our Keogh contracts
for your Keogh plan, provided you are eligible.
Starting Out
We'll issue you a TIAA contract when 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. 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 end 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 percent, 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.
[SIDEBAR]
Vesting
Once you're fully vested under your employer's plan, you can't lose the
benefits you've earned under your RA, GRA or GA contract. Ask your employer for
your vesting status. Your benefits under SRAs, GSRAs, and IRAs are immediately
vested and can't be forfeited.
[END SIDEBAR]
34
<PAGE>
TIAA doesn't restrict the amount or frequency of premiums to your RA, GRA, and
IRA contracts, although we may in the future. Your employer's retirement plan
may limit your premium amounts, while the Internal Revenue Code limits the
total annual premiums you may invest in plans qualified for favorable tax
treatment. If you pay premiums directly to an RA or IRA, the premiums and any
earnings are not subject to your employer's plan.
In most cases (subject to any restriction we may impose, as described in this
prospectus), 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, GSRA, or Keogh contracts at any time.
Allocating Your Premiums Among the Account and Other TIAA and CREF Accounts
You can allocate all or part of your premiums to the Real Estate Account,
unless your employer's plan precludes that choice. You can also allocate
premiums to TIAA's traditional annuity or any of the CREF variable investment
accounts, if the account is available under your employer's plan.
You can change your allocation choices for future premiums by
o writing to our home office
o using our Inter/ACT Internet service at www.tiaa-cref.org or
o calling our Automated Telephone Service (24 hours a day) at 800-842-2252.
The Right to Cancel Your Contract
You can cancel your contract up to 30 days after you first receive it, unless
we have begun making annuity payments from it. If you already had a TIAA
contract, and are simply receiving a Real Estate Account rider for the first
time, you have no 30-day right to cancel the contract. To cancel, mail or
deliver the contract with a signed Notice of Cancellation (available by
contacting TIAA) to our home office. We'll cancel the contract, then send the
entire current accumulation to whomever sent the premiums. You bear the
investment risk during this period (although some states require us to send
back your entire premium without accounting for investment results).
Determining the Value of Your Interest in the Account--Accumulation Units
When you pay premiums or make transfers to 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 at the end of
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 accumulation unit value for the end
35
<PAGE>
of the business day when we receive your transaction request and all required
information and documents (unless you ask for a later date).
The accumulation unit value reflects the Account's investment experience (i.e.,
the real estate net operating income accrued, as well as dividends, interest
and other income accrued), realized and unrealized capital gains and losses, as
well as Account expense charges.
[SIDEBAR]
Calculating Accumulation Unit Values
We calculate the Account's accumulation unit value at the end of each valuation
day. To do that, we multiply the previous day's value by the net investment
factor for the Account. The net investment factor is calculated as A divided by
B, where A and B are defined as:
A. The value of the Account's net assets at the end of the current valuation
period, less premiums received during the current valuation period.
B. The value of the Account's net assets at the end of the previous valuation
period, plus the net effect of transactions made at the start of the
current valuation period.
[END SIDEBAR]
- --------------------------------------------------------------------------------
How to Transfer and Withdraw Your Money
Generally TIAA allows you to move your money to or from the Real Estate Account
in the following ways:
o once a calendar quarter from the Real Estate Account to a CREF investment
account or TIAA's traditional annuity
o to the Real Estate Account from a CREF investment account or TIAA's
traditional annuity (subject to certain limitations)
o from the Real Estate Account to other companies
o to the Real Estate Account from other plans
o by withdrawing cash
o by setting up a program of automatic withdrawals or transfers
These transactions generally must be for at least $1,000 at a time (or your
entire Account accumulation, if less). These options may be limited by the
terms of your employer's plan or by current tax law. Transfers and cash
withdrawals are currently free.
Transfers and cash withdrawals are effective at the end of the business day we
receive your request and all required documentation. You can also 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. If you request a transfer at any
36
<PAGE>
time other than during a business day, it will be effective at the close of the
next business day.
To request a transfer or to withdraw cash:
o write to TIAA's home office at 730 Third Ave., New York, NY 10017-3206
o call us at 800 842-2252 or
o for transfers, use Inter/ACT on the Internet at www.tiaa-cref.org
You may be required to complete and return certain forms to effect these
transactions. We can suspend or terminate your ability to transact by telephone
or over the Internet at any time, for any reason.
Before you transfer or withdraw cash, make sure you understand the possible
federal and other income tax consequences. See "Taxes," page 45.
Transfers Between the Real Estate Account and Other TIAA-CREF Accounts
Once every calendar quarter 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. Transfers to certain CREF accounts may be restricted by your
employer's plan.
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, if your employer's
plan offers the Account. 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.
Because excessive transfer activity can hurt Account performance and other
participants, we may further limit how often you transfer or otherwise modify
the transfer privilege.
Transfers to Other Companies
Generally you may transfer funds from the Real Estate Account to a company
other than TIAA or CREF, subject to certain tax restrictions. This right may be
limited by your employer's plan. If your employer participates in our special
transfer services program, we can make automatic monthly transfers from your RA
or GRA contract to another company, and the $1,000 minimum will not apply to
these transfers.
Transfers 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 plan. You can also transfer funds from 401(a), 403(a), and 403(b)
plans to a TIAA Classic IRA, or from an IRA containing funds originally
contributed to such plans, to either a Classic or
37
<PAGE>
Roth IRA, assuming you meet the income eligibility criteria.
Withdrawing Cash
You may withdraw cash from your SRA, GSRA, IRA, or Keogh Real Estate Account
accumulation at any time during the accumulation period, provided federal tax
law permits it (see below). Cash withdrawals from your RA or GRA accumulation
may be limited by the terms of your employer's plan and federal tax law.
Normally, you can't withdraw money from a contract if you've already begun
receiving lifetime annuity income.
Current federal tax law restricts your ability to make cash withdrawals from
your accumulation under most voluntary salary reduction agreements. Withdrawals
are generally available only if you reach age 591/2, leave your job, become
disabled, or die, or if your employer terminates its retirement plan. If your
employer's plan permits, you may also be able to withdraw money if you
encounter hardship, as defined by the IRS, but hardship withdrawals can be from
contributions only, not investment earnings. Different restrictions apply to
withdrawals from Classic and Roth IRAs. You may be subject to a 10 percent
penalty tax if you make a withdrawal before you reach age 591/2, unless an
exception applies to your situation.
Possible Restrictions on Premiums and Transfers to the Account
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.
[SIDEBAR]
Systematic Withdrawals and
Transfers
If your employer's plan allows, you can set up a program to make cash
withdrawals or transfers automatically by specifying that we withdraw or
transfer from your Real Estate Account accumulation any fixed
o number of accumulation units
o dollar amount or
o percentage of accumulation
until you tell us to stop or until your accumulation is exhausted. Currently,
the program must be set up so that at least $100 is automatically withdrawn or
transferred at a time.
[END SIDEBAR]
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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.
- --------------------------------------------------------------------------------
Receiving Annuity Income
The Annuity Period in General
You can receive an income stream from all or part of your Real Estate Account
accumulation. Unless you opt for a lifetime annuity, generally you must be at
least age 59-1/2 to begin receiving annuity income payments from your annuity
contract free of a 10 percent early distribution penalty. Your employer's plan
may also restrict when you can begin income payments. Under the minimum
distribution rules, you generally must begin receiving some payments from your
contract shortly after you reach age 70-1/2 or you retire. Also, 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.
Your income payments may be paid out from the Real Estate Account through a
variety of income options. You can pick a different income option for different
portions of your accumulation, but once you've started payments you usually
can't change your income option 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.
Your initial income payments are based on the value of your 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
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results during the previous month. For the formulas used to calculate the
amount of annuity payments, see page 42. 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 but you can change this date at any time prior to the day before that
annuity starting date. Ordinarily, annuity payments begin on your annuity
starting date, provided we have received all documentation necessary for the
income option you've picked. 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 70 days after payments begin may
be used to provide additional annuity income. Premiums received after 70 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.
Income Options
Both the number of annuity units you purchase and the amount of your income
payments will depend on which income option you pick. Your employer's plan, tax
law and ERISA may limit which income options you can use to receive income from
an RA or GRA. Ordinarily you'll choose your income options shortly before you
want payments to begin, but you can make or change your choice any time before
your annuity starting date.
All Real Estate Account income options provide variable payments, and the
amount of income you receive depends in part on the investment experience of
the Account. The current options are:
o One-Life Annuity with or without Guaranteed Period: Pays income as long as
you live. If you opt for a guaranteed period (10, 15 or 20 years) and you
die before it's over, income payments will continue to your beneficiary
until the end of the period. If you don't opt for a guaranteed period, all
payments end at your death--so that it's possible for you to receive only
one payment if you die less than a month after payments start.
o Annuity for a Fixed Period: Pays income for any period you choose from 5
to 30 years.
o Two-Life Annuities: Pays income to you as long as you live, then continues
at either the same or a reduced level for the life of your annuity
partner. There are three types of two-life annuity options, all available
with or without a guaranteed period-- Full Benefit to Survivor, Two-Thirds
Benefit to Survivor, and a Half-Benefit to Annuity Partner.
o Minimum Distribution Option ("MDO") Annuity: Generally available only if
you must begin annuity payments under the Internal Revenue Code minimum
distribu-
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tion requirements. (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 us.
Receiving Lump Sum Payments (Retirement Transition Benefit): If your
employer's plan allows, you may be able to receive a single sum payment of up
to 10 percent 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 percent) of your Real Estate Account accumulation as a cash payment. The
retirement transition benefit will be subject to current federal income tax
requirements and possible early distribution penalties. See "Taxes," page 45.
If you haven't picked an income option when the annuity starting date arrives
for your RA, GRA, SRA or GSRA contract, TIAA usually 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.
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.
Transfers During the Annuity Period
After you begin receiving annuity income, you can transfer all or part of the
future annuity income payable once each calendar quarter (i) from the Real
Estate Account into a "comparable annuity" 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, and remaining guaranteed period.
We'll process your transfer on the business day we receive your request. You
can also choose
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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. 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 that is on or after the transfer date. You can switch
between the annual and monthly income change methods, and the switch will go
into effect on the following March 31.
Annuity Payments
The amount of annuity payments we pay you or your beneficiary (annuitant) will
depend upon the number and 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.
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, 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
described 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 Account accumulation 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 percent, 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
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this Account. Annuitants bear no mortality risk under their contracts--actual
mortality experience will not reduce annuity payments after they have started.
TIAA may change the mortality assumptions used to determine the number of
annuity units payable for any future accumulations converted to provide annuity
payments.
The number of annuity units payable under an income change method under your
contract will be reduced by the number of annuity units you transfer out of
that income change method under your contract. The number of annuity units
payable will be increased by any internal transfers you make to that income
change method under your contract.
Value of Annuity Units: The Real Estate Account's annuity unit value is
calculated separately for each income change method for each business day and
for 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 percent assumed investment
return. In general, your payments will increase if the performance of the
Account is greater than 4 percent and decrease if the value is less than 4
percent. 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 percent 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 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.
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.
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Death Benefits
Availability; Choosing Beneficiaries
TIAA may pay death benefits if you or your annuity partner die during the
accumulation or annuity period. When you purchase your annuity contract, you
name one or more beneficiaries to receive the death benefit if you die. You can
change your beneficiaries anytime before you die, and, unless you instruct
otherwise, your annuity partner can do the same after your death.
Your Spouse's Rights
Your choice of beneficiary for death benefits may, in some cases, be subject to
the consent of your spouse. Similarly, if you are married at the time of your
death, federal law may require a portion of the death benefit be paid to your
spouse even if you have named someone else as beneficiary. If you die without
having named any beneficiary, any portion of your death benefit not payable to
your spouse will go to your estate.
Amount of Death Benefit
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.
Methods of Payment of Death Benefits
Generally, you can choose the method by which we'll pay the death benefit. 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 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.
Payments During the 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 the
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death benefit value must be at least $5,000); and
o the Minimum Distribution Option (also called the TIAA-CREF Savings and
Investment Plan), which is available only to beneficiaries who must
receive income under the Internal Revenue Code's minimum distribution
requirements. It operates in much the same way as the MDO annuity income
option. 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.
Payments During the Annuity Period: If you and your annuity partner die during
the annuity period, your beneficiary can choose to receive any 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.
Ordinarily, death benefits are subject to federal estate tax. For more detailed
information on death benefits, please contact TIAA.
- --------------------------------------------------------------------------------
Taxes
This section offers general information concerning federal taxes. It doesn't
cover every situation. Tax treatment 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.
Taxes In General
During the accumulation period, Real Estate Account premiums paid in before-tax
dollars, employer contributions and all earnings are not taxed until they're
withdrawn. Annuity payments, single-sum withdrawals, systematic withdrawals,
and death benefits are usually taxed as ordinary income. Premiums paid in
after-tax dollars aren't taxable when withdrawn, but earnings are taxable.
Death benefits are usually also subject to federal estate and state estate or
inheritance taxation. Generally, transfers between qualified retirement plans
are not taxed.
Generally, contributions you can make under an employer's plan are limited by
federal tax law. Employee voluntary salary reduction contributions to 403(b)
and 401(k) plans are limited to $10,000 per year. Certain long-term employees
may be able to defer up to
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$13,000 per year in a 403(b) plan. Contributions to IRAs and Roth IRAs, other
than rollover contributions, cannot generally exceed $2,000 per year.
Early Distributions
If you want to withdraw funds or begin receiving 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 a 10 percent early distribution tax on the taxable amount. You
won't have to pay this tax in certain circumstances. Consult your tax advisor
for more information.
Minimum Distribution Requirements
In most cases, payments have to begin by April 1 of the year after the year you
reach age 70-1/2, or if later, retirement. (For IRAs, payments must begin by
April 1 of the year after the 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 even if you do not elect to receive them.
In addition, if you don't begin distributions on time, you may be subject to a
50 percent excise tax on the amount you should have received but did not. Roth
IRAs are generally not subject to these rules and do not require that any
distributions be made prior to your death.
[SIDEBAR]
How the Real Estate Account is treated for tax purposes
The Account is not a separate taxpayer for purposes of the Internal Revenue
Code--its earnings are taxed as part of TIAA's operations. Although 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.
[END SIDEBAR]
Withholding on Distributions
If we send an "eligible rollover" distribution directly to you, federal law
requires us to withhold 20 percent from the taxable portion. If we roll over
such a distribution directly to an IRA or to an employer plan that is similar
to the plan making the distribution, we do not withhold any federal income tax.
The 20 percent withholding also does not apply to certain "non-eligible"
rollover distributions such as payments from IRAs, lifetime annuity payments,
or minimum distribution payments.
For the taxable portion of non-eligible rollover distributions, we will usually
withhold federal income taxes unless you tell us not to and you are eligible to
avoid withholding. Nonresident aliens who pay U.S. taxes are subject to
different withholding rules. Contact TIAA or your tax advisor for more
information.
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General Matters
Making Choices and Changes
You may have to make certain choices or changes (e.g., changing your income
option, making a cash withdrawal) by written notice satisfactory to us and
received at our home office. 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 has died 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. (You
can establish a PIN by calling us.) Both will lead you through the transaction
process and will use reasonable procedures to confirm that instructions given
are genuine. If we use such procedures, we are not responsible for incorrect or
fraudulent transactions. 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.
We can suspend or terminate your ability to transact by telephone or over the
Internet at any time, for any reason.
Voting Rights
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.
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
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these documents, you may call us toll-free at 800 842-2733, extension 5509, or
write us.
Miscellaneous Policies
If You're Married: If you're married, you may be required by law or your
employer's plan to get advance written consent from your spouse before we make
certain transactions for you. If you're married at your annuity starting date,
you may also be required by law or your employer's plan to choose an income
option that provides survivor annuity income to your spouse, unless he or she
waives that right in writing. There are limited exceptions to the waiver
requirement.
Texas Optional Retirement Program Restrictions: If you're in the Texas Optional
Retirement Program, 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.
Assigning Your Contract: Generally, neither you nor your beneficiaries can
assign your ownership of a TIAA retirement contract to anyone else.
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 Internal Revenue Code, we'll refund them to your employer as long as we're
requested to do so (in writing) before you start receiving annuity income. Any
time there's a question about premium refunds, TIAA will rely on information
from your employer. If you've withdrawn or transferred the amounts involved
from your accumulation, we won't refund them.
Errors or Omissions: We reserve the right to correct any errors or omissions
on any form, report, or statement that we send you.
Payment to an Estate, Guardian, Trustee, etc.: We reserve the right to pay in
one sum the commuted value of any benefits due an estate, corporation,
partnership, trustee, or other entity not a natural person. Neither TIAA nor the
Account will be responsible for the conduct of any executor, trustee, guardian,
or other third party to whom payment is made.
Benefits Based on Incorrect Information: If the amounts of benefits provided
under a contract were based on information that is incorrect, benefits will be
recalculated on the basis of the correct data. If the Account has overpaid or
underpaid, 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 we have not received this proof after we request it in writing, the
Account will have the right to make reduced payments or to withhold payments
entirely until such proof is received.
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Distributor
The annuity 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 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 for distributing the contracts. Anyone distributing the contracts must be
a registered representative of Services or TPIS, whose main offices are both at
730 Third Avenue, New York, NY 10017-3206.
- --------------------------------------------------------------------------------
State Regulation
TIAA, the Real Estate Account, and the contracts are subject to regulation by
the New York Insurance Department (NYID) as well as by the insurance regulatory
authorities of certain other states and jurisdictions.
TIAA and the Real Estate Account must file with the NYID both quarterly and
annual statements. The Account's books and assets are subject to review and
examination by the NYID at all times, and a full examination into the affairs
of the Account is made at least every five years. In addition, a full
examination of the Real Estate Account operations is usually conducted
periodically by some other states.
- --------------------------------------------------------------------------------
Legal Matters
All matters involving state law and relating 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. Sutherland Asbill &
Brennan LLP, Washington, D.C., have passed upon legal matters relating to the
federal securities laws.
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Experts
Ernst & Young LLP, independent auditors, have audited our (i) consolidated
financial statements and financial statement schedule at December 31, 1998 and
1997, and for the years then ended, (ii) statement of revenues and certain
expenses of The Colorado for the year ended December 31, 1997, (iii) statement
of revenues and certain expenses of Bay Court at Harbour Pointe for the year
ended December 31, 1997, (iv) statement of revenues and certain expenses of
Indian Creek Apartments for the year ended December 31, 1997, and (v) statement
of revenues and certain expenses of the Bent Tree Apartments for the year ended
December 15, 1997, respectively, as set forth in their reports. We have included
these financial statements and schedule in this prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's reports, given on
their authority as experts in accounting and auditing.
- --------------------------------------------------------------------------------
Additional Information
Information Available at the SEC
The Account has filed with the SEC a registration statement under the
Securities Act of 1933 which contains this prospectus and additional
information related to the offering described in this prospectus. The Account
also files annual, quarterly, and current reports, along with other
information, with the SEC, as required by the Securities Exchange Act of 1934.
You may read and copy the full registration statement, and any reports and
information filed with the SEC for the Account, at the SEC's public reference
room at 450 Fifth Street, N.W., Room 1024, Washington, DC 20549. This
information can also be obtained through the SEC's website on the Internet
(http://www.sec.gov).
Other Reports to Participants
TIAA will mail to each participant in the Real Estate Account periodic reports
providing information relating to their accumulations in the Account, including
premiums paid, number and value of accumulations, and withdrawals or transfers
during the period, as well as such other information as may be required by
applicable law or regulations.
Further information may be obtained from TIAA at 730 Third Avenue, New York, NY
10017-3206.
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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 into this prospectus 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.
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Index to Financial Statements
<TABLE>
<S> <C>
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-15
Proforma Condensed Financial Statements:
Proforma Condensed Statement of Assets and Liabilities ................... F-19
Proforma Condensed Statement of Operations ............................... F-20
Notes to Proforma Condensed Financial Statements ......................... F-21
The Colorado:
Report of Independent Auditors ........................................... F-22
Statement of Revenues and Certain Expenses ............................... F-23
Notes to Statement of Revenues and Certain Expenses ...................... F-24
Bay Court at Harbour Pointe:
Report of Independent Auditors ........................................... F-25
Statement of Revenues and Certain Expenses ............................... F-26
Notes to Statement of Revenues and Certain Expenses ...................... F-27
Indian Creek Apartments:
Report of Independent Auditors ........................................... F-28
Statement of Revenues and Certain Expenses ............................... F-29
Notes to Statement of Revenues and Certain Expenses ...................... F-30
Bent Tree Apartments:
Report of Independent Auditors ........................................... F-31
Statement of Revenues and Certain Expenses ............................... F-32
Notes to Statement of Revenues and Certain Expenses ...................... F-33
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
Condensed Unaudited Statutory-Basis Financial Statements ................. F-34
Supplemental Information to Condensed Unaudited Statutory-Basis Financial
Statements .............................................................. F-35
</TABLE>
F-1
<PAGE>
[TIAA-CREF
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 accompanying financial statements 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 audit 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>
[letterhead of Ernst & Young LLP]
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 statements 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, 1998 and 1997, and the related consolidated
statements of operations, changes in net assets and cash flows for the two
years 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 audits. The
consolidated financial statements for 1996 were audited by other auditors whose
report dated February 6, 1997 expressed an unqualified opinion on those
consolidated financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, 1998, 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 audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Account as of
December 31, 1998 and 1997, the results of its operations and the changes in
its net assets and its cash flows for the two years then ended, in conformity
/s/ Ernst & Young LLP
February 5, 1999
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
F-3
<PAGE>
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
--------------- ------------
<S> <C> <C>
ASSETS
Investments, at value:
Real estate properties
(cost: $775,801,883 and $510,096,015)....................... $ 820,211,240 $521,284,091
Marketable securities
(cost: $402,041,089 and $270,910,952)....................... 391,033,557 280,002,042
Cash .......................................................... 572,343 407,598
Other ......................................................... 17,786,291 14,067,094
-------------- ------------
TOTAL ASSETS 1,229,603,431 815,760,825
-------------- ------------
LIABILITIES
Payable for securities transactions ........................... -- 10,463
Accrued real estate property level expenses and taxes ......... 11,432,529 10,343,593
Security deposits held ........................................ 1,890,423 1,305,958
-------------- ------------
TOTAL LIABILITIES 13,322,952 11,660,014
-------------- ------------
MINORITY INTEREST 19,913,592 18,282,096
-------------- ------------
NET ASSETS
Accumulation Fund ............................................. 1,167,591,317 772,059,676
Anuity Fund ................................................... 28,775,570 13,759,039
-------------- ------------
TOTAL NET ASSETS $1,196,366,887 $785,818,715
============== ============
THOUSANDS OF ACCUMULATION UNITS OUTSTANDING--Notes 6
and 7 ........................................................ 8,833,911 6,313,015
========= =========
NET ASSET VALUE, PER ACCUMULATION UNIT--Note 6 ................. $132.17 $122.30
======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
-------------- ---------- ----------
<S> <C> <C> <C>
INVESTMENT INCOME
Real estate income, net:
Rental income ............................................. $ 81,009,203 $ 44,342,342 $10,951,183
-------------- ------------ -----------
Real estate property level expenses and taxes:
Operating expenses ....................................... 17,339,706 9,024,240 2,116,334
Real estate taxes ........................................ 9,103,637 4,472,311 1,254,163
-------------- ------------ -----------
Total real estate property level expenses and taxes 26,443,343 13,496,551 3,370,497
-------------- ------------ -----------
Real estate income, net 54,565,860 30,845,791 7,580,686
Interest .................................................. 15,588,829 12,079,600 5,570,907
Dividends ................................................. 8,354,899 4,406,679 456,579
-------------- ------------ -----------
TOTAL INCOME 78,509,588 47,332,070 13,608,172
-------------- ------------ -----------
Expenses--Note 3:
Investment advisory charges ............................... 2,999,113 1,647,689 642,042
Administrative and distribution charges ................... 2,498,376 1,368,501 437,894
Mortality and expense risk charges ........................ 675,450 400,925 70,535
Liquidity guarantee charges ............................... 101,655 109,430 5,325
-------------- ------------ -----------
TOTAL EXPENSES 6,274,594 3,526,545 1,155,796
-------------- ------------ -----------
INVESTMENT INCOME, NET 72,234,994 43,805,525 12,452,376
-------------- ------------ -----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain (loss) on marketable securities .......... (5,258,000) 1,076,725 141,439
-------------- ------------ -----------
Net change in unrealized appreciation on:
Real estate properties ................................... 33,221,281 10,234,316 953,760
Marketable securities .................................... (20,098,622) 6,836,012 2,235,340
-------------- ------------ -----------
Net change in unrealized appreciation on investments 13,122,659 17,070,328 3,189,100
-------------- ------------ -----------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS 7,864,659 18,147,053 3,330,539
-------------- ------------ -----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS BEFORE MINORITY INTEREST 80,099,653 61,952,578 15,782,915
Minority interest in net increase in net assets
resulting from operations ................................ (3,487,991) (1,881,178) --
-------------- ------------ -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 76,611,662 $ 60,071,400 $15,782,915
============== ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1998 1997 1996
---------------- ------------ -----------
<S> <C> <C> <C>
FROM OPERATIONS
Investment income, net ................................... $ 72,234,994 $ 43,805,525 $ 12,452,376
Net realized gain (loss) on marketable securities ........ (5,258,000) 1,076,725 141,439
Net change in unrealized appreciation on investments ..... 13,122,659 17,070,328 3,189,100
Minority interest in net increase in net assets
resulting from operations .............................. (3,487,991) (1,881,178) --
---------------- ------------- ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 76,611,662 60,071,400 15,782,915
---------------- ------------- ------------
Premiums ................................................. 91,248,578 52,344,830 9,665,306
TIAA seed money withdrawn--Note 1 ........................ (76,666,109) (37,915,190) (7,294,134)
Net participant transfers from TIAA--General Account ..... 26,568,616 43,681,385 19,203,309
Net participant transfers from CREF Accounts ............. 310,999,448 307,493,199 213,306,573
Annuity and other periodic payments ...................... (3,209,761) (1,499,054) (336,103)
Withdrawals .............................................. (14,195,234) (7,696,711) (864,480)
Death benefits ........................................... (809,028) (356,197) (26,678)
---------------- ------------- ------------
NET INCREASE IN NET ASSETS RESULTING
FROM PARTICIPANT TRANSACTIONS 333,936,510 356,052,262 233,653,793
---------------- ------------- ------------
NET INCREASE IN NET ASSETS 410,548,172 416,123,662 249,436,708
NET ASSETS
Beginning of year ........................................ 785,818,715 369,695,053 120,258,345
---------------- ------------- ------------
End of year .............................................. $1,196,366,887 $ 785,818,715 $369,695,053
================ ============= ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1998 1997 1996
--------------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations ..... $ 76,611,662 $ 60,071,400 $ 15,782,915
Adjustments to reconcile net increse in net assets
resulting from operations to net cash used in
operating activities:
Increase in investments ................................. (409,958,664) (433,355,406) (249,948,493)
Decrease (increase) in receivable from
securities transactions ............................... -- 47,480,000 (24,330,000)
Increase in other assets ................................ (3,719,197) (7,087,554) (5,331,140)
Increase (decrease) in payable
for securities transactions ........................... (10,463) (51,344,156) 28,566,584
Increase in accrued real estate property
level expenses and taxes .............................. 1,088,936 5,021,258 5,191,294
Increase in security deposits held ...................... 584,465 1,305,958 --
Increase in minority interest ........................... 1,631,496 18,282,096 --
--------------- -------------- --------------
NET CASH USED IN
OPERATING ACTIVITIES (333,771,765) (359,626,404) (230,068,840)
--------------- -------------- --------------
CASH FLOWS FROM PARTICIPANT TRANSACTIONS
Premiums ................................................. 91,248,578 52,344,830 9,665,306
TIAA seed money withdrawn--Note 1 ........................ (76,666,109) (37,915,190) (7,294,134)
Net participant transfers from TIAA--General Account ..... 26,568,616 43,681,385 19,203,309
Net participant transfers from CREF Accounts ............. 310,999,448 307,493,199 213,306,573
Annuity and other periodic payments ...................... (3,209,761) (1,499,054) (336,103)
Withdrawals .............................................. (14,195,234) (7,696,711) (864,480)
Death benefits ........................................... (809,028) (356,197) (26,678)
--------------- -------------- --------------
NET CASH PROVIDED BY
PARTICIPANT TRANSACTIONS 333,936,510 356,052,262 233,653,793
--------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH 164,745 (3,574,142) 3,584,953
CASH
Beginning of year ........................................ 407,598 3,981,740 396,787
--------------- -------------- --------------
End of year .............................................. $ 572,343 $ 407,598 $ 3,981,740
=============== ============== ==============
</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, LLC, 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. Teachers REA III, LLC, a
wholly-owned subsidiary of the Account, began operations in July 1998 and holds
one property in Florida.
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 at 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
were 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. At
December 31, 1998, all of TIAA's Accumulation Units have been withdrawn.
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.
F-8
<PAGE>
TIAA REAL ESTATE ACCOUNT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1--Organization (Continued)
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.
Basis of Presentation: The accompanying consolidated financial statements
include the Account, Teachers REA, LLC, Teachers REA II, Inc. and Teachers REA
III, LLC, 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
F-9
<PAGE>
TIAA REAL ESTATE ACCOUNT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2--Significant Accounting Policies (Continued)
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.
F-10
<PAGE>
TIAA REAL ESTATE ACCOUNT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. The charges for
such services, for the year ended December 31, 1998 amounted to $855,810
($507,829 in 1997) for investment advisory expenses and $102,953 ($0 for 1997)
for administrative expenses which are recorded accordingly 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, 1998 been acquired at the beginning of the period (January
1, 1998), rental income and real estate property level expenses and taxes for
the year ended December 31, 1998 would have increased by approximately
$14,134,000 and $4,182,000 respectively. In addition, interest income for the
year ended December 31, 1998 would have decreased by approximately $10,059,000.
Accordingly, the total proforma effect on the Account's net investment income
for the year ended December 31, 1998 would have been a decrease of
approximately $107,000, if the real estate properties acquired during the year
ended December 31, 1998 had been acquired at the beginning of the period.
Several of these properties had little or no rental activity prior to purchase
by the Account because they were newly or recently constructed. In such cases,
there was little or no net real estate income to offset the proforma decline in
interest income, resulting in a net decrease in net investment income from this
calculation. This decrease is not indicative of expected future results because
all of these properties were substantially rented at the time of purchase.
F-11
<PAGE>
TIAA REAL ESTATE ACCOUNT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5--Leases
The Account's real estate properties are leased to tenants under operating
lease agreements which expire on various dates through 2021. Aggregate minimum
annual rentals for the properties owned, excluding short-term residential
leases, are as follows:
<TABLE>
<CAPTION>
Years Ending
December 31
-----------
<S> <C>
1999 $ 52,909,000
2000 50,213,000
2001 44,308,000
2002 40,265,000
2003 32,737,000
Thereafter 113,865,000
------------
Total $334,297,000
============
</TABLE>
Certain leases provide for additional rental amounts based upon the recovery of
actual operating expenses in excess of specified base amounts.
F-12
<PAGE>
TIAA REAL ESTATE ACCOUNT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6--Condensed Consolidated Financial Information
Selected condensed consolidated financial information for an Accumulation Unit
of the Account is presented below.
<TABLE>
<CAPTION>
For the Years Ended
December 31, July 3, 1995
------------------------------------------- (Commencement
of Operations) to
1998 1997 1996 December 31, 1995 (1)
----------- ---- ---- ---------------------
<S> <C> <C> <C> <C>
Per Accumulation Unit Data: ...........................
Rental income ......................................... $ 10.425 $ 7.288 $ 6.012 $ 0.159
Real estate property level expenses and taxes ......... 3.403 2.218 1.850 0.042
-------- -------- -------- ---------
Real estate income, net 7.022 5.070 4.162 0.117
Dividends and interest ................................ 3.082 2.709 3.309 2.716
-------- -------- -------- ---------
Total income 10.104 7.779 7.471 2.833
Expense charges (2) ................................... 0.808 0.580 0.635 0.298
-------- -------- -------- ---------
Investment income, net 9.296 7.199 6.836 2.535
Net realized and unrealized
gain on investments ................................. .579 3.987 1.709 0.031
-------- -------- -------- ---------
Net increase in
Accumulation Unit Value ............................. 9.875 11.186 8.545 2.566
Accumulation Unit Value:
Beginning of period .................................. 122.297 111.111 102.566 100.000
-------- -------- -------- ---------
End of period ........................................ $132.172 $122.297 $111.111 $ 102.566
======== ======== ======== =========
Total return .......................................... 8.07% 10.07% 8.33% 2.57%
Ratios to Average Net Assets:
Expenses (2) ......................................... 0.64% 0.58% 0.61% 0.30%
Investment income, net ............................... 7.34% 7.25% 6.57% 2.51%
Portfolio turnover rate:
Real estate properties ............................... 0% 0% 0% 0%
Securities ........................................... 24.54% 7.67% 15.04% 0%
Thousands of Accumulation Units .......................
outstanding at end of period ......................... 8,834 6,313 3,296 1,172
</TABLE>
(1) The percentages shown for this period are not annualized.
(2) Expense charges per Accumulation Unit and the Ratio of Expenses to Average
Net Assets include the portion of expenses related to the 10% minority
interest in Light Street and exclude real estate property level expenses
and taxes. If the real estate property level expenses and taxes were
included, the expense charge per Accumulation Unit for the year ended
December 31, 1998 would be $4.211 ($2.798 and $2.485 for the years ended
December 31, 1997 and 1996 respectively, 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, 1998 would be 3.32% (2.82% and
2.39% for the years ended December 31, 1997 and 1996 respectively, and
0.34% for the period July 3, 1995 through December 31, 1995).
F-13
<PAGE>
TIAA REAL ESTATE ACCOUNT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7--Accumulation Units
Changes in the number of Accumulation Units outstanding were as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------------------------
1998 1997 1996
---------- ------- -------
<S> <C> <C> <C>
Accumulation Units:
Credited for premiums ........................ 511,462 448,822 89,841
Credited for transfers, net disbursements and
amounts applied to the Annuity Fund ......... 2,009,434 2,568,407 2,033,447
Outstanding:
Beginning of year ........................... 6,313,015 3,295,786 1,172,498
---------- --------- ---------
End of year .................................. 8,833,911 6,313,015 3,295,786
========== ========= =========
</TABLE>
Note 8--Commitments
During the normal course of business, the Account enters into discussions and
agreements to purchase or sell real estate properties. As of December 31, 1998,
the Account had an outstanding commitment to purchase one real estate property
totaling approximately $37.3 million, and an outstanding commitment to sell one
real estate property totaling approximately $31.8 million. The sale transaction
was closed in January, 1999.
F-14
<PAGE>
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
December 31, 1998
REAL ESTATE PROPERTIES--67.71%
<TABLE>
<CAPTION>
Location/Description Value
- -------------------- -----
<S> <C>
Arizona:
Southbank Building -- Office building ....................... $13,000,000
California:
IDI California Portfolio -- Industrial building ............. 35,668,791
Ontario Industrial Property -- Industrial building .......... 24,433,584
Metro Center Office Park -Office building ................... 30,056,741(2)
Eastgate Distribution Center -- Industrial building ......... 12,700,000
Westcreek -- Apartments ..................................... 14,554,494
Colorado:
Araphoe Park East -- Industrial building .................... 11,500,000
Lodge at Willow Creek -- Apartments ......................... 28,500,000
Monte Vista -- Apartments ................................... 19,500,000
Florida:
Westinghouse -- Industrial building ......................... 6,200,000
Plantation Grove -- Shopping center ......................... 7,200,000
The Greens at Metrowest -- Apartments ....................... 14,300,000
Golfview -- Apartments ...................................... 28,010,000
Corporate Center at Sawgrass -- Office building ............. 14,000,000
Royal St. George -- Apartments .............................. 16,500,000
Georgia:
Brixworth -- Apartments ..................................... 16,800,000
Illinois:
Woodcreek Business Park -- Industrial building .............. 6,800,000
Glenpointe Business Park -- Industrial building ............. 15,400,000
Rockrun Business Park -- Industrial building ................ 9,325,000
Parkview Plaza -- Office building ........................... 52,106,591(2)
Rolling Meadows -- Shopping center .......................... 12,650,000
Columbia Center III -- Office building ...................... 41,000,000
Kentucky:
IDI Kentucky Portfolio -- Industrial building ............... 24,651,154
Iowa:
Interstate Acres -- Industrial building ..................... 14,369,742
Maryland:
Saks Distribution Center -- Industrial building ............. 29,900,000
Fedex Distribution Facility -- Industrial building .......... 7,828,025
Longview Executive Park -- Office building .................. 27,400,000(2)
Massachusetts:
Two Newton Center -- Office building ........................ 19,600,000(2)
Michigan:
Indian Creek -- Apartments .................................. 17,003,388
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
Location/Description Value
- -------------------- -----
<S> <C>
Minnesota:
Interstate Crossing -- Industrial building .................... $ 6,361,020
River Road Distribution Center -- Industrial building ......... 4,200,000
New Jersey:
371 Hoes Lane -- Office building .............................. 15,614,856
Nevada:
UPS Distribution Facility -- Industrial building .............. 10,989,393
North Carolina:
Lynwood Collection -- Shopping center ......................... 7,500,000
Millbrook Collection -- Shopping center ....................... 7,300,000
Ohio:
Northmark Business Center -- Office building .................. 12,632,603 (2)
Bent Tree -- Apartments ....................................... 14,412,235
Oregon:
Five Centerpointe -- Office building .......................... 18,703,502 (2)
Pennsylvania:
Lincoln Woods -- Apartments ................................... 22,700,000
Texas:
Butterfield Industrial Park -- Industrial building ............ 4,850,000 (1)
The Crest at Shadow Mountain -- Apartments .................... 9,500,000
The Legends at Chase Oaks -- Apartments ....................... 29,200,000
Utah:
USF&G Building -- Office building ............................. 8,800,224 (2)
Virginia:
Fairgate at Ballston -- Office building ....................... 28,725,524 (2)
River Oaks -- Shopping center ................................. 12,600,000
Washington:
The Bay Court at Harbour Pointe -- Apartments ................. 35,164,373
---------------
TOTAL REAL ESTATE PROPERTIES (Cost $775,801,883)............... 820,211,240
---------------
</TABLE>
(1) Leasehold interest only.
(2) The full fair value of this property is reflected; however, the Account
only has a 90% interest in the property. The minority partner in Light
Street has the remaining 10% interest in the property.
F-16
<PAGE>
MARKETABLE SECURITIES--32.29%
REAL ESTATE INVESTMENT TRUSTS--8.98%
<TABLE>
<CAPTION>
Shares Issuer Value
------- ------ -----
<S> <C> <C>
89,900 AMB Property Corporation Series A .......................... 2,225,025
200,000 Archstone Communities Tr (Series C) Pf ..................... 5,100,000
60,000 Avalon Bay Communities, Inc. ............................... 2,055,000
30,000 Avalon Bay Communities, Inc. Pfd Series F .................. 759,375
170,000 Bradley Real Estate, Inc. .................................. 3,485,000
235,000 Brandywine Realty Trust .................................... 4,200,625
80,000 Camden Property Trust ...................................... 2,080,000
200,000 Carramerica Realty Corporation, Pfd Series B ............... 4,500,000
60,000 Centerpoint Properties Corp. ............................... 2,028,750
95,000 Colonial Properties Trust .................................. 2,529,375
260,000 Cornerstone Properties, Inc. ............................... 4,062,500
125,000 Corporate Office Properties Trust, Inc. .................... 890,625
90,000 Developers Diversified Realty .............................. 2,126,250
140,000 Equity Office Properties Trust ............................. 3,360,000
200,000 Equity Office Properties Trust Pfd Series A ................ 5,100,000
130,000 Equity Residential Properties Trust ........................ 5,256,875
100,000 Equity Residential Properties Trust, Pfd Series G .......... 2,050,000
100,000 Equity Residential Properties Trust, Pfd Series L .......... 2,206,250
77,966 Excel Legacy Corporate ..................................... 311,864
25,000 Federal Realty Investment Trust Pfd ........................ 598,438
100,000 First Industrial Realty Trust, Inc. Pfd .................... 2,406,250
100,000 Gables Residential Trust, Pfd Series A ..................... 2,318,750
80,000 Hospitality Properties Trust ............................... 1,930,000
68,000 Lasalle Hotel Properties ................................... 705,500
95,000 Macerich Company ........................................... 2,434,375
69,559 New Plan Excel Realty Trust ................................ 1,543,340
100,000 Post Properties, Inc. ...................................... 3,843,750
19,900 Prologis Trust-Pfd Series A ................................ 506,206
130,000 Public Storage, Inc. ....................................... 3,518,125
20,000 Rouse Company .............................................. 550,000
210,000 Simon Debartolo Group, Inc. ................................ 5,985,000
100,000 Spieker Properties, Inc. ................................... 3,462,500
80,000 Starwood Hotels & Resorts Trust ............................ 1,815,000
85,000 Storage USA, Inc. .......................................... 2,746,563
150,000 Taubman Centers, Inc ....................................... 2,062,500
35,000 Taubman Centers, Inc Pfd Series A .......................... 770,000
40,000 Tower Realty Trust, Inc. ................................... 805,000
132,000 Trinet Corporate Realty Trust, Inc. ........................ 3,531,000
26,000 Trinet Corporate Realty Trust, Inc., Pfd Series B .......... 611,000
100,000 United Dominion Realty Trust, Inc .......................... 2,537,500
106,000 Urban Shopping Centers, Inc. ............................... 3,471,500
50,000 Vornado Realty Trust, Pfd Series A ......................... 2,425,000
135,000 Weeks Corp. ................................................ 3,805,312
---------
TOTAL REAL ESTATE INVESTMENT TRUSTS (Cost $119,704,512)................ 108,710,123
-----------
</TABLE>
F-17
<PAGE>
CORPORATE BONDS--0.25%
<TABLE>
<CAPTION>
Principal Issuer, Coupon and Maturity Date Value
---------- -------------------------------- -----
<S> <C> <C>
$3,000,000 International Paper
6.87% 06/17/99 ...................... $ 3,021,660
--------------
TOTAL CORPORATE BONDS (Cost $3,040,800)............... 3,021,660
--------------
GOVERNMENT AGENCIES--13.97%
10,546,000 Federal Home Loan Banks
5.00% 01/8/99 ....................... 10,535,220
73,420,000 Federal Home Loan Mortgage Corporation
4.25% 01/4/99 ....................... 73,383,290
22,555,000 Federal Home Loan Mortgage Corporation
5.01% 01/22/99 ...................... 22,490,905
36,000,000 Federal National Mortgage Association
5.05% 01/7/99 ....................... 35,968,500
26,945,000 Federal National Mortgage Association
5.00% 02/9/99 ....................... 26,803,690
--------------
TOTAL GOVERNMENT AGENCIES (Amortized cost $169,187,575) 169,181,605
--------------
COMMERCIAL PAPER--9.09%
15,900,000 Caterpillar Financial Service Corporation
5.45% 02/12/99 ......................... 15,806,560
15,000,000 Ciesco LP
5.15% 02/12/99 ......................... 14,911,850
20,000,000 Corporate Asset Funding Corporation, Inc.
5.35% 01/14/99 ......................... 19,961,112
17,000,000 General Electric Capital Corporation
5.32% 01/19/99 ......................... 16,955,856
8,335,000 Mccormick & Company Incorporated
5.12% 01/5/99 .......................... 8,329,096
2,200,000 Park Avenue Receivables Corporation
5.45% 01/28/99 ......................... 2,191,581
13,455,000 Park Avenue Receivables Corporation
5.60% 01/15/99 ......................... 13,427,417
15,000,000 Penny Funding Corporation
5.15% 01/27/99 ......................... 14,944,650
600,000 SC Johnson & Son Incorporated
5.10% 01/22/99 ......................... 598,196
3,000,000 SC Johnson & Son Incorporated
5.23% 01/15/99 ......................... 2,993,851
--------------
TOTAL COMMERCIAL PAPER (Amortized cost $110,108,202)... 110,120,169
--------------
TOTAL MARKETABLE SECURITIES (Cost $402,041,089)........ 391,033,557
--------------
TOTAL INVESTMENTS--100.00% (Cost $1,177,842,972)....... $1,211,244,797
==============
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE>
TIAA REAL ESTATE ACCOUNT
PROFORMA CONDENSED
STATEMENT OF ASSETS AND LIABILITIES (Unaudited)
December 31, 1998
<TABLE>
<CAPTION>
Proforma
Historical Adjustments Proforma
----------------- ---------------------- -----------------
<S> <C> <C> <C>
ASSETS
Investments, at value:
Real estate properties ................... $ 820,211,240 $ 90,004,733 (a) $ 910,215,973
Marketable securities .................... 391,033,557 (90,004,733)(a) 301,028,824
Cash ...................................... 572,343 -- 572,343
Other ..................................... 17,786,291 -- 17,786,291
-------------- ------------ --------------
TOTAL ASSETS 1,229,603,431 -- 1,229,603,431
-------------- ------------ --------------
LIABILITIES
Accrued real estate property level expenses
and taxes ................................ 11,432,529 -- 11,432,529
Security deposits held .................... 1,890,423 -- 1,890,423
-------------- ------------ --------------
TOTAL LIABILITIES 13,322,952 -- 13,322,952
-------------- ------------ --------------
MINORITY INTEREST 19,913,592 -- 19,913,592
-------------- ------------ --------------
NET ASSETS
Accumulation Fund ......................... 1,167,591,317 -- 1,167,591,317
Annuity Fund .............................. 28,775,570 -- 28,775,570
-------------- ------------ --------------
TOTAL NET ASSETS $1,196,366,887 -- $1,196,366,887
============== ============ ==============
</TABLE>
See notes to proforma condensed financial statements.
F-19
<PAGE>
TIAA REAL ESTATE ACCOUNT
PROFORMA CONDENSED
STATEMENT OF OPERATIONS (Unaudited)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Proforma
Historical Adjustments Proforma
-------------- ---------------------- ---------------
<S> <C> <C> <C>
INVESTMENT INCOME
Income
Real estate income, net:
Rental income .................................... $ 81,009,203 $ 28,236,511(b) $109,245,714
------------ -------------- ------------
Real estate property level expenses and taxes:
Operating expenses .............................. 17,339,706 6,661,836(b) 24,001,542
Real estate taxes ............................... 9,103,637 3,728,464(b) 12,832,101
------------ -------------- ------------
Total real estate property level expenses and
taxes ........................................... 26,443,343 10,390,300 36,833,643
------------ -------------- ------------
Real estate income, net ........................... 54,565,860 17,846,211 72,412,071
Interest and dividends ............................ 23,943,728 (16,234,910)(c) 7,708,818
------------ -------------- ------------
TOTAL INCOME ....................................... 78,509,588 1,611,301 80,120,889
EXPENSES ........................................... 6,274,594 329,000(d) 6,603,594
------------ -------------- ------------
INVESTMENT INCOME, NET ............................. 72,234,994 1,282,301 73,517,295
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS ............................. 7,864,659 -- 7,864,659
------------ -------------- ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS
BEFORE MINORITY INTEREST ......................... 80,099,653 1,282,301 81,381,954
MINORITY INTEREST .................................. (3,487,991) -- (3,487,991)
------------ -------------- ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ........................ $ 76,611,662 $ 1,282,301 $ 77,893,963
============ ============== ============
</TABLE>
See notes to proforma condensed financial statements.
F-20
<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,
1998 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, 1999 through the date
of this prospectus were purchased as of December 31, 1998. The proforma
condensed statement of operations has been prepared assuming all real estate
properties purchased during the period January 1, 1998 through the date of this
prospectus were purchased as of January 1, 1998.
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 properties purchased during the period January 1,
1999 through the date of this prospectus, assuming such properties were
purchased as of December 31, 1998.
Proforma Condensed Statement of Operations:
(b) To record the rental income and real estate property level expenses of the
real estate properties purchased during the period January 1, 1998 through
the date of this prospectus, assuming such properties were owned for the
period January 1, 1998 through December 31, 1998.
(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, 1998 through the date of
this prospectus had been purchased as of January 1, 1998.
(d) To record additional investment advisory charges which would have been
incurred during 1998, assuming the real estate properties purchased during
the period January 1, 1998 through the date of this prospectus had been
purchased as of January 1, 1998.
F-21
<PAGE>
[letterhead of Ernst & Young LLP]
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees of TIAA
We have audited the statement of revenues and certain expenses of the property
("The Colorado") as described in Note 2 for the year ended December 31, 1997.
The financial statement is the responsibility of the The Colorado'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 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 the The Colorado'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 Colorado, as
described in Note 2, for the year ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
March 26, 1999
F-22
<PAGE>
The Colorado
Statement of Revenues and Certain Expenses
Year ended December 31, 1997
<TABLE>
<S> <C>
Revenues:
Rental income ................................. $5,732,550
Other income .................................. 155,611
Interest income ............................... 32,440
----------
Total revenues ................................. 5,920,601
Certain expenses:
Property operating and maintenance ............ 979,498
Real estate taxes ............................. 1,342,944
Management fees ............................... 85,004
General and administrative .................... 87,578
----------
Total expenses ................................. 2,495,024
----------
Revenues in excess of certain expenses ......... $3,425,577
==========
</TABLE>
See accompanying notes.
F-23
<PAGE>
The Colorado
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 The Colorado (the "Property"). The Property was acquired in
December 1998 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, amortization and advisory
fees.
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
attributable to leases is recognized on a straight line basis over the term of
the respective lease, which are generally one year.
3. Management Agreement
Management services for the Property are provided by Charles H. Greenthal and
Company, Inc.
F-24
<PAGE>
[letterhead of Ernst & Young LLP]
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees of TIAA
We have audited the statement of revenues and certain expenses of the property
("Bay Court at Harbour Pointe") as described in Note 2 for the year ended
December 31, 1997. The financial statement is the responsibility of the Bay
Court at Harbour Pointe'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 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 the Bay Court at Harbour
Pointe'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 Bay Court at Harbour
Pointe, as described in Note 2, for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
March 9, 1999
F-25
<PAGE>
Bay Court at Harbour Pointe
Statement of Revenues and Certain Expenses
Year Ended December 31, 1997
<TABLE>
<S> <C>
Revenues:
Rental income ................................. $3,692,509
Other income .................................. 264,631
----------
Total revenues ................................. 3,957,140
----------
Certain expenses:
Property operating and maintenance ............ 958,505
Real estate taxes ............................. 265,135
Management fees ............................... 138,479
General and administrative .................... 210,286
----------
Total expenses ................................. 1,572,405
----------
Revenues in excess of certain expenses ......... $2,384,735
==========
</TABLE>
See accompanying notes.
F-26
<PAGE>
Bay Court at Harbour Pointe
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 Bay Court at Harbour Pointe (the "Property"). The Property was
acquired in December 1998 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
attributable to leases is recognized on a straight line basis over the term of
the respective lease, which are generally one year.
3. Management Agreement
Management services for the Property were provided by West RS, Inc.. Fees paid
for such services are based on 3.5% of the annual Net Effective Revenue as
defined in the Management Agreement.
F-27
<PAGE>
[letterhead of Ernst & Young LLP]
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees of TIAA
We have audited the statement of revenues and certain expenses of the property
("Indian Creek Apartments") as described in Note 2 for the year ended December
31, 1997. The financial statement is the responsibility of the Indian Creek
Apartments' 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 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 the Indian Creek
Apartments' revenues and expenses.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the revenues and certain expenses of Indian Creek
Apartments, as described in Note 2, for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
October 9, 1998
F-28
<PAGE>
Indian Creek Apartments
Statement of Revenues and Certain Expenses
Year Ended December 31, 1997
<TABLE>
<S> <C>
Revenues:
Rental income ................................. $1,937,984
Other income .................................. 49,944
----------
Total revenues ................................. 1,987,928
----------
Certain expenses:
Property operating and maintenance ............ 309,757
Real estate taxes ............................. 201,448
Management fees ............................... 56,407
General and administrative .................... 161,969
----------
729,581
----------
Revenues in excess of certain expenses ......... $1,258,347
==========
</TABLE>
See accompanying notes.
F-29
<PAGE>
Indian Creek Apartments
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 Indian Creek Apartments (the "Property"). The Property was
acquired in October 1998 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
attributable to leases is recognized on a straight line basis over the term of
the respective lease, which are generally one year.
3. Management Agreement
Management services for the Property were provided by Insignia Financial Group.
Fees paid for such services are based on 2% of monthly rent and 1% of
controllable profit as defined in the Management Agreement.
F-30
<PAGE>
[letterhead of Ernst & Young LLP]
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees of TIAA
We have audited the statement of revenues and certain expenses of the property
("Bent Tree Apartments") as described in Note 2 for the year ended December 15,
1997. The financial statement is the responsibility of the Bent Tree
Apartments' 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 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 the Bay Court Apartments'
revenues and expenses.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the revenues and certain expenses of Bent Tree
Apartments, as described in Note 2, for the year ended December 15, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
December 2, 1998
F-31
<PAGE>
Bent Tree Apartments
Statement of Revenues and Certain Expenses
Year Ended December 15, 1997
<TABLE>
<S> <C>
Revenues:
Rental income ................................. $1,781,237
Other income .................................. 129,254
----------
Total revenues ................................. 1,910,491
----------
Certain expenses:
Property operating and maintenance ............ 267,144
Real estate taxes ............................. 166,226
Management fees ............................... 75,543
General and administrative .................... 127,999
Payroll ....................................... 208,756
----------
Total expenses ............................... 845,668
----------
Revenues in excess of certain expenses ......... $1,064,823
==========
</TABLE>
See accompanying notes.
F-32
<PAGE>
Bent Tree Apartments
Notes to Statement of Revenues and Certain Expenses
December 15, 1997
1. Business
The accompanying statement of revenues and certain expenses relates to the
operations of Bent Tree Apartments (the "Property"). The Property was acquired
in October 1998 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
attributable to leases is recognized on a straight line basis over the term of
the respective lease, which are generally one year.
3. Management Agreement
Management services for the Property were provided by Michelson Realty Company.
Fees paid for such services are generally based on 5% of monthly rent as
defined in the Management Agreement.
F-33
<PAGE>
Teachers Insurance and Annuity Association of America
Condensed Unaudited Financial Statements
(These condensed unaudited financial statements have been derived from
audited financial statements which are available upon request)
TIAA Condensed Balance Sheets
<TABLE>
<CAPTION>
(in thousands)
December 31,
-------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Bonds ...................................................... $ 69,067,549 $63,469,596
Mortgages .................................................. 20,248,446 18,901,926
Real Estate ................................................ 6,099,403 6,434,359
Stocks ..................................................... 1,257,044 965,295
Other long-term investments ................................ 1,513,274 1,018,052
Cash and short-term investments ............................ 511,966 178,852
Investment income due and accrued .......................... 1,181,140 1,230,046
Separate Account assets .................................... 1,965,047 1,340,154
Other assets ............................................... 372,369 257,038
------------ -----------
TOTAL ASSETS $102,216,238 $93,795,318
------------ -----------
LIABILITIES
Policy and contract reserves ............................... $ 87,772,711 $81,149,016
Dividends declared for the following year .................. 1,923,463 1,778,732
Asset Valuation Reserve .................................... 2,454,123 2,338,643
Interest Maintenance Reserve ............................... 936,641 781,272
Separate Account liabilities ............................... 1,965,047 1,265,447
Other liabilities .......................................... 841,044 705,633
------------ -----------
TOTAL LIABILITIES 95,893,029 88,018,743
------------ -----------
CAPITAL AND CONTINGENCY RESERVES
Capital .................................................... 2,500 2,500
------------ -----------
Contingency reserves:
For group life insurance .................................. 11,013 9,846
For investment losses, annuity and insurance mortality, and
other risks ............................................. 6,309,696 5,764,229
------------ -----------
TOTAL CONTINGENCY RESERVES 6,320,709 5,774,075
------------ -----------
TOTAL CAPITAL AND CONTINGENCY RESERVES 6,323,209 5,776,575
------------ -----------
TOTAL LIABILITIES, CAPITAL AND CONTINGENCY RESERVES $102,216,238 $93,795,318
- ---------------------------------------------------------------------------------------------
</TABLE>
F-34
<PAGE>
Teachers Insurance and Annuity Association of America
TIAA Condensed Unaudited Statements of Operations and
Changes in Contingency Reserves
<TABLE>
<CAPTION>
(in thousands)
December 31,
--------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
INCOME
Insurance and annuity premiums and deposits .................... $ 2,957,870 $ 2,844,792
Transfers from CREF, net ....................................... 1,274,152 686,373
Annuity dividend additions ..................................... 2,427,685 2,284,029
Net investment income .......................................... 7,446,656 6,902,123
Supplementary contract consideration ........................... 297,074 227,936
----------- -----------
TOTAL INCOME $14,403,437 $12,945,253
=========== ===========
DISTRIBUTION OF INCOME
Policy and contract benefits ................................... $ 2,413,220 $ 2,138,424
Dividends ...................................................... 3,844,313 3,617,551
Increase in policy and contract reserves ....................... 6,636,704 5,234,590
Operating expenses ............................................. 327,085 272,584
Transfers to Separate Accounts, net ............................ 487,976 543,891
Federal income taxes ........................................... (11,854) 24,194
Other, net ..................................................... (4,639) 307
Increase in contingency reserves from operations ............... 710,632 1,113,712
----------- -----------
TOTAL DISTRIBUTION OF INCOME $14,403,437 $12,945,253
=========== ===========
CHANGES IN CONTINGENCY RESERVES:
From operations ................................................ $ 710,632 $ 1,113,712
Net realized capital gain on investments ....................... 394,727 249,412
Net unrealized capital gain (loss) on investments .............. (171,049) (2,482)
Transfer to the Interest Maintenance Reserve ................... (264,997) (136,512)
Transfers from (to) the Asset Valuation Reserve:
Required formula contribution ................................. (297,442) (205,450)
Net capital (gains) losses absorbed ........................... 181,961 (117,961)
Adjustment down to maximum .................................... -- 119,690
Increase in non-admitted assets other than investments ......... (17,829) 1,200
Change in valuation basis of policy reserves ................... 8,671 (4,657)
Other, net ..................................................... 1,960 8,918
----------- -----------
NET CHANGE IN CONTINGENCY RESERVES 546,634 1,025,870
CONTINGENCY RESERVES AT BEGINNING OF YEAR 5,774,075 4,748,205
----------- -----------
CONTINGENCY RESERVES AT END OF YEAR $ 6,320,709 $ 5,774,075
- --------------------------------------------------------------------------------------------------
</TABLE>
F-35
<PAGE>
Teachers Insurance and Annuity Association of America
Supplemental Information to
Condensed Unaudited Financial Statements
Valuation of Investments: Bonds and short-term investments (debt securities
with maturities of one year or less at the time of acquisition) not in default
are generally stated at amortized cost; medium to highest quality preferred
stocks at cost; common stocks at market value; and all other bond, short-term
and preferred stock investments at the lower of 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. Anticipated prepayments are based on life-to-date payment speeds,
using historical cash flows and internal estimates. 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. Separate Account assets are generally stated at
market value. Seed money investments in the TIAA-CREF Mutual Funds and in new
accounts established by College Retirement Equities Fund (ACREF), a companion
organization, are stated at market value. All investments are stated net of any
permanent impairments, which are determined on an individual asset basis.
Depreciation is generally computed over a 40 year period on the constant yield
method for properties acquired prior to 1991, and on the straight-line method
for properties acquired thereafter.
Additional Information:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
As a percentage of total bond investments:
Below investment grade bonds ........................... 6% 5%
As a percentage of total mortgage investments:
Total mortgage investments in California ............... 17% 20%
Total mortgage investments in office buildings ......... 39% 40%
Total mortgage investments in shopping centers ......... 32% 31%
As a percentage of total real estate investments:
Two states with highest real estate investment ......... California 12% California 11%
Florida 11% Minnesota 11%
TOTAL REAL ESTATE INVESTMENTS IN OFFICE BUILDINGS 64% 62%
- ----------------------------------------------------------------------------------------------
</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, 1998 and 1997, TIAA had
outstanding foreign currency swap contracts with a total notional value of
approximately $654,242,000 and $485,274,000, respectively, foreign currency
forward contracts with a total notional value of approximately $179,820,000 and
$2,274,000, respectively, interest rate swap contracts with a total notional
value of approximately $451,366,000 and $267,755,000, respectively, and
interest rate cap contracts with a total notional value of approximately
$110,270,000 and $5,978,970,000, respectively. At December 31, 1998, TIAA had
no swap options outstanding. At December 31, 1997, TIAA had swap options
outstanding with a total notional value of $170,700,000.
F-36
<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, 66.
President Emeritus, Pomona College. Formerly, President, Pomona College and
American Secretary, Rhodes Scholarship Trust.
Marcus Alexis, 67.
Board of Trustees Professor of Economics and Professor of Management and
Strategy, J.L. Kellogg Graduate School of Management, Northwestern University.
Willard T. Carleton, 64.
Karl L. Eller Professor of Finance, College of Business and Public
Administration, University of Arizona.
Robert C. Clark, 55.
Dean and Royall Professor of Law, Harvard Law School, Harvard University.
Estelle A. Fishbein, 64.
Vice President and General Counsel, The Johns Hopkins University.
Frederick R. Ford, 62.
Executive Vice President and Treasurer Emeritus, Purdue University. Formerly,
Treasurer, Purdue University.
Martin J. Gruber, 61.
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, 61.
Professor, Department of Sociology, and Director, African Diaspora Research
Project, Michigan State University.
Dorothy Ann Kelly, O.S.U., 69.
Chancellor, College of New Rochelle. Formerly, President, College of New
Rochelle.
Robert M. O'Neil, 64.
Professor of Law, University of Virginia and Director, The Thomas Jefferson
Center for the Protection of Free Expression.
Leonard S. Simon, 62.
Vice Chairman, Charter One Financial Inc. Formerly, Chairman, President and
Chief Executive Officer, RCSB Financial, Inc. and Chairman and Chief Executive
Officer, The Rochester Community Savings Bank.
A-1
<PAGE>
Ronald L. Thompson, 49.
Chairman and Chief Executive Officer, Midwest Stamping Co. Formerly, Chairman
and President, The GR Group.
Paul R. Tregurtha, 63.
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, 61.
Chairman, Technology Solutions Company. Formerly, Chairman and Chief Executive
Officer, Bausch & Lomb Inc., and Chairman and Chief Executive Officer, Biggers
Brothers, Inc.
Rosalie J. Wolf, 57.
Treasurer and Chief Investment Officer, The Rockefeller Foundation. Formerly,
Executive Vice President, Sithe Energies, Inc., and Managing Director--Merchant
Banking, Bankers Trust Company.
Officer-Trustees
John H. Biggs, 62.
Chairman, President and Chief Executive Officer, TIAA and CREF.
Martin L. Leibowitz, 62.
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, 56.
Vice President and Treasurer, TIAA and CREF.
Richard L. Gibbs, 51.
Executive Vice President, Finance and Planning, TIAA and CREF.
E. Laverne Jones, 49
Vice President and Corporate Secretary, TIAA and CREF.
A-2
<PAGE>
Appendix B--Glossary
Accumulation: The total value of your accumulation units in the Real Estate
Account.
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. The Account's accumulation unit value
changes daily.
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 the guaranteed period of your annuity ends.
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.
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.
Eligible Institution: A public or private institution in the United States that
is nonproprietary and nonprofit, and whose main purpose is to offer
instruction, conduct research, or serve and support education or research, or
perform ancillary functions for such institutions.
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 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
Separate Account: An investment account legally separated from the general
assets of TIAA, whose income and investment gains and losses are credited to or
charged against its own assets, without regard to TIAA's other income, gains or
losses.
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.
B-1
<PAGE>
How To Reach Us
Our Address
Teachers Insurance and Annuity Association of America
730 Third Avenue
New York, NY 10017-3206
Send all notices, forms, requests, or payments to this address only.
Internet
www.tiaa-cref.org
24 hours a day/seven days a week
Obtain general information (including Real Estate Account performance) about
TIAA-CREF; use Inter/ACT to view personal account information, reallocate
premiums and transfer funds among TIAA and CREF investment options, or to ask
us questions.
Automated Telephone Service
800 842-2252
24 hours a day/seven days a week
Change your allocation; transfer accumulations; get your accumulation unit
values; get TIAA and CREF performance (provided you've received a Real Estate
Account prospectus); confirm last premium paid.
Telephone Counseling Center
800 842-2776
8 a.m. to 11 p.m. ET Monday-Friday
Speak to a consultant about retirement savings and planning; quarterly and
annuity benefits reports; receiving annuity payments and annuity income
options; tax reports.
IRA Enrollment Hotline
800 842-2888
Speak with a service agent about our IRA products.
We can suspend or terminate your ability to transact by telephone or over the
Internet at any time, for any reason.
REPROS-599 [recycle 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 $1,515,152*
Costs of printing and engraving $ 500,000*
Legal fees $ 10,000*
Accounting fees $ 10,000*
----------
TOTAL $1,565,152*
- -----------------
* - Approximate
Item 14. Indemnification of Directors and Officers.
Trustees, officers, and employees of TIAA may be indemnified against
liabilities and expenses incurred in such capacity pursuant to Article Six of
TIAA's bylaws (see Exhibit 3(B)). Article Six provides that, to the extent
permitted by law, TIAA will indemnify any person made or threatened to be made a
party to any action, suit or proceeding by reason of the fact that such person
is or was a trustee, officer, or employee of TIAA or, while a trustee, officer,
or employee of TIAA, served any other organization in any capacity at TIAA's
request. To the extent permitted by law, such indemnification could include
judgments, fines, amounts paid in settlement, and expenses, including attorney's
fees. TIAA has in effect an insurance policy that will indemnify its trustees,
officers, and employees for liabilities arising from certain forms of conduct.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers, or employees of TIAA, pursuant
to the foregoing provision or otherwise, TIAA has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in that Act and is therefore unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment of expenses incurred or paid by a trustee, officer, or employee
in the successful defense of any action, suit or proceeding) is asserted by a
trustee, officer, or employee in connection with the securities being
registered, TIAA will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in that Act and will be governed by the final adjudication of such
issue.
Item 15. Recent Sales of Unregistered Securities.
None.
II-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
(1) Distribution and Administrative Services Agreement by and between
TIAA and TIAA-CREF Individual & Institutional Services, Inc. (as
amended)*
(3) (A) Charter of TIAA (as amended)*
(B) Bylaws of TIAA (as amended)**
(4) (A) Forms of RA, GRA, GSRA, SRA, and IRA Real Estate Account
Contract Endorsements*
(B) Forms of Income-Paying Contracts*
(5) Opinion and Consent of Charles H. Stamm, Esquire
(10) (A) Independent Fiduciary Agreement by and among TIAA, the
Registrant, and Institutional Property Consultants, Inc.
(as amended)***
(B) Custodial Services Agreement by and between TIAA and
Morgan Guaranty Trust Company of New York with
respect to the Real Estate Account*
(23) (A) Opinion and Consent of Charles H. Stamm, Esquire (filed
as Exhibit 5)
(B) Consent of Sutherland Asbill & Brennan LLP
(C) Consent of Ernst & Young LLP
(27) Financial Data Schedule of the Account's
Financial Statements for the year ended December 31, 1998
- -----------------
* - Previously filed and incorporated herein by reference to Post-Effective
Amendment No. 2 to the Account's previous Registration Statement on Form S-1
filed April 30, 1996 (File No. 33-92990).
** - Previously filed and incorporated herein by reference to the Account's Form
10-Q Quarterly Report for the 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)
II-2
<PAGE>
(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.
(4) To provide the full financial statements of TIAA promptly upon
written or oral request.
Following are the full audited financial statements of TIAA.
II-3
<PAGE>
[TIAA LOGO]
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, 1998. 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. 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.
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-basis 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"); this reference to GAAP is required by the
auditors' professional standards. 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.
Statutory accounting is the only basis of accounting recognized by the
Department for regulatory purposes, and 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-4
<PAGE>
[TIAA LOGO] 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 control 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 control 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, comprised entirely of
independent, nonmanagement trustees, meets regularly with management,
representatives of Ernst & Young LLP and internal auditing personnel to review
matters relating to financial reporting, internal control and auditing. In
addition to the annual audit of the TIAA financial statements, the New York
State Insurance Department and other state insurance departments regularly
examine the financial statements of TIAA as part of their periodic corporate
examinations.
/s/ John H. Biggs
------------------------------
Chairman, President and
Chief Executive Officer
/s/ Richard L. Gibbs
------------------------------
Executive Vice President and
Principal Accounting Officer
II-5
<PAGE>
[letterhead of ERNST & YOUNG LLP]
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 sheets of Teachers
Insurance and Annuity Association of America ("TIAA") as of December 31, 1998
and 1997, and the related statutory-basis statements of operations, changes in
contingency reserves, and cash flows for the years 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 audits. TIAA's
financial statements for the year ended December 31, 1996 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
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 1998 and 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, 1998 and 1997, or
the results of its operations or its cash flows for the years then ended.
However, in our opinion, the 1998 and 1997 statutory-basis financial statements
referred to above present fairly, in all material respects, the financial
position of TIAA at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
statutory accounting practices prescribed or permitted by the New York State
Insurance Department.
/s/ Ernst & Young LLP
March 10, 1999
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
II-6
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
STATUTORY-BASIS BALANCE SHEETS
(amounts in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Bonds ................................................. $ 69,067,549 $63,469,596
Mortgages ............................................. 20,248,446 18,901,926
Real estate ........................................... 6,099,403 6,434,359
Stocks ................................................ 1,257,044 965,295
Other long-term investments ........................... 1,513,274 1,018,052
Cash and short-term investments ....................... 511,966 178,852
Investment income due and accrued ..................... 1,181,140 1,230,046
Separate account assets ............................... 1,965,047 1,340,154
Other assets .......................................... 372,369 257,038
------------- ------------
Total Assets $102,216,238 $93,795,318
============= ============
LIABILITIES, CAPITAL AND CONTINGENCY RESERVES
Policy and contract reserves .......................... $ 87,772,711 $81,149,016
Dividends declared for the following year ............. 1,923,463 1,778,732
Asset Valuation Reserve ............................... 2,454,123 2,338,643
Interest Maintenance Reserve .......................... 936,641 781,272
Separate account liabilities .......................... 1,965,047 1,265,447
Other liabilities ..................................... 841,044 705,633
------------- ------------
Total Liabilities 95,893,029 88,018,743
------------- ------------
Capital: 2,500 shares of $1,000 par value common stock
issued and outstanding ............................... 2,500 2,500
------------- ------------
Contingency reserves:
For group life insurance .............................. 11,013 9,846
For investment losses, annuity and insurance mortality,
and other risks ...................................... 6,309,696 5,764,229
------------- ------------
Total Contingency Reserves 6,320,709 5,774,075
------------- ------------
Total Capital and Contingency Reserves 6,323,209 5,776,575
------------- ------------
TOTAL LIABILITIES, CAPITAL AND CONTINGENCY RESERVES $102,216,238 $93,795,318
============= ============
</TABLE>
See notes to statutory-basis financial statements.
II-7
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
STATUTORY-BASIS STATEMENTS OF OPERATIONS
(amounts in thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
INCOME
Insurance and annuity premiums and deposits .......... $ 2,957,870 $ 2,844,792 $ 2,781,827
Transfers from CREF, net ............................. 1,274,152 686,373 366,920
Annuity dividend additions ........................... 2,427,685 2,284,029 2,131,890
Net investment income ................................ 7,446,656 6,902,123 6,525,529
Supplementary contract considerations ................ 297,074 227,936 203,770
------------- ------------ ------------
TOTAL INCOME $14,403,437 $12,945,253 $12,009,936
============= ============ ============
DISTRIBUTION OF INCOME
Policy and contract benefits ......................... $ 2,413,220 $ 2,138,424 $ 1,916,597
Dividends ............................................ 3,844,313 3,617,551 3,399,581
Increase in policy and contract reserves ............. 6,636,704 5,234,590 5,097,213
Operating expenses ................................... 327,085 272,584 249,000
Transfers to separate accounts, net .................. 487,976 543,891 395,686
Federal income taxes ................................. (11,854) 24,194 13,154
Other, net ........................................... (4,639) 307 1,112
Increase in contingency reserves ..................... 710,632 1,113,712 937,593
------------- ------------ ------------
TOTAL DISTRIBUTION OF INCOME $14,403,437 $12,945,253 $12,009,936
============= ============ ============
</TABLE>
See notes to statutory-basis financial statements.
II-8
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
STATUTORY-BASIS STATEMENTS OF CHANGES IN CONTINGENCY RESERVES
(amounts in thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
CHANGES IN CONTINGENCY RESERVES
From operations .............................................. $ 710,632 $1,113,712 $ 937,593
Net realized capital gains on investments .................... 394,727 249,412 163,950
Net unrealized capital gains (losses) on investments ......... (171,049) (2,482) 30,452
Transfers to the Interest Maintenance Reserve ................ (264,997) (136,512) (167,086)
Transfers from (to) the Asset Valuation Reserve:
Required formula contributions .............................. (297,442) (205,450) (246,181)
Net capital (gains) losses absorbed ......................... 181,961 (117,961) (27,872)
Adjustment down to maximum .................................. -- 119,690 --
Decrease (increase) in non-admitted assets,
other than investments. ..................................... (17,829) 1,200 (4,764)
Change in valuation basis of policy reserves ................. 8,671 (4,657) --
Other, net ................................................... 1,960 8,918 8,433
----------- ----------- -----------
NET CHANGE IN CONTINGENCY RESERVES 546,634 1,025,870 694,525
CONTINGENCY RESERVES AT BEGINNING OF YEAR 5,774,075 4,748,205 4,053,680
----------- ----------- -----------
CONTINGENCY RESERVES AT END OF YEAR $6,320,709 $5,774,075 $4,748,205
=========== =========== ===========
</TABLE>
See notes to statutory-basis financial statements.
II-9
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
STATUTORY-BASIS STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH PROVIDED
By operating activities:
Insurance and annuity premiums,
deposits and considerations ...................... $ 3,254,238 $ 3,053,452 $ 2,973,899
Transfers from CREF, net .......................... 1,274,152 686,373 366,920
Annuity dividend additions ........................ 2,427,685 2,284,029 2,131,890
Investment income, net ............................ 7,338,368 6,777,023 6,485,403
------------ ------------ ------------
Total Receipts 14,294,443 12,800,877 11,958,112
------------ ------------ ------------
Policy and contract benefits ...................... 2,410,824 2,143,927 2,084,122
Dividends ......................................... 3,699,582 3,475,557 3,251,329
Operating expenses ................................ 311,460 269,041 247,251
Federal income taxes .............................. 506 27,277 14,985
Transfers to separate accounts, net ............... 486,945 543,933 396,239
Separate account seed money redemptions ........... (76,666) (37,915) (7,387)
Other, net ........................................ 494 (46,076) 48,215
------------ ------------ ------------
Total Disbursements 6,833,145 6,375,744 6,034,754
------------ ------------ ------------
Cash Provided by Operating Activities 7,461,298 6,425,133 5,923,358
------------ ------------ ------------
By investing activities:
Sales and redemptions of bonds and stocks ......... 9,781,071 4,716,915 4,480,206
Repayment of mortgage principal ................... 2,129,896 3,773,723 3,481,965
Sales of real estate .............................. 834,298 1,030,385 834,010
Other, net ........................................ 279,097 258,489 276,394
------------ ------------ ------------
Cash Provided by Investing Activities 13,024,362 9,779,512 9,072,575
------------ ------------ ------------
TOTAL CASH PROVIDED 20,485,660 16,204,645 14,995,933
------------ ------------ ------------
DISBURSEMENTS FOR NEW INVESTMENTS
Investments acquired:
Bonds and stocks .................................. 15,298,648 12,711,227 11,577,235
Mortgages ......................................... 3,704,940 3,152,563 2,761,897
Real estate ....................................... 351,109 310,159 488,543
Other, net ........................................ 797,849 466,926 266,227
------------ ------------ ------------
TOTAL DISBURSEMENTS FOR NEW INVESTMENTS 20,152,546 16,640,875 15,093,902
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND
SHORT-TERM INVESTMENTS 333,114 (436,230) (97,969)
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF YEAR 178,852 615,082 713,051
------------ ------------ ------------
CASH AND SHORT-TERM INVESTMENTS
AT END OF YEAR $ 511,966 $ 178,852 $ 615,082
============ ============ ============
</TABLE>
See notes to statutory-basis financial statements.
II-10
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
December 31, 1998
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 "Permitted Statutory Accounting Practices" and
"Generally Accepted Accounting Principles", within this note.)
The preparation of TIAA's financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. Actual results could differ from those
estimates. The following is a summary of the significant accounting policies
consistently followed by TIAA.
Valuation of Investments: Bonds and short-term investments (debt securities
with maturities of one year or less at the time of acquisition) not in default
are generally stated at amortized cost; medium to highest quality preferred
stocks at cost; common stocks at market value; and all other bond, short-term
and preferred stock investments at the lower of amortized cost or market value.
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. Anticipated prepayments are based on life-to-date prepayment
speeds, using historical cash flows, and internal estimates. 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. Separate account assets are generally
stated at market value. 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-11
<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-12
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(Continued)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES--(Continued)
Non-Admitted Assets: Certain investment balances and corresponding investment
income due and accrued are designated as non-admitted assets by the Department,
based on delinquencies, defaults, and other statutory criteria, and, cannot be
included in life insurance company balance sheets filed with the Department.
Such investment-related non-admitted assets totaled approximately $466,107,000
and $436,405,000 at December 31, 1998 and 1997, respectively. Income on bonds
in default is not accrued and, therefore, is not included in the non-admitted
totals. Certain non-investment assets, such as furniture and fixtures and
various receivables, are also designated as non-admitted assets. Such
non-admitted assets approximated $195,987,000 at December 31, 1998 and
$178,158,000 at December 31, 1997. 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 permitted or approved by the
Department. Reserves are stated at the present value of all future guaranteed
benefits 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. Contributions and adjustments
to the AVR are reported as transfers to or from contingency reserves.
Interest Maintenance Reserve: The Interest Maintenance Reserve ("IMR") is a
liability reserve required by the NAIC which accumulates realized capital gains
and losses resulting from interest rate fluctuations. Such capital gains and
losses are amortized out of the IMR, under the grouped method of amortization,
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 to provide benefits in accordance with
TIAA's charter purpose.
Income and Expenses: Premiums, investment income and expenses are reported as
earned/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 ("Code"). Any non-pension related income, however, was subject to
federal income taxation as unrelated business income. The federal income tax
provisions included in the accompanying statements of operations are based on
taxes actually paid or anticipated to be paid with the tax return filings.
Effective January 1, 1998, as a result of federal legislation, TIAA is no
longer exempt from federal income taxation and is taxed as a stock life
insurance company. Effective for 1998, TIAA will file a consolidated federal
income tax return with its qualifying subsidiary affiliates. The tax sharing
agreement will follow the current reimbursement method, whereby members of the
consolidated group will generally be reimbursed for their losses on a pro-rata
basis by other members of the group to the extent that they have taxable
income, subject to limitations imposed under the Code. The approximate twelve
million dollar federal income tax recoverable for 1998 that is reflected in the
accompanying statement
II-13
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(Continued)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES--(Concluded)
of operations is the amount that is receivable from certain of TIAA's
subsidiaries which generated taxable income, under such tax sharing agreement.
TIAA has not yet prepared or filed its 1998 federal income tax return. In
conjunction with this initial federal income tax return filing, TIAA currently
expects to report a significant net tax loss for 1998, due primarily to
required increases in policy and contract reserves computed for tax reporting
purposes in accordance with the requirements of the Code. Such reserve
increases will reverse over time, thereby increasing TIAA's taxable income in
future years. Under the Code, any tax loss carryforwards will expire after
twenty years, if not previously used.
Permitted Statutory Accounting Practices: Statutory accounting practices
prescribed by the Department include accounting requirements contained 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 which are not prescribed. The Department
permits TIAA to follow certain reporting and disclosure conventions reflected in
these statutory-basis financial statements.
Such reporting and disclosure conventions include the following: (i)
classification of real estate subsidiaries and real estate limited partnerships
in the "Real estate" caption in the accompanying balance sheets, (ii) the
netting of securities lending collateral against the "Cash and short-term
investments" caption in the accompanying balance sheets, (iii) the preceding
federal income taxes disclosure, and (iv) the recognition of permanent
impairments of individual assets.
Generally Accepted Accounting Principles: The Financial Accounting Standards
Board ("FASB") requires that financial statements that are intended to be in
conformity with GAAP should follow all applicable authoritative accounting
pronouncements. As a result, TIAA cannot 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:
- - 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;
- - 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;
- - 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;
- - The "non-admitted" asset designation is not utilized;
- - Policy acquisition costs are deferred and amortized over the lives of the
policies issued rather than being charged to operations as incurred;
- - Policy and contract reserves are based on estimates of expected mortality and
interest rather than being based on statutory mortality and interest
requirements;
- - 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;
- - Long-term bond investments considered to be "available for sale" are carried
at fair value rather than at amortized cost;
- - Deferred tax assets and liabilities are determined based on the differences
between the financial statement amounts and the tax bases of assets and
liabilities rather than not being recognized.
Management believes that the effects of these differences would increase TIAA's
total capital if GAAP were implemented.
Reclassifications: Certain amounts in the 1997 financial statements have been
reclassified to conform with the 1998 presentation.
II-14
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(Continued)
NOTE 3--INVESTMENTS
Securities Investments: At December 31, 1998 and 1997, the carrying values
(balance sheet amounts) and estimated market values of long-term bond
investments, and the gross unrealized gains and losses with respect to such
market values, are shown below:
<TABLE>
<CAPTION>
Gross Gross
Carrying Unrealized Unrealized Estimated
Value Gains Losses Market Value
------------------ ---------------- ------------------ ------------------
<S> <C> <C> <C> <C>
December 31, 1998
- ------------------------------------------
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations ............... $ 23,269,573 $ 8,137,457 $ (618,292) $ 30,788,738
Debt securities issued by foreign
governments ............................. 1,670,480,048 278,650,027 (13,102,912) 1,936,027,163
Corporate securities ..................... 34,143,277,454 2,758,241,791 (90,974,189) 36,810,545,056
Mortgage-backed securities ............... 20,309,833,989 1,143,783,128 (62,707,409) 21,390,909,708
Asset-backed securities .................. 12,920,687,576 463,968,128 (210,450,588) 13,174,205,116
--------------- -------------- -------------- ---------------
$69,067,548,640 $4,652,780,531 $ (377,853,390) $73,342,475,781
=============== ============== ============== ===============
December 31, 1997
- ------------------------------------------
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
--------------- -------------- -------------- ---------------
$63,469,596,034 $4,430,645,947 $ (259,542,472) $67,640,699,509
=============== ============== ============== ===============
</TABLE>
At December 31, 1998 and 1997, approximately 94.5% and 94.6%, respectively, of
the long-term bond portfolio was comprised of investment grade securities. At
December 31, 1998, outstanding forward commitments for future long-term bond
and equity investments approximated $3,106,923,000. Of this, $2,473,692,000 is
scheduled for disbursement in 1999, $174,580,000 in 2000, $155,377,000 in 2001
and $303,274,000 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 $2,587,000 and $2,749,000 at
December 31, 1998 and 1997, 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, 1998, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Estimated
Carrying Value Market Value
------------------ -----------------
<S> <C> <C>
December 31, 1998
- ---------------------------------------------------------
Due in one year or less ................................. $ 625,974,908 $ 634,407,454
Due after one year through five years ................... 7,178,956,866 7,534,037,459
Due after five years through ten years .................. 11,242,906,773 11,898,171,146
Due after ten years ..................................... 16,789,188,528 18,710,744,898
--------------- ---------------
Subtotal .............................. 35,837,027,075 38,777,360,957
--------------- ---------------
Mortgage-backed securities .............................. 20,309,833,989 21,390,909,708
Asset-backed securities ................................. 12,920,687,576 13,174,205,116
--------------- ---------------
Total ................................. $69,067,548,640 $73,342,475,781
=============== ===============
</TABLE>
II-15
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(Continued)
NOTE 3--INVESTMENTS--(Continued)
Bonds not due at a single maturity date have been included in the preceding
table based on the year of final maturity. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations, although prepayment premiums may be applicable.
At December 31, 1998 and 1997, the carrying values of long-term bond
investments were diversified by industry classification as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Mortgage-backed securities ................... 29.4% 31.0%
Asset-backed securities ...................... 18.7 15.4
Manufacturing ................................ 11.6 11.9
Public utilities ............................. 9.7 11.1
Finance and financial services ............... 9.2 9.0
Communications ............................... 3.8 3.8
Retail and wholesale trade ................... 3.7 3.8
Oil and gas .................................. 3.7 3.4
Government ................................... 3.1 4.3
Other ........................................ 7.1 6.3
----- -----
Total ....................... 100.0% 100.0%
===== =====
</TABLE>
The approximate carrying values and market values of debt securities loaned,
and the cash collateral received in connection therewith, were as follows:
<TABLE>
<CAPTION>
Carrying Value Market Value Cash Collateral
---------------- ----------------- ----------------
<S> <C> <C> <C>
December 31, 1998 .......... $1,687,699,000 $1,803,100,000 $1,844,563,000
December 31, 1997 .......... 1,634,267,000 1,742,556,000 1,790,560,000
</TABLE>
At December 31, 1998 and 1997, TIAA had interest rate swap contracts
outstanding with a total notional value of $451,366,000 and $267,755,000,
respectively.
At December 31, 1998 and 1997, TIAA had foreign currency swap contracts
outstanding with a total notional value of approximately $654,242,000 and
$485,274,000, respectively. The unrealized gains (losses) on foreign currency
swap contracts outstanding at year-end were approximately $(6,511,000),
$25,864,000 and $1,367,000 at December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, TIAA had foreign currency forward contracts
outstanding with a total notional value of approximately $179,820,000 and
$2,274,000, respectively, and the unamortized value of the premiums was
approximately $621,000 and $29,000, respectively. The unrealized gains on the
forward contracts outstanding at year-end were approximately $1,143,000 and
$65,000 at December 31, 1998 and 1997, respectively.
At December 31, 1998, TIAA had no swap options outstanding. At December 31,
1997, TIAA had swap options outstanding with a total notional value of
$170,700,000 and the unamortized value of the premiums was approximately
$677,000. 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, 1998 and 1997, TIAA had interest rate cap contracts outstanding
with a total notional value of $110,270,000 and $5,978,970,000, respectively,
and the unamortized value of the premiums was approximately $669,000 and
$37,758,000, respectively.
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 result in 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. The range of coupon
rates for mortgage loans issued during 1998 was from 6.00% to 8.45%. At
December 31, 1998 and 1997, TIAA's mortgage portfolio included loans totaling
approximately $308,570,000 and $341,662,000, respectively, which were
collateralized by real estate with prior liens not held by TIAA.
II-16
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(Continued)
NOTE 3--INVESTMENTS--(Continued)
At December 31, 1998 and 1997, the carrying values of mortgage loan investments
were diversified by property type and geographic region as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Property Type
- -------------
Office building .................... 39.2% 40.0%
Shopping centers ................... 31.6 30.7
Mixed-use projects ................. 11.1 10.2
Apartments ......................... 6.6 6.9
Industrial buildings ............... 6.0 5.6
Hotel .............................. 3.5 4.3
Other .............................. 2.0 2.3
----- -----
Total ............... 100.0% 100.0%
===== =====
Geographic Region
- -----------------
Pacific ............................ 22.3% 25.4%
South Atlantic ..................... 18.7 18.3
East North Central ................. 12.4 11.1
Middle Atlantic .................... 11.7 12.4
New England ........................ 9.6 9.9
West North Central ................. 9.0 8.1
West South Central ................. 7.5 6.8
Mountain ........................... 7.2 6.3
East South Central ................. 1.6 1.7
----- -----
Total ............... 100.0% 100.0%
===== =====
</TABLE>
At December 31, 1998 and 1997, approximately 17% and 20%, respectively, of the
mortgage portfolio was invested in California and is included in the Pacific
region shown above.
At December 31, 1998, the contractual maturity schedule of mortgage loans is
shown below:
<TABLE>
<CAPTION>
Carrying Value
-----------------
<S> <C>
Due in one year or less .............................. $ 692,373,552
Due after one year through five years ................ 3,754,946,379
Due after five years through ten years ............... 11,382,817,297
Due after ten years .................................. 4,418,308,604
---------------
Total ......................... $20,248,445,832
===============
</TABLE>
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, 1998, outstanding forward commitments for future mortgage loan
investments approximated $2,190,631,000, including commitments under
litigation. Of this, $2,136,631,000 is scheduled for disbursement in 1999,
$54,000,000 in 2000. The funding of mortgage loan commitments is contingent
upon the underlying properties meeting specified requirements, including
construction, leasing and occupancy.
At December 31, 1998, 1997 and 1996, the aggregate carrying values of mortgages
with restructured or modified terms, as defined by generally accepted
accounting principles, were approximately $44,153,000, $552,070,000 and
$621,056,000, respectively. For the years ended December 31, 1998, 1997 and
1996, the investment income earned on such mortgages was approximately
$7,381,000, $39,945,000 and $43,408,000, respectively, which would have been
approximately $5,030,000, $56,034,000 and $68,371,000, 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.
II-17
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(Continued)
NOTE 3--INVESTMENTS--(Concluded)
At December 31, 1998 and 1997, the carrying values of real estate investments
were diversified by property type and geographic region as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Property Type
- -------------
Office buildings ..................................................... 64.3% 61.6%
Shopping centers ..................................................... 17.2 17.8
Mixed-use projects ................................................... 4.8 7.9
Income-producing land underlying improved real estate. ............... 4.2 3.3
Industrial buildings. ................................................ 2.9 3.0
Land held for future development. .................................... 2.6 1.9
Apartments ........................................................... 0.3 0.3
Other ................................................................ 3.7 4.2
----- -----
Total .............................. 100.0% 100.0%
===== =====
Geographic Region
- -----------------
South Atlantic ...................................................... 22.6% 26.4%
East North Central ................................................... 18.5 18.8
Pacific .............................................................. 17.1 14.4
West North Central ................................................... 12.9 13.9
Middle Atlantic ...................................................... 11.0 11.9
West South Central ................................................... 7.5 7.0
Mountain ............................................................ 3.3 2.8
New England ......................................................... 1.3 1.5
East South Central ................................................... 0.8 0.8
Other. ............................................................... 5.0 2.5
----- -----
Total .............................. 100.0% 100.0%
===== =====
</TABLE>
At December 31, 1998 and 1997, approximately 12% and 11%, respectively, of the
real estate portfolio was invested in both California and Florida. California
is included in the Pacific region shown above, and Florida is included in the
South Atlantic region shown above.
At December 31, 1998, outstanding forward commitments for future real estate
investments approximated $263,468,000. Under these commitments, it is estimated
that $242,903,000 will be disbursed in 1999 and $20,565,000 in later years. The
funding of real estate investment commitments is contingent upon the properties
meeting specified requirements, including construction, leasing and occupancy.
Depreciation expense on real estate investments for the years ended December
31, 1998, 1997 and 1996, was approximately $176,237,000, $147,494,000 and
$135,982,000, respectively; the amount of accumulated depreciation at December
31, 1998 and 1997 was approximately $674,541,000 and $440,659,000,
respectively.
Asset Valuation Reserves: The AVR balances at December 31, 1998 and 1997 were
comprised of the following asset-specific reserves:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Bonds and preferred stocks ............... $ 560,477,946 $ 545,863,951
Mortgages. ............................... 1,117,503,060 975,041,395
Real estate .............................. 689,550,807 756,720,622
Common stocks ............................ 48,573,376 27,266,124
Other invested assets .................... 38,018,128 33,750,538
-------------- --------------
Total ................ $2,454,123,317 $2,338,642,630
============== ==============
</TABLE>
II-18
<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, 1998, 1997 and 1996,
the components of net investment income were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Gross investment income:
Bonds ........................................... $5,441,796,398 $4,919,147,802 $4,397,330,653
Mortgages ....................................... 1,569,281,835 1,561,650,688 1,704,612,536
Real estate (net of property
expenses, taxes
and depreciation) .............................. 275,402,304 282,710,437 349,550,153
Stocks .......................................... 82,871,728 45,018,729 14,512,747
Other long-term investments ..................... 46,399,969 49,877,245 16,299,166
Cash and short-term investments ................. 59,637,401 81,908,105 64,600,106
Other ........................................... 4,430,354 1,863,273 30,748,262
-------------- -------------- --------------
Total ........................ 7,479,819,989 6,942,176,279 6,577,653,623
Less investment expenses ........................ (142,791,775) (124,382,062) (111,487,052)
-------------- -------------- --------------
Net investment income before
amortization of net IMR gains ................... 7,337,028,214 6,817,794,217 6,466,166,571
Plus amortization of net IMR gains ............... 109,627,953 84,329,279 59,362,364
-------------- -------------- --------------
Net investment income. ........................... $7,446,656,167 $6,902,123,496 $6,525,528,935
============== ============== ==============
</TABLE>
Participation income received on securities, mortgages and real estate included
in the above table was approximately $12,512,000, $20,894,000 and $21,121,000
in 1998, 1997 and 1996, 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 7.95%, 7.99% and 8.17% in 1998, 1997 and 1996,
respectively.
Future rental income expected to be received during the next five years under
existing real estate leases in effect as of December 31, 1998 is approximately
$547,703,000 in 1999, $472,791,000 in 2000, $389,192,000 in 2001, $306,191,000
in 2002 and $60,172,000 in 2003.
Realized Capital Gains and Losses: For the years ended December 31, 1998, 1997
and 1996, the net realized capital gains (losses) on sales, redemptions and
writedowns of investments were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- ---------------- -----------------
<S> <C> <C> <C>
Bonds ......................................... $ 398,363,008 $ 99,205,212 $ 83,521,853
Mortgages ..................................... (50,492,383) (18,206,968) (120,569,347)
Real estate ................................... 76,983,899 172,463,239 62,836,567
Stocks ........................................ 15,778,492 651,273 123,374,256
Other long-term investments ................... (49,832,409) (2,552,791) 27,068,040
Cash and short-term investments ............... 3,926,077 (121,752) (13,797,036)
Other ......................................... -- -- 14,400
-------------- -------------- --------------
Total realized gains (losses) before
capital gains tax ............................ 394,726,684 251,438,213 162,448,733
Capital gains (tax) benefit. .................. -- (2,026,003) 1,501,742
-------------- -------------- --------------
Total ................... $ 394,726,684 $ 249,412,210 $ 163,950,475
============== ============== ==============
</TABLE>
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--(Concluded)
Writedowns of investments resulting from permanent impairments and mortgage
foreclosures, reflected in the preceding table as realized capital losses, were
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ---------------
<S> <C> <C> <C>
Permanent impairments:
Bonds .............................. $ 9,345,164 $ 1,499,190 $ 3,292,468
Mortgages ......................... 23,344,175 38,855,209 106,869,780
Real estate ........................ 4,468,490 20,797,149 20,000,001
----------- ----------- ------------
Total ................ $37,157,829 $61,151,548 $130,162,249
=========== =========== ============
Mortgage foreclosures ............... $63,907,494 $31,579,934 $ 43,025,114
=========== =========== ============
</TABLE>
Proceeds from sales and redemptions of long-term bond investments during 1998,
1997 and 1996 were approximately $9,445,709,000, $4,652,635,000 and
$4,329,771,000, respectively. Gross gains of approximately $422,231,000,
$111,635,000 and $133,807,000 and gross losses of approximately $14,523,000,
$10,931,000 and $45,397,000 were realized on these sales and redemptions during
1998, 1997 and 1996, respectively.
Unrealized Capital Gains and Losses: For the years ended December 31, 1998,
1997 and 1996, the net changes in unrealized capital gains (losses) on
investments, resulting in a net increase (decrease) in the valuation of
investments, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- ----------------
<S> <C> <C> <C>
Bonds ......................................... $ (48,352,549) $ (68,528,047) $ 3,982,108
Mortgages .................................... (6,500,000) 1,232,724 2,393,812
Real estate ................................... (8,435,351) 14,315,196 20,766,890
Stocks ....................................... (31,866,148) 30,350,946 (26,004,886)
Other long-term investments .................. 19,347,901 20,169,489 10,306,026
Cash and short-term investments ............... -- (21,987) 8,605
Other ......................................... (95,242,707) _ 18,999,590
--------------- --------------- -------------
Total ...................... $ (171,048,854) $ (2,481,679) $ 30,452,145
============== ============= =============
</TABLE>
II-20
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(Continued)
NOTE 5--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments presented in the
following tables have been determined by TIAA using market information
available as of December 31, 1998 and 1997 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
Value Value Fair Value
---------------- ------------------ ------------------
<S> <C> <C> <C>
December 31, 1998
Assets
Bonds ................................. $69,067,548,640 $73,342,475,781
Mortgages. ............................ 20,248,445,832 21,556,575,796
Common stocks ......................... 240,209,436 240,209,436
Preferred stocks ...................... 1,016,834,232 1,020,529,083
Cash and short-term investments ....... 511,966,433 511,966,433
Policy loans .......................... 317,939,719 317,939,719
Seed money investments ................ 383,288,422 383,288,422
Liabilities
Teachers Personal Annuity-Fixed
Account. ............................. 1,089,268,569 1,089,268,569
Other financial instruments ............
Foreign currency swap contracts ....... $ 654,241,992 18,569,714 4,938,964
Foreign currency forward contracts..... 179,820,224 1,764,608 1,929,656
Interest rate swap contracts .......... 451,365,681 -- 16,874,273
Interest rate cap contracts. .......... 110,270,000 668,710 114,699
Stock warrants ........................ -- 8,987,029
December 31, 1997
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
</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--(Concluded)
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, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------- ---------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Publicly traded bonds ................ $41,212,863,245 $43,921,621,760 $37,479,723,007 $40,216,394,144
Privately placed bonds ............... 27,854,685,395 29,420,854,021 25,989,873,027 27,424,305,365
--------------- --------------- --------------- ---------------
Total .................... $69,067,548,640 $73,342,475,781 $63,469,596,034 $67,640,699,509
=============== =============== =============== ===============
</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 their 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 their 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
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 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
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 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 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 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/(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 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.
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.
II-22
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(Continued)
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 Securities and Exchange Commission ("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. ("NASD"). 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
the actual expenses incurred and the management fees received are adjusted
quarterly. Such fees and the equivalent allocated expenses, which amounted to
approximately $474,611,000, $340,898,000 and $274,447,000 in 1998, 1997 and
1996, respectively, are not included in the statements of operations and had no
effect on TIAA's operations. Beginning in 1998, TIAA provides guarantees for
the CREF Accounts for certain mortality and expense risks pursuant to an
Immediate Annuity Purchase Rate Guarantee Agreement.
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 $22,640,000, $20,862,000 and $20,808,000
in 1998, 1997 and 1996, respectively.
In addition to the pension plan, TIAA provides certain other postretirement
life and health insurance benefits to eligible retired employees who meet
prescribed age and service requirements. The postretirement benefit obligation
for retirees and fully eligible employees was $31,672,000 as of January 1, 1998
and $26,233,000 as of January 1, 1997. The postretirement benefit obligation
for non-vested employees was $25,823,000 as of January 1, 1998 and $20,857,000
as of January 1, 1997. The cost of such benefits reflected in the accompanying
statements of operations was approximately $3,008,000, $3,398,000 and
$3,022,000 for 1998, 1997 and 1996, respectively. The discount rate used in
determining the postretirement benefit obligations was 7.0% per year and the
medical care cost trend rate was 9.0% per year in 1998, decreasing by 1% in
each future year, to an ultimate rate of 6% per year in 2001.
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 unconsolidated subsidiaries and affiliates primarily consist of
TIAA-CREF Enterprises, Inc. ("Enterprises") and wholly-owned investment
subsidiaries, which are primarily involved in real estate investment
activities. The carrying value of TIAA's investments in unconsolidated
subsidiaries and affiliates totaled approximately $5,564,491,000 and
$3,971,101,000 at December 31, 1998 and 1997, respectively. TIAA's investment
in Enterprises is included in the other long-term investments caption on the
accompanying balance sheets and totaled approximately $285,528,000 and
$94,514,000 at December 31, 1998 and 1997, respectively. At December 31, 1998
and 1997, the carrying values of TIAA's investments in real estate subsidiaries
and other affiliates were approximately $4,643,100,000 and $3,423,910,000,
respectively.
II-23
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(Continued)
NOTE 8--UNCONSOLIDATED SUBSIDIARIES AND OTHER AFFILIATES (Concluded)
Total assets, liabilities and gross rental income of real estate subsidiaries,
at December 31, 1998, 1997 and 1996 and for the years then ended, were
approximately as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Assets ....................... $5,723,222,000 $4,387,482,000 $5,149,487,000
Liabilities .................. 724,361,000 792,142,000 933,678,000
Gross rental income .......... 783,261,000 688,963,000 760,704,000
</TABLE>
Earnings of approximately $161,885,000, $156,648,000 and $238,313,000 in 1998,
1997 and 1996, 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, 1998 and 1997, the carrying values of TIAA real
estate subsidiaries that are partners in joint ventures were approximately
$1,147,216,000 and $1,382,378,000, respectively. Joint venture total assets,
liabilities and gross rental income, at December 31, 1998, 1997 and 1996 and
for the years then ended, were approximately as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Assets ....................... $1,709,297,000 $2,075,352,000 $3,099,467,000
Liabilities .................. 556,823,000 997,969,000 1,116,222,000
Gross rental income .......... 274,106,000 377,919,000 484,657,000
</TABLE>
The subsidiaries' equity share in these total assets, liabilities and gross
rental income were approximately as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Assets ....................... $1,701,668,000 $1,960,400,000 $2,981,156,000
Liabilities .................. 554,451,000 577,826,000 778,312,000
Gross rental income .......... 270,208,000 349,770,000 455,196,000
</TABLE>
Net income earned by the subsidiaries from joint venture investments was
approximately $16,123,000, $56,362,000 and $130,887,000 in 1998, 1997 and 1996,
respectively. Some of the real estate joint ventures have loans from TIAA. At
December 31, 1998 and 1997, the unpaid principal of such loans was
approximately $529,504,000 and $437,932,000, respectively.
NOTE 9--ANNUITY RESERVES
At December 31, 1998 and 1997, TIAA's general account annuity reserves are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------- ------------------------------
Amount Percent Amount Percent
----------------- --------- ----------------- ----------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal:
At book value without adjustment ......... $ 9,066,466,368 10.4% $ 7,856,442,214 9.8%
At market value ......................... -- -- -- --
Not subject to discretionary
withdrawal .............................. 77,797,831,264 89.6 72,437,186,123 90.2
---------------- ----- ---------------- -----
Total annuity reserves ................... 86,864,297,632 100.0% 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 ........................ 377,741,433 348,411,715
Reserves on accident and health
policies ............................. 530,672,352 506,976,271
---------------- ----------------
Total policy and contract reserves ....... $87,772,711,417 $81,149,016,323
================ ================
</TABLE>
II-24
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(Continued)
NOTE 10--SEPARATE ACCOUNTS
TIAA currently has two separate accounts. The Separate Account VA-1 ("VA-1") is
a segregated investment account and was organized on February 16, 1994 under
the insurance laws of the State of New York for the purpose of issuing and
funding variable annuity contracts. VA-1 was registered with the 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.
The TIAA Real Estate Account ("REA") is a segregated investment account and was
organized on February 22, 1995 under the insurance laws of the State of New
York for the purpose of funding variable annuity contracts. REA was registered
with the Commission under the Securities Act of 1933 effective October 2, 1995.
REA's target is to invest between 70% and 95% 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 shared in the
pro rata investment experience of REA and were 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, the number of units retained by TIAA in
REA was 610,864, with a total value of approximately $74,706,520. TIAA redeemed
all of its REA units by the end of 1998.
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. Total separate account premiums were approximately $226,984,000,
$206,808,000 and $153,919,000 in 1998, 1997 and 1996, respectively. Total
separate account net transfers from other accounts were approximately
$300,737,000, $360,391,000 and $249,836,000 in 1998, 1997 and 1996,
respectively. 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 once they have begun. 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.
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.
TIAA's original seed money investment in the Funds, plus reinvested dividends
and undistributed earnings, totaled approximately $303,017,000 and $252,327,000
at December 31, 1998 and 1997, respectively, and such amounts are reflected in
the "Other long-term investments" caption in the accompanying balance sheets.
NOTE 12--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-25
<PAGE>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS--(Concluded)
NOTE 13--YEAR 2000 (UNAUDITED)
Like all other financial service organizations, TIAA could be adversely
affected if the computer systems that it uses and those used by its major
service providers do not properly process and calculate date-related
information on or after January 1, 2000. TIAA has taken steps that management
believes are prudent and reasonably designed to address the Year 2000 issue.
TIAA has developed, and is executing, an extensive Year 2000 remediation and
certification plan that addresses its critical computer systems, as well as the
interfaces with its important external vendors and service providers. TIAA has
also developed contingency plans intended to minimize the impact that
unexpected systems failures (internal and external) may have on its operations.
Management has periodically apprised the TIAA Board of Trustees regarding these
plans and the progress of efforts to deal with the Year 2000 issue. Although
there can be no absolute assurance that these steps will be sufficient to
address all aspects of the Year 2000 issue, management does not anticipate that
the Year 2000 issue will have a significant adverse impact on TIAA's business
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 26th day of April, 1999.
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John H. Biggs Chairman of the Board, 4-26-99
- ---------------------------------- President and Chief Executive
John H. Biggs Officer (Principal Executive
Officer) and Trustee
/s/ Martin L. Leibowitz Vice Chairman, Chief 4-26-98
- ---------------------------------- Investment Officer and Trustee
Martin L. Leibowitz
/s/ Richard L. Gibbs Executive Vice President
- ---------------------------------- (Principal Financial and 4-26-99
Richard L. Gibbs Accounting Officer)
</TABLE>
II-27
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
Signature of Trustee Date Signature of Trustee Date
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
/s/ David Alexander 4-26-99 /s/ Dorothy Ann Kelly 4-26-99
--------------------------- ---------------------------
David Alexander Dorothy Ann Kelly, O.S.U.
/s/ Marcus Alexis 4-26-99 /s/Robert M. O'Neil 4-26-99
--------------------------- ---------------------------
Marcus Alexis Robert M. O'Neil
/s/ Willard T. Carleton 4-26-99 /s/ Leonard S. Simon 4-26-99
--------------------------- ---------------------------
Willard T. Carleton Leonard S. Simon
/s/ Robert C. Clark 4-26-99 /s/ Ronald L. Thompson 4-26-99
--------------------------- ---------------------------
Robert C. Clark Ronald L. Thompson
/s/ Estelle A. Fishbein 4-26-99
--------------------------- ---------------------------
Estelle A. Fishbein Paul R. Tregurtha
/s/ Frederick R. Ford /s/ William H. Waltrip 4-26-99
--------------------------- ---------------------------
Frederick R. Ford 4-26-99 William H. Waltrip
/s/ Martin J. Gruber 4-26-99 /s/ Rosalie J. Wolf 4-26-99
--------------------------- ---------------------------
Martin J. Gruber Rosalie J. Wolf
/s/ Ruth Simms Hamilton 4-26-99
---------------------------
Ruth Simms Hamilton
====================================================================================================
</TABLE>
<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, 1998 and have issued our report thereon dated February 5, 1999.
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 5, 1999
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, 1998
<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) 1998 Completed Acquired
----------- ------- -------- ----------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C>
River Road Distribution Center $-0- $ 4,166,787 $ 33,213 $ 4,200,000 1995 11/22/95
Industrial Building
Fridley, Minnesota
The Greens At Metrowest -0- 12,490,895 1,809,105 14,300,000 1990 12/15/95
Apartments
Orlando, Florida
Butterfield Industrial Park -0- 4,431,166 418,834 4,850,000 1981 12/22/95
Industrial Building
El Paso, Texas (1)
Brixworth Apartments -0- 15,574,647 1,225,353 16,800,000 1989 12/28/95
Apartments
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 2,930,102 13,000,000 1995 02/27/96
Office Building
Phoenix, Arizona
Millbrook Collection -0- 6,774,711 525,289 7,300,000 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) 1998 Completed Acquired
----------- ------- -------- ----------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Lynnwood Collection $-0- $6,708,120 $791,880 $7,500,000 1988 03/29/96
Shopping Center
Raleigh, North Carolina
Monte Vista Apartments -0- 17,664,247 1,835,753 19,500,000 1995 06/21/96
Apartments
Littleton, Colorado
River Oaks Shopping Center -0- 13,036,153 (436,153) 12,600,000 1995 07/12/96
Shopping Center
Woodbridge, Virginia
Arapahoe Park East -0- 9,920,680 1,579,320 11,500,000 1982 10/31/96
Industrial Building
Boulder, Colorado
Royal St. George Apartments -0- 16,072,275 427,725 16,500,000 1995 12/20/96
Apartments
West Palm Beach, Florida
Interstate Crossing -0- 6,485,249 (124,229) 6,361,020 1995 12/31/96
Industrial Building
Eagan, Minnesota
West Creek Apartments -0- 13,488,279 1,066,215 14,554,494 1988 01/02/97
Apartments
Westlake Village, California
Interstate Acres -0- 13,610,294 759,448 14,369,742 1988 01/24/97
Industrial Building
Urbandale, Iowa
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) 1998 Completed Acquired
----------- ------- -------- ----------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C>
The Crest at Shadow Mountain $-0- $9,192,389 $307,611 $9,500,000 1992 01/31/97
Apartments
El Paso, Texas
Westinghouse Facility -0- 6,089,473 110,527 6,200,000 1997 02/05/97
Industrial Building
Coral Springs, Florida
Rolling Meadows -0- 12,930,463 (280,463) 12,650,000 1957 05/28/97
Shopping Center
Rolling Meadows, Illinois
Saks Distribution Center -0- 26,908,401 2,991,599 29,900,000 1997 05/15/97
Industrial Building
Aberdeen, Maryland
Eastgate Distribution Center -0- 11,941,992 758,008 12,700,000 1996 05/29/97
Industrial Building
San Diego, California
Five Centerpointe -0- 15,429,103 3,274,399 18,703,502 1988 04/21/97
Office Building
Lake Oswego, Oregon
Longview Executive Park -0- 23,249,805 4,150,195 27,400,000 1988 04/21/97
Office Building
Longview, Maryland
Metro Center Office Park -0- 21,085,210 8,971,531 30,056,741 1986 04/21/97
Office Building
Sacramento, California
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) 1998 Completed Acquired
----------- ------- -------- ----------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Northmark Business Center III $-0- $8,591,636 $4,040,967 $12,632,603 1985 04/21/97
Office Building
Blue Ash, Ohio
USF&G Building -0- 6,195,142 2,605,082 8,800,224 1988 04/21/97
Office Building
Salt Lake City, Utah
Two Newton Place -0- 16,368,169 3,231,831 19,600,000 1987 04/21/97
Office Building
Newton, Massachusetts
Fairgate at Ballston -0- 26,790,792 1,934,732 28,725,524 1988 04/21/97
Office Building
Arlington, Virginia
Parkview Plaza -0- 49,139,012 2,967,579 52,106,591 1990 04/29/97
Office Building
Oakbrook Terrace, Illinois
Lincoln Woods Apartments -0- 21,476,050 1,223,950 22,700,000 1991 10/20/97
Apartments
Lafayette Hill, Pennsylvania
Corporate Center at Sawgrass -0- 12,956,957 1,043,043 14,000,000 1997 12/02/97
Office Building
Sunrise, Florida
371 Hoes Lane -0- 15,499,306 115,550 15,614,856 1986 12/15/97
Office Building
Piscataway, New Jersey
S-5
<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) 1998 Completed Acquired
----------- ------- -------- ----------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Columbia Centre III $-0- $38,580,850 $2,419,150 $41,000,000 1989 12/23/97
Office Building
Rosemont, Illinois
The Lodge at Willow Creek -0- 27,562,882 937,118 28,500,000 1997 12/24/97
Apartments
Douglas County, Colorado
The Legends at Chase Oaks -0- 29,701,668 (501,668) 29,200,000 1997 03/31/98
Apartments
Plano, Texas
Glen Pointe Business Park -0- 15,279,508 120,492 15,400,000 1997 06/30/98
Industrial Building
Glendale Heights, Illinois
Wood Creek Business Park -0- 7,222,421 (422,421) 6,800,000 1995 06/30/98
Industrial Building
Boilingbrook, Illinois
Rock Run Business Park -0- 9,325,421 (421) 9,325,000 1998 06/30/98
Industrial Building
Joliet, Illinois
Golfview Apartments -0- 28,066,591 (56,591) 28,010,000 1998 07/31/98
Apartments
Lake Mary, Florida
Indian Creek Apartments -0- 17,003,388 -0- 17,003,388 1988 10/08/98
Apartments
Farmington Hills, Michigan
S-6
<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) 1998 Completed Acquired
----------- ------- -------- ----------- ---- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Bent Tree Apartments $-0- $14,412,235 $ 0 $14,412,235 1987 10/22/98
Apartments
Columbus, Ohio
UPS Distribution Center -0- 10,989,393 0 10,989,393 1998 11/13/98
Industrial Building
Fernly, Nevada
Ontario Industrial Properties -0- 24,433,584 0 24,433,584 1997 12/17/98
Industrial Building
Ontario, California
IDI California Portfolio -0- 35,668,791 0 35,668,791 1998 12/17/98
Industrial Building
Ontario, California
IDI Kentucky Portfolio -0- 24,651,154 0 24,651,154 1998 12/17/98
Industrial Building
Hebron, Kentucky
Feded Distribution Center -0- 7,828,025 0 7,828,025 1998 12/18/98
Industrial Building
Crofton, Maryland
The Bay Court at Harbor Pointe -0- 35,164,373 0 35,164,373 1991 12/18/98
Apartments
Mukilteo, Washington
---- ------------ ----------- ------------
$-0- $767,553,755 $52,657,485 $820,211,240
==== ============ =========== ============
</TABLE>
(1) Leasehold interest only
S-7
<PAGE>
<TABLE>
<S> <C>
Reconciliation of investment property owned:
Balance at beginning of period $521,284,091
Acquisitions 259,746,552
Capital improvements and carrying costs
(including unrealized gains and losses) 39,180,599
------------
Balance at end of period $820,211,242
============
</TABLE>
S-8
<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
(27) Financial Data Schedule
[TIAA LOGO]
730 Third Avenue
New York, New York 10017-3206
212 490-9000
April 26, 1999
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. 4 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 26, 1999
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
Atlanta Austin New York Tallahasee Washington
1275 Pennsylvania Avenue, N.W. TEL: (202) 383-0100
Washington, D.C. 20004-2415 FAX: (202) 637-3593
STEVEN B. BOEHM
DIRECT LINE: (202) 383-0176
Internet: [email protected]
April 26, 1999
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 to our firm under the caption "Experts" and to the
use of our reports dated February 5, 1999 with respect to the consolidated
financial statements of the TIAA Real Estate Account and the related financial
statement schedule in the Post Effective Amendment No. 4 to the Registration
Statement (Form S-1 No. 333-2809) and the related Prospectus of TIAA Real Estate
Account for the offer and sale of interests in the TIAA Real Estate Account, a
variable option offered through certain TIAA annuity contracts.
We also consent to the reference therein of our reports dated March 9, 1999,
October 9, 1998, December 2, 1998 and March 26, 1999 with respect to the (i)
statement of revenues and certain expenses of Bay Court at Harbour Pointe for
the year ended December 31, 1997, (ii) statement of revenues and certain
expenses of Indian Creek Apartments for the year ended December 31, 1997, (iii)
statement of revenues and certain expenses of Bent Tree Apartments for the year
ended December 15, 1997, and (iv) statement of revenues and certain expenses of
the Colorado for the year ended December 31, 1997, respectively, all as filed
with the Securities and Exchange Commission.
We also consent to the use of our report dated March 10, 1999 with respect to
the statutory-basis financial statements of Teachers Insurance and Annuity
Association of America ("TIAA") included in the Post Effective Amendment No. 4
to the Registration Statement.
/s/ Ernst & Young LLP
New York, New York
April 23, 1999
<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-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 1,177,842,972
<INVESTMENTS-AT-VALUE> 1,211,244,797
<RECEIVABLES> 0
<ASSETS-OTHER> 17,786,291
<OTHER-ITEMS-ASSETS> 572,343
<TOTAL-ASSETS> 1,229,603,431
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 33,236,544
<TOTAL-LIABILITIES> 33,236,544
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 8,833,911
<SHARES-COMMON-PRIOR> 6,313,015
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1,196,366,887
<DIVIDEND-INCOME> 8,354,899
<INTEREST-INCOME> 15,588,829
<OTHER-INCOME> 51,077,869
<EXPENSES-NET> (6,274,594)
<NET-INVESTMENT-INCOME> 68,747,003
<REALIZED-GAINS-CURRENT> (5,258,000)
<APPREC-INCREASE-CURRENT> 13,122,659
<NET-CHANGE-FROM-OPS> 76,611,662
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,520,896
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 410,548,172
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
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</TABLE>
