-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KKvDoqcz03CW82nKL/kiF7PeDtswzQ1GY+LQtM4jP6DQfTqjX4kA+q6YK1V6HsIj qY4eKW6Jiruyp93GZfwGwA== 0000950146-97-000666.txt : 19970430 0000950146-97-000666.hdr.sgml : 19970430 ACCESSION NUMBER: 0000950146-97-000666 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 REFERENCES 429: 033-92990 REFERENCES 429: 333-13477 FILED AS OF DATE: 19970429 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIAA REAL ESTATE ACCOUNT CENTRAL INDEX KEY: 0000946155 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE DEALERS (FOR THEIR OWN ACCOUNT) [6532] STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-22809 FILM NUMBER: 97590207 BUSINESS ADDRESS: STREET 1: 730 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2124909000 MAIL ADDRESS: STREET 1: 730 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10017 S-1/A 1 As filed with the Securities and Exchange Commission on April 29, 1997 Registration No. 333-22809 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 TIAA REAL ESTATE ACCOUNT ------------------------ (Exact name of registrant as specified in its charter) New York -------- (State or other jurisdiction of incorporation or organization) (Not applicable) ---------------- (Primary Standard Industrial Classification Code Number) (Not applicable) ---------------- (I.R.S. Employer Identification No.) c/o Teachers Insurance and Annuity Association of America 730 Third Avenue New York, New York 10017-3206 (212) 490-9000 ---------------------------------------------------------------- (Address including zip code, and telephone number, including area code, of registrant's principal executive offices) Peter C. Clapman, Esquire Teachers Insurance and Annuity Association of America 730 Third Avenue New York, New York 10017-3206 (212) 490-9000 --------------------------------------------------------- (Name, address, including zip code, and telephone number, including area code, of agent for service) Copy to: Paul J. Mason, Esquire Sutherland, Asbill & Brennan, L.L.P. 1275 Pennsylvania Avenue, N.W. Washington, D.C. 20004-2404 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of the registration statement. 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. CROSS REFERENCE SHEET Pursuant to Item 501(b) of Regulation S-K Showing Location of Information Required by Form S-1 in Part I (Prospectus) of the Registration Statement Item of Form S-1 Caption or Location in Prospectus - ---------------- ---------------------------------- 1. Forepart of the Outside Front Cover Page Registration Statement and Outside Front Cover Page of Prospectus 2. Inside Front Cover and Inside Front and Outside Back Outside Back Cover Pages Cover Page of Prospectus 3. Summary Information, Risk Summary; The Real Estate Account Factors and Ratio of and TIAA; Risk Factors Earnings to Fixed Charges 4. Use of Proceeds (Not Applicable) 5. Determination of Offering (Not Applicable) Price 6. Dilution (Not Applicable) 7. Selling Security Holders (Not Applicable) 8. Plan of Distribution Distribution of the Contracts 9. Description of Securities Summary; The Annuity Contracts; to Be Registered Annuity Payments 10. Interests of Named (Not Applicable) Experts and Counsel 11. Information with Respect Summary; The Real Estate Account to the Registrant and TIAA; Investment Practices of the Account; General Investment and Operating Policies; Description of Properties; Risk Factors; Role of TIAA; Conflicts of Interest; Management's Discussion and Analysis of Financial Condition and Results of Operations; Valuation of Assets; Management and Investment Advisory Arrangements; Federal Income Taxes; State Regulation; Legal Matters; Experts; Legal Proceedings; Financial Statements - ii - Item of Form S-1 Caption or Location in Prospectus - ---------------- ---------------------------------- 12. Disclosure of Commission (Not Applicable) Position on Indemnification for Securities Act Liabilities - iii - PART I INFORMATION REQUIRED IN PROSPECTUS PROSPECTUS TIAA REAL ESTATE ACCOUNT A Variable Annuity Offered Through Individual, Group and Tax-Deferred Annuity Contracts Issued By TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA This prospectus tells you about the TIAA Real Estate Account (the "Real Estate Account" or the "Account"), a variable annuity investment option being offered through individual, group and tax-deferred annuity contracts issued by Teachers Insurance and Annuity Association of America ("TIAA"). Read it carefully before investing and keep it for future reference. The Real Estate Account is a segregated investment account of TIAA that provides variable individual and group annuities for retirement and tax-deferred savings plans at tax-exempt or publicly supported colleges, universities, and other educational and research institutions. The Account's main purpose is to accumulate, invest, and then disburse funds for your retirement, in the form of lifetime income or other payment options, by investing mainly in real estate and real estate-related investments. The contracts also offer a traditional (guaranteed) annuity option through TIAA's general account. As with all variable annuities, your accumulation and retirement income from the Account can increase or decrease, depending on how well the underlying investments do over time. TIAA does not guarantee the investment performance of the Account, and you bear the entire investment risk. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is May 1, 1997 - 2 - TABLE OF CONTENTS Page ---- DEFINITIONS............................................................... 5 SUMMARY ............................................................... 8 THE REAL ESTATE ACCOUNT AND TIAA.......................................... 12 INVESTMENT PRACTICES OF THE ACCOUNT....................................... 13 GENERAL INVESTMENT AND OPERATING POLICIES................................. 19 DESCRIPTION OF PROPERTIES................................................. 20 RISK FACTORS.............................................................. 21 ROLE OF TIAA.............................................................. 27 CONFLICTS OF INTEREST..................................................... 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 31 VALUATION OF ASSETS....................................................... 35 MANAGEMENT AND INVESTMENT ADVISORY ARRANGEMENTS........................... 39 EXPENSE DEDUCTIONS........................................................ 40 THE ANNUITY CONTRACTS..................................................... 41 ANNUITY PAYMENTS.......................................................... 57 FEDERAL INCOME TAXES...................................................... 61 GENERAL MATTERS........................................................... 65 DISTRIBUTION OF THE CONTRACTS............................................. 67 PERIODIC REPORTS.......................................................... 68 STATE REGULATION.......................................................... 68 LEGAL MATTERS............................................................. 69 EXPERTS ............................................................... 69 LEGAL PROCEEDINGS......................................................... 69 ADDITIONAL INFORMATION.................................................... 69 FINANCIAL STATEMENTS...................................................... 70 INDEX TO FINANCIAL STATEMENTS............................................. F-1 APPENDIX A--DESCRIPTION OF PROPERTIES..................................... A-1 APPENDIX B--MANAGEMENT OF TIAA............................................ B-1 - 3 - The Account is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports and other information with the Securities and Exchange Commission ("SEC"). All reports and information filed on behalf of the Account can be inspected and copied at the Public Reference Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at certain of its regional offices: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York, New York 10048. This information can also be obtained through the SEC's Web site on the Internet (http://www.sec.gov), as part of the SEC's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. Reports to Participants. TIAA will mail to each participant in the Real Estate Account periodic reports relating to accumulations in the Account, and such other information as may be required by applicable law or regulation. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. - 4 - DEFINITIONS Throughout the prospectus, "TIAA," "we," and "our" refer to Teachers Insurance and Annuity Association of America. "You" and "your" mean any participant or any prospective participant. Account - The TIAA Real Estate Account, a separate account of TIAA. Accumulation - The total value of your accumulation units in the Real Estate Account. Accumulation Fund - The assets of the Real Estate Account not dedicated to current retirement benefits or other liabilities. Accumulation Period - The period that begins with your first premium and continues until the entire accumulation has been applied to purchase annuity income, transferred from the Account, or paid to you or a beneficiary. Accumulation Unit - A share of participation in the Real Estate Account for someone in the accumulation period. Annuity Fund - The assets in the Account that fund current retirement benefits. We plan to offer (in the first half of 1998, subject to regulatory approval) an additional payment method under which annuity income will be revalued each month. To provide this option, a separate annuity fund will be created in the Real Estate Account -- the monthly revalued annuity fund - -- to fund the monthly revalued retirement benefits. At that time, the existing annuity fund will become the annually revalued annuity fund. The investment experience of the entire account will be used to calculate changes in income for benefits being revalued monthly and annually. Annuity Partner - Anyone you name under a survivor income option to receive lifetime annuity income if you die. Your annuity partner can be your spouse, child, or anyone else eligible under current TIAA practices, subject to any limitations under the IRC and ERISA. Annuity Payments - Payments under any income option or method of payment. Annuity Unit - A measure used to calculate the amount of annuity payments due a participant. Beneficiary - Any person or institution named to receive benefits if you die during the accumulation period or if you (and your annuity partner, if you have one) die before any guaranteed period of your income-paying annuity ends. You don't have to name the same beneficiary for each of these two situations. - 5 - Business Day - Any day the New York Stock Exchange ("NYSE") is open for trading. A business day ends at 4 p.m. eastern time, or when trading closes on the NYSE, if earlier. Calendar Day - Any day of the year. Calendar days end at the same time as business days. Cash Withdrawal - Taking some or all of an accumulation as a single payment. Commuted Value - The present value of annuity payments due under an income option or method of payment not based on life contingencies. Present value is calculated using the then-current value of the annuity unit, adjusted for investment gains or losses since the annuity unit value was last calculated. Contract - The document that sets forth the terms of your Real Estate Account annuity. There are separate contracts for the accumulation period and for the income-paying period for each annuity. CREF - The College Retirement Equities Fund, TIAA's companion organization. Eligible Institution - A private or public institution in the United States that is non-proprietary and non-profit. Private institutions have to be ruled tax-exempt under IRC section 501(c)(3) or earlier versions of the section and cannot be private foundations. The main purpose of any eligible institution must be to offer instruction, conduct research, serve and support education or research, or perform ancillary functions for such institutions. Employer - An eligible institution that maintains an employee retirement or tax-deferred annuity plan. ERISA - The Employee Retirement Income Security Act of 1974, as amended. General Account - All of TIAA's assets other than those allocated to the Real Estate Account or to other existing or future TIAA separate accounts. Income Option - Any of the ways you can receive Real Estate Account retirement income. Independent Fiduciary - The firm appointed by TIAA to provide independent fiduciary services to the Real Estate Account and which will be responsible for reviewing, approving, and/or monitoring certain aspects of the Account's operations. Internal Revenue Code or IRC - The Internal Revenue Code of 1986, as amended. - 6 - Method of Payment - Any type of Real Estate Account death benefit available to a beneficiary. Participant - Any person who owns a Real Estate Account contract. Under certain arrangements, an employer can be the owner of the contract. Plan - An employer's retirement, profit-sharing, or tax- deferred annuity program. Premium - The amount you or your employer sends to the Real Estate Account to purchase retirement benefits. Survivor Annuity Option - An income option that continues lifetime annuity payments to your annuity partner after you die. TIAA - Teachers Insurance and Annuity Association of America. Valuation Day - Any day the NYSE is open for trading, as well as the last calendar day of each month. Valuation days end as of the close of all U.S. national exchanges where securities or other investments of the Account are principally traded. Valuation days that aren't business days will end at 4 p.m. eastern time. Valuation Period - The time from the end of one valuation day to the end of the next. - 7 - SUMMARY The following summary of prospectus information should be read together with the detailed information contained elsewhere in this prospectus. The TIAA Real Estate Account - ---------------------------- This prospectus describes the TIAA Real Estate Account, a separate investment account of TIAA. Its investment objective is a favorable rate of return over the long term, primarily through rental income and capital appreciation from real estate investments owned by the Account. The majority of the Account's real estate investments will be ownership interests in income-producing office, industrial, retail, and multi-family residential properties. The Account can make other real estate-related investments, including mortgage loans and purchasing shares of real estate investment trusts and other entities engaged primarily in real estate-related activities. The Account will also invest in publicly-traded securities and other instruments to maintain liquidity to make distributions and cover capital expenditures and expenses. TIAA will provide additional liquidity to the Account as needed, according to its arrangement with the U.S. Department of Labor, as described on page 28. As with any variable account, we cannot assure you that the investment objective will be met. One factor critical to achieving the objective is whether we can find enough suitable investments for the Account at any particular time. TIAA, a nonprofit New York insurance company, manages the investment and reinvestment of the Real Estate Account's assets. For these services, TIAA receives fees from the assets of the Account. You don't have the right to vote on the management and operation of the Account. For more information, see "Management and Investment Advisory Arrangements," page 39. Because the Account does not fall within the definition of "investment company" under the Investment Company Act of 1940, as amended (the "1940 Act"), it is neither registered as an investment company nor subject to regulation under the 1940 Act. Risk Factors - ------------ Investment in the Account involves significant risks, which are fully described in "Risk Factors," page 21. These include fluctuations in real estate values and the possibility that the Account won't receive the appraised or estimated value of a real property investment when it is sold. The Account may also sometimes have trouble selling some of its real estate investments on commercially acceptable terms, making it difficult to convert those investments into cash quickly. - 8 - The Account's assets can be adversely affected by changes in local, national, or foreign economic conditions. You should, therefore, view it as a long-term investment. Also, since the Account has existed only for a short time, there is little operating history to look to in assessing how the Account might respond to different market conditions. Because it invests in real estate, the Account is also exposed to risks relating to environmental matters. For instance, if an investment property does not comply with certain environmental protection regulations, the liability for clean-up costs could exceed the Account's investment in the property (or the principal amount loaned by the Account as a mortgage lender). Conflicts of Interest - --------------------- The Account is managed by TIAA employees. TIAA employees who manage the Account's real estate-related investments may also manage real estate-related investments of TIAA's general account. Similarly, the part of the Account invested in securities and other instruments not related to real estate is managed by employees who may also manage investments of TIAA's general account and other accounts that are not related to real estate. These employees could therefore face various conflicts of interest (see "Conflicts of Interest," page 30). TIAA's guarantee to provide liquidity for the Account under certain circumstances could also raise conflicts of interest (see "Liquidity Guarantee," page 28). The Contracts - ------------- The Real Estate Account is available (subject to regulatory approval) as a variable component to a number of different TIAA accumulating annuity contracts. The annuity contracts are a Retirement Annuity ("RA"), a Group Retirement Annuity ("GRA"), a Supplemental Retirement Annuity ("SRA"), a Group Supplemental Retirement Annuity ("GSRA"), and a Rollover Individual Retirement Annuity ("Rollover IRA"). Subject to regulatory approval, we have plans to offer a new individual retirement annuity that will accept both rollovers and direct contributions ("New IRA") and a Keogh Plan Annuity ("Keogh"). (We will refer to the Rollover IRA and New IRA collectively as the "IRAs".) RAs, SRAs, IRAs and Keoghs are issued to you directly. GRAs and GSRAs are issued under the terms of a group contract. The Real Estate Account is also available through a variety of income-paying annuity contracts. For details, see "Income Options," page 53. Subject to the conditions described in this prospectus, you can allocate all or part of your premiums to the Real Estate Account under the accumulating contracts, although your employer's plan may restrict your ability to allocate premiums to the Real Estate Account under an RA, GRA, or GSRA contract. The specific terms of your plan or - 9 - relevant tax laws also may limit the amount of premiums you are allowed to contribute or that may be contributed on your behalf. See "Remitting Premiums," page 44, "Possible Restrictions on Acceptance of Premiums and Transfers," page 45, "Allocation of Premiums," page 45, and "Federal Income Taxes," page 61. Expense Deductions. We make daily deductions from the net assets of the Real Estate Account to pay the Account's operating and investment management expenses. The Account also pays TIAA for bearing mortality and expense risks and providing liquidity guarantees. The current annual expense deductions from the net assets of the Account total 0.60%: 0.28% for investment management services, 0.23% for administrative and distribution expenses, 0.06% for mortality and expense risks, and 0.03% for liquidity guarantees. We guarantee that these deductions, together, will never exceed 2.50% of the Account's average net assets annually. See "Expense Deductions," page 40. Transfers and Withdrawals. You can transfer your accumulation in the Account to TIAA's traditional annuity or to CREF once per calendar month. We permit withdrawals from SRAs, GSRAs, and IRAs at any time. However, your employer's plan can restrict your ability to withdraw funds from RA and GRA contracts. Federal income tax law may also restrict your ability to transfer or withdraw funds. You may have to pay a tax penalty if you want to make a cash withdrawal before age 59-1/2. (See "Federal Income Taxes," page 61.) - 10 - Selected Financial Data - ----------------------- The following selected financial data should be considered in conjunction with the financial statements and notes thereto for the Account provided herein. July 3, 1995 Year Ended (commencement of December 31, operations) to 1996 December 31, 1995 ------------ ----------------- Investment income: Real estate income, net: Rental income . . . . . . . . . . $ 10,951,183 $ 165,762 ------------ ------------ Real estate property level expenses and taxes: Operating expenses . . . . . . . 2,116,334 29,173 Real estate taxes . . . . . . . 1,254,163 14,659 ------------ ------------ Total real estate property level expenses and taxes 3,370,497 43,832 ------------ ------------ Real estate income, net 7,580,686 121,930 Dividends and interest . . . . . . . 6,027,486 2,828,900 ------------ ------------ Total investment income $ 13,608,172 $ 2,950,830 ============ ============ Net realized and unrealized gain on investments . . . . . . . . . $ 3,330,539 $ 35,603 ============ ============ Net increase in net assets resulting from operations. . . . . . . $ 15,782,915 $ 2,676,000 ============ ============ Net increase in net assets resulting from participant transactions $233,653,793 $117,582,345 ============ ============ Net increase in net assets. . . . . . . $249,436,708 $120,258,345 ============ ============ December 31, December 31, 1996 1995 ------------ ------------- Total assets . . . . . . . . . . . . . $426,372,007 $143,177,421 ============ ============ Total liabilities . . . . . . . . . . . $ 56,676,954 $ 22,919,076 ============ ============ Total net assets . . . . . . . . . . . $369,695,053 $120,258,345 ============ ============ Accumulation units outstanding 3,295,786 1,172,498 ========= ========= Accumulation unit value . . . . . . . . $ 111.11 $102.57 ========= ======= - 11 - THE REAL ESTATE ACCOUNT AND TIAA On February 22, 1995, the Real Estate Account was established by resolution of TIAA's Board of Trustees as a separate investment account of TIAA under New York law. As part of TIAA, the Account is subject to regulation by the State of New York Insurance Department ("NYID") and the insurance departments of some other jurisdictions in which the contracts are offered (see "State Regulation," page 68). Although TIAA owns the assets of the Real Estate Account, the Account's income, investment gains, and investment losses are credited to or charged against the assets of the Account without regard to TIAA's other income, gains, or losses. Under New York insurance law, we cannot charge the Account with liabilities incurred by any other TIAA separate account or other business activity TIAA may undertake. TIAA is a nonprofit stock life insurance company organized under the laws of New York State. It was founded on March 4, 1918, by the Carnegie Foundation for the Advancement of Teaching. All of the stock of TIAA is held by the TIAA Board of Overseers, a nonprofit New York membership corporation whose main purpose is to hold TIAA's stock. TIAA's headquarters are at 730 Third Avenue, New York, New York 10017-3206; there are also regional offices in Atlanta, Boston, Chicago, Dallas, Denver, Detroit, New York, Philadelphia, San Francisco, and Washington, D.C., and a service center in Denver. TIAA offers both traditional annuities, which guarantee principal and a specified interest rate while providing the opportunity for additional dividends, and variable annuities, whose return depends upon the performance of certain specified investments. TIAA also offers life, disability, and long-term care insurance. TIAA manages the investment of the Account's assets. TIAA has been making mortgage loans for over 50 years. We are currently one of the largest and most experienced investors in mortgages and real estate equity interests in the nation. As of December 31, 1996, TIAA employees managed for TIAA's general account a mortgage portfolio of $20.1 billion. The vast majority of the portfolio is secured by investment-grade properties located throughout the U.S. Almost three-quarters of the TIAA general account's mortgage portfolio consists of mortgage loans made on office buildings and retail properties (i.e., shopping centers, including malls). As of December 31, 1996, TIAA employees oversaw for TIAA's general account a real estate equity portfolio of $6.7 billion, with properties located across the U.S. Office buildings and shopping centers comprise more than three-quarters of the real estate equity portfolio of the general account. - 12 - TIAA is the companion organization of the College Retirement Equities Fund ("CREF"), the first company in the United States to issue a variable annuity. CREF is a nonprofit membership corporation established in New York State in 1952. Together, TIAA and CREF form the principal retirement system for the nation's education and research communities and the largest retirement system in the U.S., based on assets under management. TIAA-CREF serves approximately 1.8 million people at about 6,100 institutions. As of December 31, 1996, TIAA's assets were approximately $86 billion; the combined assets for TIAA and CREF totalled approximately $185 billion (although CREF doesn't stand behind TIAA's guarantees). TIAA currently has one other separate account. TIAA may offer new investment accounts with different investment objectives in the future, as permitted by law. INVESTMENT PRACTICES OF THE ACCOUNT General - ------- The investment objective of the Real Estate Account is a favorable rate of return over the long term, primarily through rental income and capital appreciation from real estate investments owned by the Account. The Account will also invest in publicly-traded securities and other instruments to maintain liquidity needed for capital expenditures and expenses and to make distributions. As with any variable account, we cannot assure you that its investment objective will be met. One critical factor to achieving the objective is whether we can find enough suitable investments for the Account at any particular time. The Account's target is to invest between 70% and 80% of its assets directly in real estate or in real estate-related investments. We expect the majority of the Account's real estate investments to be direct ownership interests in income-producing real estate, such as office, industrial, retail, and multi-family residential properties. The Account can also invest in other real estate or real estate-related investments, through joint ventures, real estate partnerships or real estate investment trusts ("REITs"). To a limited extent, the Account can also invest in conventional mortgage loans, participating mortgage loans, common or preferred stock of companies whose operations involve real estate (i.e., that own or manage real estate primarily), and collateralized mortgage obligations. Between 20% and 30% of the Account is targeted to be invested in government and corporate debt securities, short-term money market instruments and other cash equivalents, and, to some - 13 - extent, common or preferred stock of companies that don't primarily own or manage real estate. In some circumstances, the Account can increase the portion of its assets invested in debt securities or money market instruments for a period of time. This could happen because of a rapid influx of participants' funds, lack of suitable real estate investments, or a need for more liquidity. We do not expect that the Account will invest in foreign real estate or other types of foreign real estate-related investments initially, but it may do so as it grows. The percentage of the Account's assets in foreign investments will vary, but we expect that foreign investments will not be more than 25% of the Account's portfolio. In order not to be considered an "investment company" under the 1940 Act, the Account will limit its holdings of investment securities (as defined under the 1940 Act) to less than 40% of its total assets (not including U.S. Government securities and cash items). TIAA can, in its discretion, decide to change the operating policies of the Account or wind it down. This could happen if, for instance, the Account is smaller than expected. If the Account is wound down, you may be required to transfer your accumulations to TIAA's traditional annuity or any CREF account available under your employer's plan. You will be notified in advance if we decide to change or wind down the Account. Investments in Direct Ownership Interests in Real Estate - -------------------------------------------------------- Acquisition. The Account's main investment policy is to acquire direct ownership interests in existing or newly-constructed income-producing real estate, including office buildings, multi-family residential properties, and retail and industrial properties. TIAA will invest a substantial part of the Account's assets in established properties that have existing rent and expense schedules or in new properties with predictable cash flows. The Account will usually acquire real estate that's ready for occupancy by tenants, which eliminates the development or construction risks inherent in buying unimproved real estate. However, from time to time the Account can, consistent with its objective, invest in a real estate development project. The Account can also buy recently-constructed properties that are subject to agreements with sellers that provide for certain minimum levels of income. Purchase-Leaseback Transactions. Some of the Account's investments can be real property purchase-leaseback transactions ("leasebacks"). In these transactions, the Account typically will buy land and income-producing improvements on the land, and - 14 - simultaneously lease the land and improvements. Leasebacks can be for very long terms and may provide for increasing payments from the lessee. Usually, under a leaseback, the lessee will operate, or arrange for someone else to operate, the property. The lessee is responsible generally for all operating costs, including taxes, mortgage debt service, maintenance and repair of the improvements, and insurance. The Account can also give the lessee an option to buy the land and improvements after a period of years. The option exercise price may be based on factors such as the fair market value of the property, as encumbered by the lease, the increase in the gross revenues from the property, or other objective criteria. In some leasebacks, the Account may purchase only the land under an income-producing building and lease the land to the building owner. In those cases, the Account will often seek to share (or "participate") in any increase in property value from building improvements or in the lessee's gross revenues from the building above a base amount (which may be adjusted if real estate taxes or similar operating expenses increase or upon other events). The Account can invest in leasebacks that are subordinated to other interests in the land, buildings, and improvements. These interests include a first mortgage, other mortgage, or lien. In that case, the leaseback interest will be subject to greater risks. Investments in Mortgages - ------------------------ The Account can make mortgage loans or hold interests in mortgage loans made by it or others, generally on the same types of properties it would otherwise purchase. These will include commercial mortgage loans that may pay fixed or variable rates of interest or have "participating" features (as defined below). The Account's mortgage loans usually will be secured by properties that have income-producing potential based on historical or projected data. Mortgage loans usually will be non-recourse, which means they won't be the borrower's personal obligations. They usually will not be insured or guaranteed by government agencies or anyone else. We expect most of the Account's mortgage loans to be secured by first mortgages on existing income-producing property. First mortgage loans are secured by mortgages which have first-priority liens on the real property. These loans may be amortized, or may provide for interest-only payments, with a balloon payment at maturity. Participating Mortgage Loans. The Account may also seek to make mortgage loans which, in addition to charging interest, permit the Account to share (have a "participation") in the income from or appreciation of the underlying property. These participations let the Account receive additional interest, - 15 - calculated as a percentage of the revenues the borrower receives from (i) operating the property and/or (ii) selling or refinancing the property or otherwise. Participations can also involve granting the Account an option to buy the property securing the loan or an option to buy an undivided interest in the property securing the loan. Managing Mortgage Loan Investments. When advisable and consistent with its investment objective, the Account can sell its mortgage loans, or portions of them, before maturity. TIAA can also extend the maturity of any mortgage loan made by the Account, consent to a sale of the property subject to a mortgage loan, finance the purchase of a property by making a new mortgage loan in connection with the sale of a property (either with or without requiring the repayment of the existing mortgage loan), renegotiate and restructure the terms of a mortgage loan, and otherwise manage the Account's mortgage loans. Standards for Direct Ownership and Mortgage Loan Investments - ------------------------------------------------------------ In making direct ownership investments and mortgage loan investments, TIAA will consider relevant real property and financial factors. These include the location, condition, and use of the underlying property, its operating history, its future income-producing capacity, and the quality, operating experience, and creditworthiness of the unaffiliated borrower. Before the Account acquires any direct ownership interest or makes a mortgage loan, TIAA will analyze the fair market value of the underlying real estate, taking into account the property's operating cash flow (derived from the historical and expected levels of rental and occupancy rates, and the historical and projected expenses of the property), supplemented by the general economic conditions in the area where the property is located. Ordinarily, each mortgage loan made by the Account will not exceed, when added to the amount of any existing debt, 85% of the appraised value of the mortgaged property, unless the Account is compensated for taking such additional risk. Foreign Real Estate and Other Foreign Investments - ------------------------------------------------- We don't expect that the Account will buy foreign real estate or make real estate-related investments in foreign countries initially, but it might do so as it grows. It might also invest in securities or other instruments of foreign governmental or private issuers that are consistent with its investment objective and policies. Often, different factors affect foreign and domestic investment decisions. For example, foreign real estate markets have different liquidity and volatility attributes than U.S. markets. Changes in currency rates, currency exchange control regulations, possible expropriation or confiscatory taxation, political, social, and - 16 - economic developments, and foreign regulations can also affect foreign real estate investments. It may be more difficult to obtain and collect a judgment on foreign investments than on domestic ones. The value of investments that aren't denominated in U.S. dollars can go up or down as currency rates change. Rental income from those properties could be similarly affected by currency movements. Changes in currency exchange controls can also affect the value of the Account's foreign investments. The Account may seek to hedge its exposure to changes in currency rates and exchange control regulations, which could involve extra costs. We will consider the above factors and others before investing in foreign real estate, and won't invest unless our standards and objectives are met. Depending on investment opportunities, the Account's foreign investments could at times be concentrated in one or two foreign countries. The percentage of the Account's foreign investments will vary. However, we expect that foreign investments will be no more than 25% of the Account's portfolio. Other Real Estate-Related Investments - ------------------------------------- The Account can make other real estate-related investments, including holding shares of real estate investment trusts, common or preferred stock of companies whose business involves real estate, and collateralized mortgage obligations. Real Estate Investment Trusts. Real estate investment trusts ("REITs") are publicly-owned entities that lease, manage, acquire, hold mortgages on, and develop real estate. REITs attempt to optimize share value by acquiring and developing new projects. They also refurbish, upgrade, and renovate existing properties to increase rental rates and occupancy levels. REITs seek higher cash flows by negotiating for rental increases on existing leases, replacing expiring leases with new ones at higher rates, and improving occupancy rates. REITs must distribute 95% of their net earnings to shareholders in order to benefit from a special tax structure, which means they may pay high dividends. While a REIT's yield is relatively stable, its price fluctuates with interest rates. Other factors can also affect a REIT's price. For example, a REIT can be affected by such factors as cash flow dependency, the skill of its management team and defaults by lessees or borrowers. In the event of a default by a lessee or borrower, a REIT may experience delays in enforcing its rights as a lessor or mortgagee and may incur substantial costs associated with protecting its investments. - 17 - REITs invest in real property and mortgages, and therefore are subject to many of the same risks as the Real Estate Account. See "Risk Factors," page and "Risks of REIT Investments," page 26. Stock of Companies Involved in Real Estate Activities. The Account can invest in common or preferred stock of companies whose business involves real estate. These stocks can be listed on one or more U.S. or foreign stock exchanges or traded over-the-counter in the U.S. or abroad. Like other equity securities, these stocks are subject to market risk -- their price can go up or down in response to changes in the financial markets. They are also subject to financial risk, which comes from the possibility that current earnings will fall or that overall financial soundness will decline, reducing the security's value. Collateralized Mortgage Obligations. The Account can invest in collateralized mortgage obligations ("CMOs") that are fully collateralized by a portfolio of mortgages or mortgage-related securities. CMO issuers distribute principal and interest payments on the mortgages to holders of the CMOs according to the distribution schedules of each CMO. Some classes of CMOs may be entitled to receive mortgage prepayments before other classes do. Therefore, the prepayment risk for a particular CMO may be more or less than for other mortgage-related securities. CMOs may also be less marketable than other securities. CMO interest rates can be fixed or variable. Variable- rate CMOs may be structured to adjust inversely with and more rapidly than short-term interest rates. As a result, their market value tends to be more volatile than other CMOs. Other Investments - ----------------- The Account can invest in securities issued or guaranteed by the U.S. Government or one of its agencies and instrumentalities, and debt securities of foreign governments or multinational organizations. The Account can also invest in corporate debt securities, asset-backed securities, and money market instruments and other cash equivalents issued by domestic or foreign entities. It can also buy limited amounts of common or preferred stock of domestic or foreign companies that aren't involved primarily in real estate. The Account will buy only investment-grade debt securities that are rated, at the time of purchase, within the top four categories by a nationally recognized rating organization or, if not rated, that are deemed to be of equivalent quality by TIAA. - 18 - The Account's money market instruments and other cash equivalents will usually be high-quality short-term debt obligations. These investments include, but are not limited to, securities issued or guaranteed by the U.S. Government or one of its agencies and instrumentalities, commercial paper, certificates of deposit, bankers' acceptances, repurchase agreements, interest-bearing time deposits, and corporate debt securities. From time to time, a significant percentage of the Account may be invested in liquid assets while we look for suitable real property investments. Liquid assets don't have to be real estate-related. The Account also can temporarily increase the percentage of its liquid assets under particular circumstances. These include the rapid influx of participants' funds, lack of suitable real estate investments, or a need for greater liquidity. GENERAL INVESTMENT AND OPERATING POLICIES The Account doesn't intend to buy and sell any direct ownership interests in properties, mortgage loans, leasebacks, or other real estate investments simply to make short-term profits by their sale. However, the Account may sell investments to raise cash, if market conditions dictate, or otherwise. The Account will reinvest any proceeds from sales of assets (and any cash flow from operations) that it doesn't need to pay operating expenses or to meet redemption requests (e.g., cash withdrawals or transfers). Appraisals. When acquiring properties, leasebacks, or other real estate investments, the Account will rely on TIAA's analysis of the investment and usually won't receive an independent appraisal before an acquisition. However, the Account will get an independent appraisal when it makes mortgage loans. We expect that the Account's properties and participating mortgage loans will be appraised or valued annually by an independent state-certified appraiser who is a member of a professional appraisal organization. Borrowing. Usually, the Account won't borrow money to purchase direct ownership interests in real properties -- i.e., these investments will be unleveraged. However, the Account may use a line of credit to meet short-term cash needs. While the properties the Account acquires ordinarily will be free and clear of mortgage indebtedness immediately after their acquisition, it is possible that the terms of a short-term line of credit may require the Account to secure a loan with one or more of its properties or other assets. Joint Investments. While the Account will often own the entire fee interest in a property, it can also hold other - 19 - ownership interests. The Account can hold property jointly through general or limited partnerships, joint ventures, leaseholds, tenancies-in-common, or other legal arrangements. The Account cannot hold real property jointly with TIAA or its affiliates. Diversification. We have not placed percentage limitations on the type and location of properties that the Account can buy. However, the Account plans to diversify its investments by type of property and geographic location. How much the Account diversifies will depend upon the availability of suitable investments and how much the Account has available for investment at any given time. Discretion to Evict or Foreclose. TIAA can decide when it is in the best interests of the Account to evict defaulting tenants or to foreclose on defaulting borrowers. When deciding to evict or foreclose, TIAA will take a course of action that it concludes is in the best interests of the Account in order to maintain the value of an investment. Property Management and Leasing Services. We usually will hire a management company to perform local property management services for properties the Account owns and operates. The local management company will be responsible for day-to-day management of the property, supervising any on-site personnel, negotiating maintenance and service contracts, and providing advice on major repairs, replacements, and capital improvements. The local manager will also review market conditions in order to recommend changes in rent schedules and create marketing and advertising programs to attain and maintain good occupancy rates by responsible tenants. The Account may also hire one or more leasing companies to perform leasing services for any property with actual or projected vacancies, if the property management company doesn't already provide those services. The leasing companies will coordinate with the property management company to provide marketing and leasing services. The fees paid to the local management company, along with any leasing commissions and expenses, will reduce the Account's cash flow from a property. We won't usually need a management services company for mortgage loans (except for mortgage servicing), but we might decide that those services are desirable when we are foreclosing on a mortgage loan. DESCRIPTION OF PROPERTIES As of the date of this prospectus, the Account has purchased 17 properties for its portfolio, consisting of four neighborhood shopping centers, six multi-family residential complexes, one office building and six industrial properties. In addition, the Account has purchased eight suburban office - 20 - buildings through a joint venture in which it holds a 90% interest. These properties are described in detail in Appendix A. Real estate investments made on behalf of the Account after the date of this prospectus will be described in supplements to the prospectus, as appropriate. RISK FACTORS Participants should consider various risks before investing in the Account. These include valuation risks (see "Valuation of Assets," page 35), conflicts of interest (see "Conflicts of Interest," page 30), and the following: Risks of Real Property Ownership - -------------------------------- General Risks of Real Property Ownership. The Account will be subject to the risks inherent in owning real property. They include fluctuations in occupancy rates and operating expenses, unanticipated repairs and renovations (particularly in older structures), and variations in rental rates and property values. Many factors can adversely affect rental rates and property values. These include the state of the economy (local, national or global), changing supply and demand for the type of properties the Account invests in, natural disasters or man-made events, zoning laws, real property tax rates, and other governmental rates and fiscal policies. Operating the Account's real property mainly involves renting to tenants. There are risks associated with rentals. For example if a lease is terminated because the tenant is unable to pay the rent (including when a bankruptcy court has rejected the tenant's lease), the Account's cash flow will be reduced. If we terminate a lease, we might not be able to find a new tenant without incurring a loss. Any disputes with tenants could also involve costly litigation. The inability to attract and retain tenants, which means that rental income declines, is another risk for the Account. Third parties in purchase-leaseback transactions may renege or default on rental agreements or rent guarantees. We also can't assure that operating a property will produce a satisfactory profit because operating costs can increase in relation to a property's gross rental income. In particular, property taxes and utility, maintenance, and insurance costs may go up. The Account may have to advance funds to third parties to protect its investment, or sell properties on disadvantageous terms in order to raise needed funds. While the Account intends to reinvest cash flow from investments, we can't guarantee that those investments will - 21 - generate enough income to pay the Account's operating and other expenses. Resale of Real Property. Because the Account invests in real property, its investments may be illiquid compared to the readily-marketable securities held by other variable annuity accounts. A poor market for real estate can make it harder to sell any particular investment for its full value. This could lead to losses or reduced profits for the Account. The risk that resale will be difficult will vary with the size, location, and type of investment. The Account might not be able to sell a property at a particular time or price. Although the Account ordinarily would sell real property for cash, the Account may at times find it necessary to provide financing to purchasers. Risks with Purchase-Leaseback Transactions. Risks under purchase-leaseback transactions relate to the ability of the lessee to make required payments to the Account. Because subleases are usually for shorter terms than the leaseback, the lessee's ability to make payments to the Account may depend on successfully renewing any subleases or finding new subtenants. If the leaseback interest is subordinate to other interests in the real property, such as a first mortgage or other lien, the risk to the Account increases because the lessee may have to pay the senior lienholder to prevent foreclosure before it pays the Account. If the lessee defaults or the leaseback is terminated prematurely, the Account might not recover its investment unless the property is sold or leased on favorable terms. Properties Acquired Prior to Completion of Development and Construction and Recently-Constructed Properties. If the Account chooses to develop a real property, it faces the risk of delays or unexpected increases in the cost of property development and construction. These risks can come from over-building, which lowers demand for rentals. They can also be the result of slower growth in local economies, poor performance of local industries, higher interest rates, strikes, bad weather, material shortages, or increases in material and labor costs. We can't guarantee that once a property is developed it will operate at the income and expense levels we projected before developing it. We also can't guarantee that a property will be developed the same way we originally planned. The Account may buy recently-constructed properties that are subject to agreements with sellers that provide for certain minimum levels of income. We can't guarantee that the sellers or other parties will be able to carry out their obligations under those agreements. We also can't assure you that when these agreements expire or the seller defaults, the operating income from the properties will be enough to produce as good a return as the Account was getting from those properties before the expiration or default. - 22 - Risks of Joint Ownership - ------------------------ Investing in joint venture partnerships or other forms of joint property ownership sometimes involves risks that don't apply when properties are owned directly. These risks include the co-venturer's bankruptcy or the co-venturer's having interests or goals inconsistent with those of the Account. If a co-venturer doesn't follow the Account's instructions or adhere to the Account's policies, the jointly-owned properties, and consequently the Account, might be exposed to greater liabilities than expected. A co-venturer also can make it harder for the Account to transfer its interest in the joint form of ownership. A co-venturer could have the right to decide whether and when to sell the property. As a result, it could be hard for the Account to sell joint ownership investments. Risks of Mortgage Loan Investments - ---------------------------------- General Risks of Mortgage Loans. The main risk of a mortgage loan investment is that the borrower defaults. If that happens, the Account would have to foreclose on the underlying property to protect the value of its mortgage loan, or pursue other remedies. Since the Account will usually make non-recourse mortgage loans, it will usually rely solely on the value of the underlying property for its security. Mechanics', materialmen's, governmental, and other liens on the property may have or obtain priority over the Account's security interest. The unamortized principal amount due under a mortgage loan will be payable in a lump sum payment at the end of the loan term. Unless the borrower has large cash reserves, it may not be able to make this payment unless it can refinance the mortgage loan with another lender. If interest rates are volatile during the investment period, the Account's variable-rate mortgage loans could have lower yields. Prepayment Risks. The Account's mortgage loan investments will usually be subject to the risk that the borrower decides to prepay the loan. Prepayments can change the Account's return because we may be unable to reinvest the prepaid proceeds at as good an interest rate as the original mortgage loan rate. Loan-to-Value Ratio. The larger the mortgage loan compared to the fair market value of the property securing it, the greater the loan's risk. The Account therefore usually won't make mortgage loans of more than 85% of the appraised value of the property. (It will make larger loans only if it's compensated for the extra risk.) However, we can't guarantee that if a borrower defaults, the Account will be able to sell the property for its estimated or appraised value. - 23 - Interest Limitations. Because state laws could change during the term of a loan or for other reasons, we might not always be able to determine with certainty whether the interest rate we are charging on mortgage loans complies with state usury laws that limit rates. If we inadvertently violate those laws, we could incur such penalties as restitution of excess interest, unenforceability of debt, and treble damages. Risks of Participations. A participating mortgage loan could have a relatively low fixed interest rate and provide for payment of a percentage of revenues from the property or sale proceeds. In that case, if the property doesn't generate revenues or appreciate in value, the Account will have given up a potentially greater fixed return without receiving the benefit of appreciation. It's also possible that in very limited circumstances, a court could characterize the Account's participation interest as a partnership or joint venture with the borrower. The Account would then lose the priority its security interest would otherwise have been given, or be liable for the borrower's debts. General Risks of All Types of Real Estate-Related Investments - ------------------------------------------------------------- Appraisal Risks. We may rely on appraisals from real estate professionals to value properties. However, appraisals are only estimates based on the professional's opinion and may not be the amount the Account receives if it sells the property. If appraisals are too high, participants sending in premiums will be credited with fewer accumulation units than if the value were lower. Participants withdrawing funds or receiving income when appraisals are too high will receive more money than they would otherwise be entitled to, which hurts other participants. If appraisals are too low, participants sending in premiums would be credited with too many accumulation units, which hurts other participants. Payments to participants making cash withdrawals or receiving income would be lower when appraisals are too low than they would have been if the appraisals were higher. Inaccurate appraisals can also affect the fees the Account pays to TIAA, since TIAA's fees are based on the Account's value (see "Conflicts of Interest," page 30). Investment Opportunities; Size of Account. We can't guarantee that good investment opportunities will come up at the same time funds are available for investment. In addition, the Account may have to forego investment opportunities if it does not have sufficient money to invest. It will be more difficult to diversify the Account's investments when the Account is small. Returns from the Account would, in that case, be more dependent on the performance of any - 24 - one investment than if the Account were larger and more diversified. Casualty Losses. We will try to arrange for, or require proof of, comprehensive insurance, including liability, fire, and extended coverage, for the Account's real property and properties securing mortgage loans or subject to purchase-leaseback transactions. However, some types of catastrophic losses are uninsurable or so expensive to insure against that it doesn't make sense to buy insurance for them. These may include losses from earthquakes, wars, nuclear accidents, floods, or environmental or industrial hazards or accidents. If a disaster that we haven't insured against occurs, the Account could lose both invested principal and any future profits from the property affected. Some leases may permit a tenant to terminate its obligations in certain catastrophic situations, regardless of whether those events are fully covered by insurance. In that case, the Account would not receive rental income from the property while that tenant's space is vacant. Regulatory and Environmental Risks. The imposition of restrictive zoning regulations and land use controls, strict air and water quality standards, and noise pollution regulations by local, state, federal, and foreign governmental authorities could limit the availability of suitable investments for the Account and could increase any construction and operating costs of the Account. In addition, changes in local, state, federal, or international environmental regulations on the use or presence of hazardous or toxic materials or waste could raise the cost of owning and maintaining properties. It could be harder for the Account to maintain, sell, rent, finance, or refinance properties or property interests affected by new environmental regulations because of the increased costs associated with regulatory compliance. Under some federal statutes, the Account's potential liability for environmental damage could exceed the value of the Account's investment in a property. Under various federal, state, and local environmental regulations, a current or previous property owner or operator, and sometimes a mortgagee, may be liable for the cost of removing or cleaning-up hazardous or toxic substances on, in or released from a property. The Account could be liable for those costs on its properties, even if we didn't know of, and weren't responsible for, the presence or release of the hazardous or toxic substances. The presence of any hazardous or toxic substances, or the failure to clean up those substances properly, can limit an owner's ability to sell or rent a property. The Account could also be liable for the cost of removal or clean up - 25 - of those substances at a disposal or treatment facility, even if we don't own the facility. Under current environmental regulations, the cost of any required clean-up and the liability of the owner, operator, or mortgagee is usually not limited and could exceed the property's value or the aggregate assets of the owner or operator. In an extreme case, the Account could be required to incur significant costs because of a single real estate investment if it were legally required to pay for cleaning up an environmental hazard. Various environmental regulations also require property owners or operators to monitor business activities on their premises that affect the environment. Failure to comply with those requirements could make it difficult to lease or sell any affected property or subject the Account to monetary penalties. Risks of REIT Investments - ------------------------- REITs invest in real property and mortgages, and therefore are subject to many of the same general risks associated with direct real property ownership. In particular, equity REITs may be affected by changes in the value of the underlying property owned by the trust, while mortgage REITs may be affected by the quality of any credit extended. In addition to these risks, because REIT investments are securities, they may be exposed to market risk -- price volatility due to changing conditions in the financial markets and, in particular, changes in overall interest rates. Risks of Liquid Investments - --------------------------- The Account's investments in securities and other instruments are subject to several types of risks. One is financial risk, which for debt securities and other fixed-income instruments comes from the possibility the issuer won't be able to pay principal and interest when due. For common or preferred stock, it comes from the possibility that the issuer's current earnings will fall or that its overall financial soundness will decline. Another kind of risk is market risk -- price volatility due to changing conditions in the financial markets and, particularly for debt securities, changes in overall interest rates. Finally, volatile interest rates may affect current income from an investment. Other Risks - ----------- Risk of Unspecified Investments. As of the date of this prospectus, the Account has invested only a portion of its assets in real estate and we can't tell you with certainty when and if the Account will be fully invested. While we intend to supplement this prospectus periodically to describe the Account's property investments, it is unlikely that supplements will be - 26 - available for your review prior to the completion of a property acquisition. As a result, if you invest in the Account you won't have the opportunity to evaluate for yourself the economic merit of any property investments that the Account may make. You therefore must rely solely upon the judgment and ability of TIAA to select investments consistent with the Account's investment objective and policies. Investment Company Act of 1940. We intend to operate the Account so that it will not have to register as an "investment company" under the 1940 Act. This will require monitoring the Account's portfolio so that it won't have more than 40% of total assets (other than U.S. Government securities and cash items) in investment securities (as defined under the 1940 Act). As a result, the Account may be unable to make some potentially profitable investments. ROLE OF TIAA TIAA plays a significant role in operating the Real Estate Account. The Account is managed by TIAA. In addition, TIAA's general account supplied the Account's initial capital, or "seed money." On an ongoing basis, TIAA's general account provides a liquidity guarantee -- i.e., TIAA ensures that the Account has funds available to meet transfer or cash withdrawal requests. (See "Liquidity Guarantee," page 28.) Seed Money - ---------- On July 3, 1995, TIAA contributed $100 million to the Account in exchange for $100 million in accumulation units, to enable the Account to purchase a diverse portfolio of properties without having to wait to receive premiums. On September 16, 1996, in accordance with a five-year fixed repayment schedule approved by the New York Insurance Department, TIAA began to redeem the accumulation units related to its seed money investment. TIAA will redeem a pro rata portion of the accumulation units monthly over a 60-month period (16,666.667 units per month). TIAA may, with prior approval of the independent fiduciary (see page 28), accelerate the 60-month redemption period. Any prepayment, however, will not modify the existing repayment schedule to the extent TIAA still owns accumulation units related to its seed money investment. TIAA's accumulation units are being redeemed by the Account at net asset value at the time of redemption. Because of its seed money investment, TIAA owned accumulation units representing 28% of the Account's net assets, as of December 31, 1996. - 27 - Liquidity Guarantee - ------------------- Subject to federal income tax considerations and, where applicable, the terms of your plan, you can redeem accumulation units daily by making cash withdrawals or transfers from the Account. If the Account's cash flow (from premiums and investment income) and liquid investments are insufficient to fund redemption requests, TIAA's general account will fund them by purchasing accumulation units. When TIAA purchases units to keep the Account liquid ("liquidity units") or TIAA sells liquidity units back to the Account, the number of accumulation units TIAA holds will go up or down. TIAA guarantees that you can redeem your accumulation units at their then current daily net asset value. Of course, you can only make a cash withdrawal consistent with the terms of your plan. As TIAA buys liquidity units, it may end up owning more of the Real Estate Account than anticipated. An independent fiduciary (see below) will monitor whether liquidity units held by TIAA's general account have, together with the accumulation units representing TIAA's seed money investment (if still not redeemed), exceeded a specific percentage of the Account's total outstanding accumulation units. If so, TIAA may be required to redeem some of its liquidity units. The independent fiduciary may require the number of liquidity units TIAA holds to be reduced when the Account has uninvested cash or liquid investments available. The independent fiduciary may also select properties for the Account to sell so that TIAA can redeem liquidity units. See "Role of the Independent Fiduciary," below. The Account pays TIAA for the liquidity guarantee through a daily deduction from net assets. See "Liquidity Guarantee Deduction," page 40. TIAA's ERISA Fiduciary Status - ----------------------------- To the extent that assets of a plan subject to ERISA are allocated to the Account, TIAA will be acting as an "investment manager" (as that term is defined under ERISA) and a fiduciary under ERISA with respect to those assets. Role of the Independent Fiduciary - --------------------------------- TIAA's purchase and sale of liquidity units raises certain technical issues under ERISA. TIAA therefore applied for and received a prohibited transaction exemption from the U.S. Department of Labor (PTE 96-76). In connection with the exemption, TIAA has appointed an "independent fiduciary" for the Real Estate Account. - 28 - Institutional Property Consultants, Inc., a registered investment adviser in business since 1983, serves as the Account's independent fiduciary. The independent fiduciary's responsibilities include: (1) reviewing and approving the Account's investment guidelines and any changes to them; (2) monitoring whether the properties the Account buys conform to the investment guidelines; (3) reviewing and approving valuation procedures and any changes to them; (4) approving adjustments to any property valuations that change the value of the property or the Account as a whole above or below certain prescribed levels, or that are made within three months of the annual independent appraisal; (5) reviewing and approving how we value accumulation and annuity units; (6) approving the appointment of all independent appraisers; (7) reviewing the purchase and sale of units by TIAA to ensure that we use the correct unit values; and (8) reviewing the seed money redemption schedule. If the independent fiduciary believes that any of the properties have changed materially, or that an additional appraisal is otherwise necessary to assure the Account has correctly valued a property, it can require appraisals besides those normally conducted. After (and, if necessary, during) the period during which the Account must repay TIAA's seed money investment, the independent fiduciary will calculate the percentage of total accumulation units that TIAA's ownership shouldn't exceed (the "trigger point"). The independent fiduciary will also create a method for changing the trigger point. It must approve any adjustment of TIAA's interest in the Account and can require an adjustment. If TIAA's investment reaches the trigger point, the independent fiduciary may plan and participate in any program for selling the Account's assets. This can include selecting properties for sale, providing sales guidelines, and approving those sales that, in the independent fiduciary's opinion, are desirable to reduce TIAA's ownership in the Account or to facilitate winding down the Account. The independent fiduciary will supervise the Account during any winding down of operations. It will review any program for selling the assets of the Account during that time. This review can include selecting the properties to be sold, providing sales guidelines, and approving the sale of the properties in the Account, if in the independent fiduciary's opinion, the sales would facilitate winding down. The independent fiduciary will also review any other transactions or matters involving the Account that TIAA submits for review to determine whether those transactions are fair and in the Account's best interest. TIAA appointed the independent fiduciary for a five-year term, and has established a special subcommittee of the Investment Committee of its Board of Trustees with authority to - 29 - renew the appointment or remove the independent fiduciary. When the term ends, the independent fiduciary will not be reappointed unless more than 60% of the subcommittee members approve. Before the term ends, the independent fiduciary can be removed for cause by the vote of the majority of subcommittee members. In addition, the independent fiduciary can resign after at least 180 days' written notice. If the independent fiduciary resigns or is removed, the special subcommittee will appoint a successor. TIAA pays the independent fiduciary directly. The investment management charge deducted from the Account's assets and paid to TIAA includes TIAA's costs for retaining the independent fiduciary. The independent fiduciary will receive less than 5% of its annual income, including payment for services to the Real Estate Account during its term as independent fiduciary, from TIAA. Your decision as a participant or plan fiduciary to invest in the Account will constitute your approval and acceptance of Institutional Property Consultants, Inc. or any successor to serve as the Account's independent fiduciary, after full and fair disclosure has been made by TIAA, including the disclosure in this prospectus. CONFLICTS OF INTEREST TIAA is a nonprofit company and will not accept acquisition or placement fees for services provided to the Account. However, the same people who oversee the Account's real estate and non-real estate investments may also buy, sell, and manage the real estate-related and other investments of TIAA's general account. This could create conflicts of interest. The potential for conflicts of interest can arise because TIAA's general account may sometimes compete with the Real Estate Account in the purchase or sale of investments. However, we do not expect many conflicts to arise because the Real Estate Account and TIAA's general account will normally have different investment and sale objectives and will generally not be in the market to purchase or sell the same types of properties at the same time. Whenever the investment or sale objectives of the Real Estate Account and TIAA's general account are similar, we will use the following procedures to eliminate conflicts of interest: The decision, in the first instance, as to whether the Real Estate Account or TIAA's general account will purchase or sell a property will be determined by such factors as which account has cash available to make the purchase, the effect the purchase or sale will have on the diversification of each account's portfolio, the estimated future cash flow of the portfolios with regard to both purchases or sales, and other relevant legal or investment policy factors. If this analysis - 30 - does not clearly determine which account should participate in a transaction, a rotation system will be used. Potential conflicts of interest could also arise because some properties in TIAA's general account may compete for tenants with properties the Account owns or has an interest in. The decision as to whether properties owned by the Account or TIAA's general account will lease space to a tenant will be determined by such factors as the tenant's preference between the two properties, how much the tenant is willing to pay for rent, and which property can best afford to pay any required costs associated with such leasing. Many of the personnel of TIAA involved in performing services to the Real Estate Account will have competing demands on their time. The personnel will devote such time to the affairs of the Account as TIAA's management determines, in its sole discretion exercising good faith, is necessary to properly service the Account. TIAA believes that it has sufficient personnel to discharge its responsibility to both the general account and the Account and to avoid conflicts of interest. Indemnification - --------------- The Account has agreed to indemnify TIAA and its affiliates, including its officers and directors, against certain liabilities, including liabilities under the Securities Act of 1933. The Account may make such indemnification out of its assets. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Account began operating on July 3, 1995 and interests in the Account began being offered to participants on October 2, 1995. Through December 31, 1996, the Account had acquired a total of thirteen real estate properties, including four industrial properties, four neighborhood shopping centers, one office property and four apartment complexes. As of December 31, 1996, these properties represented 35.82% of the Account's total investment portfolio. 64% of the net transfers into the Account during 1996 were received during the fourth quarter, and 43% of the Account's total premiums during 1996 were received during the same time frame. This high volume of premiums and transfers into the Account so late in the year had a negative impact on the level of real estate properties held as a percentage of total investments at December 31, 1996. - 31 - The Account has made a number of additional property purchases since the beginning of the year. In April 1997, the Account purchased in joint venture with Pegasus Partners, Inc., a subsidiary of USF&G Corporation, eight suburban office buildings for a combined total purchase price of $164.5 million. (TIAA has a 90% interest in the joint venture.) The Account also purchased two industrial properties and two apartment complexes since the beginning of 1997. 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, 1996, the Account also held investments in sixteen real estate investment trusts (REITs), representing 4.95% of the portfolio, commercial paper and corporate bonds, representing 5.12% of the portfolio and short-term obligations of U.S. government agencies, representing 54.11% of the portfolio. Results of Operations-Year Ended December 31, 1996 Compared to Period Ended - -------------------------------------------------------------------------------- December 31, 1995 - ----------------- The Account's total net return was 8.33% for the year ended December 31, 1996 and 2.57% for the six month period ended December 31, 1995. The Account's performance in 1995 was lower for two reasons, first the Account was operational for less than a full year in 1995 and its real estate investments were made late in the period. The Account's net investment income, after deduction of all expenses, was $12,452,376 for the year ended December 31, 1996 and $2,640,397 for the six month period ended December 31, 1995, a 372% increase. This increase was the result of a full year of operations coupled with a growing base of net assets from December 31, 1995 to December 31, 1996. Total assets increased 198% during that period. In addition, the Account had net realized and unrealized gains (gross unrealized gains less gross unrealized losses) on investments of $3,330,539 and $35,603 for the year ended December 31, 1996 and six month period ended December 31, 1995, respectively. Net unrealized gains on real estate properties occurred for the first time during 1996 and accounted for 30% of the net change in unrealized appreciation for that period. Such gains and losses resulted from the periodic revaluations of the Account's properties. The gains were based, in part, on the fact that our experience operating the properties provided us with better estimates of future income and expenses, and, in part, on increasing prices for certain property types held by the Account. The losses were based, in part, on slower re-leasing of space at certain properties owned by the Account. - 32 - Net unrealized gains on marketable securities accounted for 70% of the net change in unrealized appreciation for the year ended December 31, 1996 and 100% during the six month period ended December 31, 1995. The net unrealized gains during both periods resulted primarily from price appreciation of the shares of REIT stock owned by the Account. The Account's real estate holdings generated approximately 56% and 4% of the Account's total investment income (before deducting Account expenses) during the year ended December 31, 1996 and the six month period ended December 31, 1995, respectively. The remaining 44% and 96%, respectively, of the Account's total investment income was generated by marketable securities investments. The Account's first real estate purchase was made on November 22, 1995, which explains the low percentage of real estate income in 1995. As the Account approaches its goal of being approximately 70% to 80% invested in real estate, future investment income is expected to be affected to a greater degree by its real estate holdings. While the future performance of the Account's investments cannot be predicted, assuming little change in current economic conditions, this anticipated increase in real estate holdings is expected to have a positive impact on the Account's total return. Gross real estate rental income was $10,951,183 for the year ended December 31, 1996 and $165,762 for the six month period ended December 31, 1995. As of December 31, 1995, the Account owned five properties, and, as of December 31, 1996, the Account owned thirteen properties. This increase in the number of properties owned by the Account was a major factor in the higher real estate income for 1996. Interest income on the Account's short-and intermediate- term investments for the year ended December 31, 1996 and the six month period ended December 31, 1995 totaled $5,570,907 and $2,820,229, respectively. This increase results from the threefold increase in the size of the Account during 1996 coupled with a full year of investing activity. Dividend income on the Account's investments in REITs totaled $456,579 and $8,671, respectively, for the same periods. Shares of REITs totaled 4.95% of the Account investments as of year end 1996 and 0.37% as of year end 1995. This increased percentage and the longer investing period accounted for the increased dividend income for 1996. Total property level expenses for the year ended December 31, 1996 were $3,370,497, of which $1,254,163 was attributable to real estate taxes and $2,116,334 represented operating expenses. Total property level expenses for the six month period ended December 31, 1995 were $43,832 of which $14,659 was attributable to real estate taxes and $29,173 was attributable to operating expenses. Property level expenses increased in 1996 as a result of the increased number of properties in the Account during 1996 and due to the fact that - 33 - the 1995 amounts represent a six month period while 1996 represents a full year of activity. The Account also incurred expenses for the year ended December 31, 1996 and six month period ended December 31, 1995 of $642,042 and $227,531, respectively, for investment advisory services provided by TIAA, $437,894 and $66,320, respectively, for administrative and distribution services provided by TIAA-CREF Individual and Institutional Services, Inc. and $75,860 and $16,582, respectively, for the mortality and expense risks assumed and the liquidity guarantee provided by TIAA. Such expenses increased in 1996 as a result of the larger net asset base in the Account during 1996 and because the 1995 expenses were incurred for a six month period while the 1996 expenses represents a full year of activity. Liquidity and Capital Resources - ------------------------------- On September 16, 1996, in accordance with a five-year repayment schedule approved by the New York Insurance Department, TIAA began to redeem its seed money accumulation units related to its initial $100 million seed money investment. TIAA will continue to redeem a pro rata portion of the accumulation units it holds over a 60 month period (16,666.667 units per month). As of December 31, 1996, the Account had redeemed 66,667 accumulation units at prevailing daily unit values, amounting to $7,294,134 in total redemption payments to TIAA, leaving it holding 933,333 units at year end 1996 with a value of $103,703,507. For the year and six month period ended December 31, 1996 and 1995, the Account earned $12,452,376 and $2,640,397, respectively, in net investment income and received $242,175,188 and $17,606,693, respectively, for the same periods in premiums and net participant transfers from other TIAA and CREF accounts. Real estate properties costing $86,731,333 and $43,989,665 were purchased during 1996 and 1995, respectively. At December 31, 1996 and 1995, the Account's liquid assets (i.e., its cash, REITs, short- and intermediate-term investments, and government securities) had a value of $240,109,263 and $74,389,356, respectively. It is anticipated that much of these liquid assets, 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 primarily invested in marketable securities 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. - 34 - No major capital expenditures were made during 1996 for any of the properties purchased through December 31, 1996. There is a small portion of the leased space in the industrial and office properties and the neighborhood shopping centers due to expire during 1997. The Account does not expect to incur any extraordinary construction costs or leasing commissions in order to re-lease that space. 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 expect such 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. VALUATION OF ASSETS We value the Account's assets as of the close of each valuation day. The Account's net asset value at the end of any valuation day is equal to the sum of: (i) the value of the Account's cash, cash equivalents, and short-term and other debt instruments; (ii) the value of any of the Account's other securities investments; (iii) the value of the individual real properties and other real estate-related investments owned by the Account, determined as described below; and (iv) an estimate of the accrued net operating income earned by the Account from real properties and certain other real estate-related investments, reduced by the Account's liabilities, including the daily investment management fee and certain other expenses attributable to operating the Account (see "Expense Deductions," page 40). Our valuation procedures are described below. The independent fiduciary approves these procedures and any changes to them (see page 28). Valuing Real Estate-Related Investments - --------------------------------------- Valuation Methods for Real Property. Individual real properties including purchase-leasebacks and joint ventures will initially be valued at their purchase prices. (Prices include all expenses related to purchase, such as acquisition fees, legal fees and expenses, and other closing costs.) However, we could use a different value in appropriate circumstances. - 35 - After this initial valuation, an independent appraiser will value properties at least once a year. The independent fiduciary must approve all independent appraisers that the Account hires. The independent fiduciary can require additional appraisals if it believes that a property has changed materially or otherwise to assure that the Account is valued correctly. Quarterly, we will conduct an internal review of each of the Account's properties. We'll adjust a valuation if we believe that the value of the property has changed since the previous valuation. We'll continue to use the revised value to calculate the Account's net asset value until the next review or appraisal. However, we can adjust the value of a property in the interim to reflect what we believe are actual changes in property value. The Account's net asset value will include the current value of any note receivable (an amount that someone else owes the Account) from selling a real estate-related investment. We'll estimate the value of the note by applying a discount rate appropriate to then-current market conditions. Valuation Methods for Conventional Mortgages. Individual mortgages will initially be valued at their face amount. Thereafter, quarterly, we'll value the Account's fixed interest mortgage loans by discounting payments of principal and interest to their present value (using a rate at which commercial lenders would make similar mortgage loans of comparable maturity). We'll also use this method for foreign mortgages with conventional terms. We'll adjust mortgage values quarterly using this formula, unless we believe that it's necessary to adjust them more frequently. We'll get information about commercial lenders by surveying typical lending institutions and from other sources. Valuation Methods for Participating Mortgages. Individual mortgages will initially be valued at their face amount. Thereafter, quarterly, we'll calculate the values of the Account's mortgage loans with participation features. To do so we'll make various assumptions about occupancy rates, rental rates, expense levels, capitalization rates upon sale, and other things. We'll use these assumptions to project the cash flow from each investment over the term of the loan, or sometimes over a shorter period. For these purposes, cash flow includes fixed interest, the participation feature, and any anticipated share in sale proceeds. To calculate asset value, we'll assume that the real property underlying each investment will be sold at the end of the period used in the valuation at a price based on market assumptions for the time of the projected sale. Although we use this time period to calculate asset values, it doesn't mean that the Account will actually hold the investment for that period. - 36 - We chose it simply as a frame of reference for estimating asset values. After we calculate estimated cash flows and sale proceeds, we discount them to their present value (using rates appropriate to then-current market conditions). We can then estimate the value of the mortgage. Net Operating Income. The Account usually receives operating income from its real properties and other real estate-related investments intermittently, not daily. We believe it is fairer to participants to estimate the Account's net operating income rather than applying it when we actually receive it. Therefore, we assume that the Account has earned (accrued) a proportionate amount of that estimated amount daily. However, because these estimates might not turn out to be accurate, you bear the risk that, until we adjust the estimates, we could be under- or overvaluing the Account. The Account's estimated net operating income from real estate assets will be based on estimates of revenues and expenses for each property. Every year, we'll prepare a month-by-month estimate of the revenues and expenses ("estimated net operating income") for each of the Account's properties. Each day, we'll add the appropriate fraction of the estimated net operating income for the month to the Account's net asset value, as determined above. In effect, the Account will have a daily accrued receivable equal to the estimated net operating income from each of its properties. Every month, the Account will receive a report of actual operating results for each property ("actual net operating income"). We will then recognize the actual net operating income on the accounting records of the Account. We will also adjust accordingly the daily accrued receivable that is then outstanding. As the Account actually receives cash from a property, we'll adjust the daily accrued receivable and other accounts appropriately. Appraisals and Realizable Value of Investments - ---------------------------------------------- The Account's net asset value won't necessarily reflect the true or realizable value of the Account's assets (i.e., what the Account would get if it sold them). We believe that we use reasonable assumptions, estimates, and formulas to calculate the values of the Account's investments. However, we can't guarantee the Account will receive that amount when it sells a property. We also expect that the Account will sell some of its real properties for cash and notes (i.e., promises to pay in the future), rather than cash alone. In the future, the amount of the note could be greater or less than the amount of the cash. - 37 - TIAA will use annual independent appraisals of the real properties in calculating asset values. However, appraisals are only estimates and don't necessarily reflect an investment's true or realizable value. If necessary, TIAA will have properties appraised more frequently than currently planned. Adjustments. We can adjust the values of an investment if we believe events or market conditions have increased or decreased the realizable value of that investment. We might do so, for example, if an event directly affects a property or its surrounding area. We could also make adjustments for events that affect a borrower's or lessee's ability to make payments on a mortgage loan or leaseback. We can't assure that we will always become aware of each event that might require a valuation adjustment. Also, because our evaluation is based on subjective factors and interpretations, we cannot assure you that we will make adjustments in all cases where changing conditions could affect the value of the real property investments, mortgage loans, or leasebacks. The independent fiduciary will approve any adjustments to any valuation of one or more properties which results in an increase or decrease of: (1) more than 6% of the value of any of the Account's properties since the last independent annual appraisal; (2) more than 2% in the value of the Account since the prior month; or (3) more than 4% in the value of the Account within any quarter. The independent fiduciary will also approve adjustments to any property valuation that are made within three months of the annual independent appraisal. Right to Change Valuation Methods. If we decide that a different valuation method would reflect the value of an investment more accurately, we may use that method if the independent fiduciary consents. Changes in TIAA's valuation methods could change the Account's net asset value. This, in turn, could change the values at which participants purchase or redeem Account interests. Valuing Liquid Investments - -------------------------- Debt Securities and Money Market Instruments. We value fixed-income securities (including money market instruments) for which market quotations are readily available at the most recent bid price or the equivalent quoted yield for those securities (or those of comparable maturity, quality, and type). We obtain values for money market instruments with maturities of one year or less either from one or more of the major market makers for those securities or from one or more financial information services. We use an independent pricing service to value securities with maturities longer than one year except when we believe prices do not accurately reflect the fair value of these securities. - 38 - Equity Securities. We value equity securities listed or traded on the New York Stock Exchange or the American Stock Exchange at their last sale price on the valuation day. If no sale is reported that day, we use the mean of the closing bid and asked prices. Equity securities listed or traded on any other exchange are valued in a comparable manner on the principal exchange where traded. We value equity securities traded on the NASDAQ Stock Market's National Market at their last sale price on the valuation day. If no sale is reported that day, we use the mean of the closing bid and asked prices. Other U.S. over-the-counter equity securities are valued at the mean of the closing bid and asked prices. Foreign Securities. To value investments traded on a foreign exchange or in foreign markets, we use their closing values under the generally accepted valuation method in the country where traded, as of the valuation date. We convert this to U.S. dollars at the exchange rate in effect on the valuation day. Investments Lacking Current Market Quotations. We value securities or other assets for which market quotations are not readily available at fair value as determined in good faith under the direction of the Investment Committee of TIAA's Board of Trustees and in accordance with the responsibilities of TIAA's Board as a whole. MANAGEMENT AND INVESTMENT ADVISORY ARRANGEMENTS The Account doesn't have its own management or board of directors. Rather, TIAA employees, under the direction and control of TIAA's Board of Trustees and its Investment Committee, manage the investment and reinvestment of the Account's assets pursuant to investment management procedures adopted by TIAA for the Account. You don't have the right to vote on the management and operation of the Account directly; however, you may send ballots to advise the TIAA Board of Overseers about voting for nominees for the TIAA Board of Trustees. TIAA's investment management responsibilities include research and recommending and placing orders for securities, real estate-related investments, and other investments. TIAA's investment management decisions for the Account may be subject to review and approval by the Account's independent fiduciary (see page 28). TIAA also provides all portfolio accounting, custodial, and related services for the Account. In performing these services, TIAA employees will act consistent with the Account's investment objective, policies, and restrictions (see page 13). - 39 - TIAA provides all services to the Account at cost. For more about the charge for investment management services, see "Investment Management Expense Deduction," below. For information about the Trustees and principal executive officers of TIAA, see Appendix B to this prospectus. EXPENSE DEDUCTIONS Deductions are made each valuation day from the net assets of the Account for various services required to manage investments, administer the Account and the contracts, and to cover certain risks borne by TIAA. Services are performed at cost by TIAA and TIAA-CREF Individual & Institutional Services, Inc. ("Services"), a non-profit subsidiary of TIAA. Because services are provided at cost, we expect that expense deductions will be relatively low. TIAA guarantees that in the aggregate, the expense charges will never be more than 2.50% of average net assets per year. Investment Management Expense Deduction - --------------------------------------- This deduction is for TIAA's investment advice, portfolio accounting, and custodial and similar services, including independent fiduciary and appraisal services. The current daily deduction is equivalent to 0.28% of net assets annually. Administrative and Distribution Expense Deduction - ------------------------------------------------- This deduction is for Services' administrative expenses, such as allocating premiums and paying annuity income, and for expenses related to the distribution of the contracts. The current daily deduction for the Account is equivalent to 0.23% of net assets annually, of which 0.20% is for administrative services and 0.03% is for distribution services. Mortality and Expense Risk Deduction - ------------------------------------ TIAA imposes a daily charge as compensation for bearing certain mortality and expense risks. The current daily deduction is equal to 0.06% of net assets annually. TIAA computes the actual mortality and expense risk charge it deducts as a percentage of the Account's net assets, less seed money invested by TIAA. Accumulations and annuity payments aren't affected by changes in actual mortality experience or by TIAA's actual expenses. Liquidity Guarantee Deduction - ----------------------------- This deduction is for TIAA's liquidity guarantees. The current daily deduction for the Account is equivalent to 0.03% of net assets annually. TIAA computes the actual liquidity expense - 40 - it charges the Account as a percentage of the Account's real estate assets, less seed money invested by TIAA. Quarterly Adjustment - -------------------- Normally within 30 days after the end of every quarter, we reconcile how much we deducted as discussed above with the expenses the Account actually incurred. If there's a difference, we add it to or deduct it from the Account in equal daily installments over the remaining days in the quarter. TIAA's board can revise the deduction rates from time to time to keep deductions as close as possible to actual expenses. No Deductions from Premiums or on Withdrawals - --------------------------------------------- Currently there are no expense deductions from your premiums or amounts you withdraw in cash, although TIAA reserves the right to deduct expenses in the future. Brokerage Fees and Related Transaction Expenses - ----------------------------------------------- Brokers' commissions, transfer taxes, and other portfolio fees are charged directly to the Real Estate Account. THE ANNUITY CONTRACTS TIAA offers the Real Estate Account as a variable component of a number of different accumulating annuity contracts: a Retirement Annuity ("RA"); a Group Retirement Annuity ("GRA"); a Supplemental Retirement Annuity ("SRA"); a Group Supplemental Retirement Annuity ("GSRA"); and a Rollover Individual Retirement Annuity ("Rollover IRA"). Subject to regulatory approval, we plan to offer an Individual Retirement Annuity that accepts both direct contributions and rollovers (the "New IRA") and a Keogh Plan Annuity ("Keogh"). (We refer to the Rollover IRA and New IRA collectively as the "IRAs".) The availability of the Account under the contracts also may be subject to state regulatory approval. RAs, SRAs, IRAs, and Keoghs are issued to you directly. GRAs and GSRAs are issued under the terms of a group contract. Neither you nor your beneficiaries can assign your ownership of a TIAA contract to anyone else, except as a result of a qualified domestic relations order as defined by the IRC. Currently TIAA makes no deductions from your premiums, but we reserve the right to do so in the future. TIAA also offers the Real Estate Account through various types of income-paying contracts. These are described beginning on page 53. In addition, the Account may be available under certain unallocated TIAA group annuity contracts issued to employers. - 41 - Right to Cancel Contract - ------------------------ You can cancel any TIAA RA, SRA, GSRA, IRA or Keogh contract up to 30 days after you first receive it, unless it's one under which annuity payments have begun. This right to cancel applies only if you don't already have an existing TIAA contract, not simply if you're receiving a Real Estate Account contract rider for the first time. To cancel a contract, mail or deliver it and a signed Notice of Cancellation to TIAA's home office. If asked to cancel the contract, TIAA will do so as of its date of issue, then send the entire current accumulation, including premiums, deductions (if any), and investment gains or losses, back to the premium remitter (although in some states we are required to send back your entire premium and any deductions, without accounting for any interim investment results). If you're considering canceling a TIAA contract, consult your employer. RA and GRA Contracts - -------------------- RA and GRA contracts are used mainly for employer- sponsored retirement plans set up under sections 401(a), 403(a) and 403(b) of the IRC (and, in limited cases, other types of employer-sponsored plans). Your rights under these contracts may be subject to vesting requirements under your employer's plan. Occasionally we issue RA or GRA contracts to employers to meet deferred compensation obligations. If you have a deferred compensation agreement, ask your employer about your rights and obligations. Depending on the terms of your plan, RA premiums can be paid by your employer, you, or both. If your RA premiums include contributions by both you and your employer, the employer usually remits them in a single combined payment. If you're paying some or all of the periodic premium, your contributions can be in either pre-tax dollars, by salary reduction (i.e., your employer periodically reduces your taxable compensation by a specified sum, and sends an equal amount to TIAA); or after-tax dollars, by payroll deduction -- in either case, subject to your employer's plan. For RAs only, you can make single, non-recurring contributions in any amount directly to TIAA. GRA premiums can also include contributions from your employer or both you and your employer. Like an RA, the GRA lets you make pre-tax contributions by salary reduction and after-tax contributions by payroll deduction -- again subject to your employer's plan. You can't make payments directly; your employer has to send them for you. You can also transfer accumulations from another investment choice under your employer's retirement plan to your RA or GRA contract (see page 48). - 42 - SRA and GSRA Contracts - ---------------------- SRA and GSRA contracts are used mainly for voluntary tax-deferred annuity ("TDA") plans set up under section 403(b) of the IRC. The GSRA may also be used for IRC section 401(k) plans. SRAs are issued directly to you, while GSRAs are issued through an agreement between TIAA and your employer. For both SRAs and GSRAs, you pay all premiums in pre-tax dollars via salary reduction. You can't pay premiums directly, though you can transfer amounts from another TDA plan (see below). Rollover IRA Contracts - ---------------------- TIAA's Rollover Individual Retirement Annuity ("Rollover IRA") is issued under IRC section 408(b). You currently can use it only for tax-deferred funds previously held in an eligible institution's retirement plan or in individual retirement accounts that were themselves set up with amounts originally in an eligible institution-sponsored plan. Subject to regulatory approval, we expect to expand eligibility, so that you or your spouse can also set up a Rollover IRA with funds rolled over from any retirement plan or individual retirement account, as long as such a rollover is permitted by the IRC and as long as you are currently employed by or retired from an eligible institution. New IRA Contracts - ----------------- We plan to issue, subject to regulatory approval, a New IRA contract that accepts the same type of funds that the Rollover IRA currently accepts, the funds it would accept under the expanded eligibility just described, as well as other types of funds. These are: (1) Direct payments from anyone employed by an eligible institution or married to an employee. The IRC limits the amount you can contribute, usually to $2,000. See "Federal Income Taxes," page 62. (2) Contributions to a Simplified Employee Pension (SEP) plan. You can use the New IRA to fund your SEP plan if you have income from self-employment and you're currently employed by or retired from an eligible institution. If you open your IRA when you are retired, or if you have a SEP plan, your contributions must be from "qualified income". Qualified income is income from work related to your primary academic or research career. You can also use the IRA to accept contributions from an eligible institution's SEP plan. For more information, please contact TIAA. - 43 - Keogh Plan Contracts - -------------------- Subject to regulatory approval, we have plans to offer Keogh contracts. They will be issued under IRC sections 401(a) and 403(a). If you own an unincorporated business, you can use them to fund your Keogh plan if you are currently employed by or retired from an eligible institution. The IRC limits the amount you can contribute each year, and contributions must be from qualified income (see above). See "Federal Income Taxes," page 61. Remitting Premiums - ------------------ We'll issue you a TIAA contract as soon as we receive your completed application or enrollment form. If you already have a TIAA contract, you will receive a rider permitting you to allocate premiums to the Real Estate Account. You may remit premiums to the Account under RAs, GRAs, or GSRAs only if permitted under your employer's plan. Your premiums will be credited to the Real Estate Account as of the business day we receive them. If we receive premiums from your employer before your application or enrollment form, we'll credit the premiums to the CREF Money Market Account until we receive your form. We'll transfer and credit the amount you've specified to the Real Estate Account as of the business day we receive your completed application or enrollment form. If the allocation instructions on your application or enrollment form are incomplete, violate plan restrictions, or don't total 100%, we'll credit your premiums to the CREF Money Market Account until we do receive complete instructions. Any amounts that we credited to the CREF Money Market Account before we received correct instructions will be transferred to the Real Estate Account only on request, and will be credited as of the business day we receive that request. TIAA doesn't restrict the amount or frequency of premiums to your RA, GRA, and IRA contracts, although we reserve the right to impose restrictions in the future. Your employer's retirement plan may limit your premium amounts, while the IRC limits the total annual premiums to plans qualified for favorable tax treatment (see page 61). Ordinarily (subject to any temporary restriction on acceptance of premiums and transfers, described below), TIAA will accept premiums to an accumulating contract at any time. Once your first premium has been paid, your TIAA contract can't lapse or be forfeited for nonpayment of premiums. However, TIAA can stop accepting future payments to both the GRA and GSRA contract at any time. - 44 - Employees or retirees of eligible institutions can also purchase at any time a contract to begin receiving annuity income starting the first day of the following month. Possible Restrictions on Acceptance of Premiums and Transfers - ------------------------------------------------------------- From time to time we may stop accepting premiums for and/or transfers into the Account. We might do so if, for example, we can't find enough appropriate real estate-related investment opportunities at a particular time. Whenever reasonably possible, we will notify you before we decide to restrict premiums and/or transfers. However, because we may need to respond quickly to changing market conditions, we reserve the right to stop accepting premiums and/or transfers at any time without prior notice. If we decide to stop accepting premiums into the Account, amounts that would otherwise be allocated to the Account will be allocated to the CREF Money Market Account instead, unless you give us other allocation instructions. We will not transfer these amounts out of the CREF Money Market Account when the restriction period is over, unless you request that we do so. However, we will resume allocating premiums to the Account on the date we remove the restrictions. Allocation of Premiums - ---------------------- You can allocate all or part (whole percentages) of your premiums to the Real Estate Account. Allocations are subject to the terms of your employer's plan. TIAA reserves the right to refuse to allocate premiums where the allocation is not consistent with an employer's plan. Amounts can also be allocated to TIAA's traditional annuity or one or more of the investment accounts offered under the companion variable annuity certificates issued by CREF. You can change your allocation for future premiums at any time by writing to our home office or calling 1 800 842-2252; however, we reserve the right to suspend or terminate your right to change your allocation by telephone. Accumulation Units - ------------------ Your premiums purchase accumulation units. When you pay premiums or make transfers into the Account, the number of your units will increase; when you take a cash withdrawal, transfer from the Account, or apply funds to begin annuity income, the number of your units will decrease. We calculate how many accumulation units to credit by dividing the amount allocated to the Account by its accumulation unit value for the business day when we received your premium. To determine how - 45 - many accumulation units to subtract for cash withdrawals and transfers, we use the unit value for the business day when we receive your completed transaction request and all required information and documents (unless you ask for a later date). For amounts applied to begin annuity income or death benefits, the accumulation unit value will be the one for the last valuation day prior to your annuity starting date (unless you ask for a different date). See "The Annuity Period," page 50 and "Death Benefits," page 55. The value of the accumulation units reflects the Account's investment experience (i.e., its accrued real estate net operating income, dividends, interest and other income accrued), realized and unrealized capital gains and losses, as well as expense charges against the Account's assets (see page 40). We calculate the accumulation unit values at the end of each valuation day. To do that, we multiply the previous day's values by the net investment factor for the Account. The net investment factor is calculated as A divided by B, where A and B are defined as: A. The value of the Account's net assets at the end of the current valuation period, less premiums received during the current valuation period. B. The value of the Account's net assets at the end of the previous valuation period, plus the net effect of transactions made at the start of the current valuation period. The valuation of accumulation units will be reviewed and approved by the independent fiduciary (see page 28). The General Account and TIAA's Traditional Annuity - -------------------------------------------------- This prospectus provides information mainly about the Real Estate Account, your TIAA contract's variable component. Premiums remitted under your TIAA contract to TIAA's traditional annuity become part of the general account of TIAA, which includes all TIAA assets, except those in the Real Estate Account or any other TIAA separate investment account. Unlike an investment in the Real Estate Account, in which you bear the investment risk, TIAA bears the full investment risk for all accumulations in TIAA's traditional annuity. For more about TIAA's traditional annuity, see the contract itself. - 46 - Transfers Between the Real Estate Account and TIAA's Traditional - ---------------------------------------------------------------- Annuity or CREF - --------------- Subject to the conditions below, you can transfer some or all of your accumulation in the Real Estate Account to TIAA's traditional annuity or to a CREF certificate once a calendar month. Transfers generally must be for at least $1,000 at a time (or the entire part of your accumulation permitted to be withdrawn, if less). (This minimum doesn't apply to transfers to the TIAA Retirement Loan Contract.) Under RAs, GRAs, and GSRAs, transfers to certain CREF accounts may be restricted by your plan. For more information, contact TIAA (see page 66). You can also transfer some or all of your accumulation in TIAA's traditional annuity or in your CREF certificate to the Real Estate Account (although your employer's plan may restrict your right to transfer any accumulations to the Real Estate Account under RA, GRA, and GSRA contracts). These transfers generally must be for at least $1,000 per account at a time. Transfers from TIAA's traditional annuity to the Real Estate Account under RA and GRA contracts take place in roughly equal installments over a ten-year period via a TIAA transfer payout annuity, or "TPA". There are no similar restrictions on transfers from TIAA's traditional annuity under SRA, GSRA, or IRA contracts, as long as you are transferring at least $1,000 at a time. Because excessive transfer activity can hurt Account performance and other participants, we reserve the right to further limit transfer frequency or otherwise modify the transfer privilege in the future. You can also transfer on a limited basis during the annuity period (see page 52). Currently, we don't charge you for transfers to CREF or to TIAA's traditional annuity. Transfers to Other Companies and Cash Withdrawals from the Real Estate Account - -------------------------------------------------------------------------------- If you have a TIAA RA, GRA, or GSRA contract, your ability to move funds from the Real Estate Account to a company other than TIAA or CREF will depend upon the terms of your employer's plan. If the plan permits, you can move some or all of your accumulation to any company approved by your employer. Under a TIAA SRA or IRA contract, however, you may transfer funds from the Real Estate Account to any company without similar plan limitations. If you do transfer some or all of your accumulation to another company, you bear the risk of the investment and tax consequences of your decision. Cash withdrawals from your SRA, GSRA, or IRA Real Estate Account accumulation may be made at any time during the accumulation period, subject to any tax law restrictions. Cash withdrawals from your RA or GRA Real Estate Account accumulation - 47 - may be limited by the terms of your employer's plan. Cash withdrawals usually must be for at least $1,000 (or the entire part of your accumulation permitted to be withdrawn, if less). For more information, see "General Considerations for all Cash Withdrawals and Transfers," page 48, "Tax Issues," page 49 and "Federal Income Taxes," page 61. Currently, TIAA does not charge you for transfers to other companies or for cash withdrawals. Rules on transfers and cash withdrawals vary depending on an institution's plan, so consult your past, current and potential future employer(s) for more detailed information. Systematic Withdrawals and Transfers - ------------------------------------ You can arrange to have TIAA execute withdrawals and transfers for you automatically. At your request, we will withdraw from your accumulation as cash, or transfer to TIAA's traditional annuity, a CREF certificate, or another company, any fixed number of accumulation units or dollar amount or percentage of accumulation that you specify until you tell us to stop or until your accumulation is exhausted. Currently, the initial amount must be at least $100. The availability of the service is subject to any restrictions in your employer's retirement plan. Transfers to TIAA from Other Plans - ---------------------------------- Ordinarily you can make single-sum transfers from another 403(b) retirement plan to a TIAA contract. Likewise, if your TIAA contract is part of a 401(a) or 403(a) arrangement, you can make single-sum transfers to it from other 401(a) or 403(a) plans if the plan using TIAA and the other 401(a) or 403(a) plan so provide. Amounts transferred from another company to TIAA may still be subject to provisions of the original retirement plan. Under current federal tax law, you can also transfer funds from certain 401(a), 403(a), and 403(b) plans, or from an IRA containing funds originally contributed to such plans, to a TIAA IRA. General Considerations for All Cash Withdrawals and Transfers - -------------------------------------------------------------- Current federal tax law restricts the availability of cash withdrawals from any part of your accumulation under voluntary salary reduction agreements (including investment earnings, if any). If your salary reduction contributions are made to a 403(b) annuity, these withdrawal restrictions apply only to amounts (and earnings, if any) credited after December 31, 1988. If they're made under a 401(k) plan, these withdrawal restrictions apply to all salary reduction amounts (including earnings). Such withdrawals are generally available only if you reach age 59-1/2, leave your job, become disabled, or die. - 48 - Withdrawals of elective deferral amounts may also be permitted if your employer's plan is a 401(k) plan and your employer terminates the plan. If permitted by your employer's plan, you may also be able to take a cash withdrawal if you encounter hardship, as defined by the IRS, but hardship withdrawals can be from contributions only, not investment earnings. These restrictions don't apply to withdrawals from any IRA. For more about tax consequences, see "Tax Issues" below and page 61. You can tell us how much you want to transfer or withdraw in dollars, accumulation units, or as a percentage of the accumulation in the Real Estate Account. Ordinarily, you can't transfer or withdraw any part of an accumulation from which you've already begun receiving annuity income. Cash withdrawals and transfers are effective at the end of the business day we receive your withdrawal or transfer request and any required information and documentation. You can instead choose to have transfers and withdrawals take effect at the close of any future business day or the last calendar day of the current or any future month, even if it's not a business day. You can request a transfer to CREF or TIAA's traditional annuity by telephone. If you do that at any time other than during a business day, it will be effective at the close of the next business day. Transfers to TIAA's traditional annuity begin participating on the next day. To request a transfer, write to TIAA's home office or call us at 1 800 842-2252. We reserve the right to suspend or terminate your right to make transfers by telephone. For more about telephone transfers, see page 66. Tax Issues - ---------- Make sure you understand the possible federal and other income tax consequences of transfers and cash distributions. Transfers between retirement plans set up under the same section of the IRC aren't ordinarily considered taxable distributions; nor are transfers from 401(a), 403(a), and 403(b) plans to any TIAA IRA. Cash withdrawals are usually taxed at the rates for ordinary income. They may also subject you to early distribution and/or excess distribution taxes as well, although these excess distribution taxes do not apply in 1997, 1998 and 1999 pursuant to recently enacted legislation. (Note that different rules may apply to residents of Puerto Rico.) For details, see "Federal Income Taxes," page 61. Texas ORP Restrictions - ---------------------- If you're in the Texas Optional Retirement Program, section 36.15 of the Texas Education Code says you (or your beneficiary) can redeem some or all of your accumulation only if you retire, die, or leave your job in the state's public - 49 - institutions of higher education. You're also subject to other distribution restrictions outlined elsewhere in this prospectus. Spousal Rights - -------------- If you're married, the Retirement Equity Act of 1984 ("REACT") or your employer's plan may require you to get advance written consent from your spouse before making certain transactions. They include (1) a cash withdrawal (except from most IRAs); (2) a payment of a retirement transition benefit (see page 54); (3) a transfer to a retirement plan not covered by ERISA; and (4) a rollover directly from a plan to another plan or an IRA (you don't receive a check). In addition, if you're married at your annuity starting date, REACT or your employer's plan may require that you choose an income option that provides survivor annuity income to your spouse, unless he or she waives that right in writing (see "The Annuity Period," page 50). There are limited exceptions to the waiver requirement -- contact TIAA for more information. For more on spousal rights, see "Death Benefits," page 55. Portability of Benefits - ----------------------- Once you're fully vested under your employer's RA or GRA plan, you can't lose the benefits you've earned. Length-of-service and other rules vary considerably from plan to plan, so check with your employer to find out your vesting status. Benefits under SRAs, GSRAs, and IRAs are immediately vested and can't be forfeited under any circumstances. Under RA contracts, you may also be able to continue paying premiums on your own, subject to federal income tax limits (see page 61). Whether or not we're receiving premiums to your contract(s), your accumulation will go on participating in the Real Estate Account. You'll retain all rights under your contract until you apply your entire accumulation to begin annuity (or survivor) benefits, transfer it to another company, or take it as a cash withdrawal. The Annuity Period - ------------------ The Real Estate Account is available (subject to regulatory approval) through a variety of income options. See "Income Options," on page 53. Subject to certain federal tax law restrictions, you can receive income from all or just a part (but not less than $10,000) of your accumulation, so it's possible for you to be both accumulating and receiving retirement benefits at the same time. You can also pick a different income option for different portions (but not less than $10,000) of your accumulation, but once you've started payments you can't change - 50 - your income option (except if you picked the Minimum Distribution Option annuity) or annuity partner (if you named one) for that payment stream. Usually income payments are monthly. You can choose quarterly, semi-annual, and annual payments as well. TIAA has the right to not make payments at any interval that would cause the initial payment to be less than $25. Income payments are calculated based on the accumulation on the last valuation day before the annuity starting date. After the initial payment, payments change according to the revaluation method you choose. There are two revaluation methods for annuity payments: annual and monthly. The annual revaluation method is the method used for all annuity payments as of the date of this prospectus. Under the annual revaluation method, payments from the Account will change each year, based on the net investment results during the prior year. Monthly revaluation is scheduled to be introduced in the first half of 1998 (subject to regulatory approval). Under the monthly revaluation method, payments from the Account will change every month, based on the net investment results during the previous month. For the formulas used to calculate the amount of TIAA annuity payments, see page 58. The total value of your annuity payments may be more or less than your total premiums. We'll send your payments by mail to your home address or (on your request) by mail or electronic funds transfer to your bank. If the address or bank where you want your payments sent changes, it's your responsibility to let us know. Annuity Starting Date - --------------------- Generally you pick an annuity starting date when you first apply for a TIAA contract. If you don't, we'll tentatively assume your annuity starting date will be the first day of the month after your 65th birthday. You can change your annuity starting date at any time prior to the day before that annuity starting date (see page ). The latest annuity starting date for your accumulation is the April 1 following whichever comes later: (1) the calendar year when you reach age 70-1/2, or (2) the calendar year when you're no longer working for the eligible employer. For IRAs, a pay-out that meets the minimum distribution rules must begin by April 1 of the calendar year following the calendar year you reach age 70-1/2. However, you can't begin an income option that is contingent on your life after you turn 90. Ordinarily, annuity payments begin when your annuity starting date arrives; however, the terms of your employer's plan can restrict when you can begin retirement income. For payments to begin on the annuity starting date, we must have received all - 51 - premiums due under your plan, as well as all information and documentation necessary for the income option you've picked. (For more information, contact TIAA -- see page 66.) If we haven't received all your premiums and the necessary information, we'll defer your annuity starting date until the first day of the month after the premiums and information have reached us. Your first annuity check may be delayed while we process your choice of income options and calculate the amount of your initial payment. Starting in the second half of 1997, subject to regulatory approval, we may begin annuity payments on the date you've chosen (assuming we've received all applicable information and documentation), even if we haven't received all premiums due under your retirement plan. Any premiums received within seventy days after payments begin may be used to provide additional annuity income. Premiums received after seventy days will remain in your accumulating annuity contract until you give us further instructions. Allocation and Transfer for Annuity Payments - -------------------------------------------- Before starting payments from your accumulation, you can transfer (at least $1,000 or the entire accumulation, if less) to TIAA's traditional annuity or to CREF (subject to the terms of your retirement plan) on either an accumulating or income-paying basis. Under RA, GSRA, and GRA contracts, you can transfer to investment vehicles offered by other companies approved for your employer's plan. Under the SRA and IRA contracts, there are no restrictions on transfers to other companies, but be sure to consider the federal and other income tax consequences of the transaction. Transfers During the Annuity Period - ----------------------------------- Once a year after you begin receiving annuity income, you can transfer all or part of the future annuity income payable (i) from the Real Estate Account into a "comparable annuity" (see below) payable from a CREF account or TIAA's traditional annuity, or (ii) from a CREF account into a comparable annuity payable from the Real Estate Account. Comparable annuities are those which are payable under the same income option, and have the same first and second annuitant (if any), remaining guaranteed period (if any), and payment mode. All transfers during the annuity period will take place on March 31. We must receive your transfer request before the end of the last business day in March of the year you want the transfer to occur. A transfer from a CREF account to the Real Estate Account or vice versa will affect your annuity payments beginning May 1 following the effective date of the transfer. We plan to allow (in the first half of 1998, subject to regulatory - 52 - approval) one transfer each calendar quarter, on any business day. A transfer will be effective on the business day we receive your request. You can instead choose to have a transfer take effect at the close of any future business day, or the last calendar day of the current or any future month, even if it's not a business day. Transfers of annually revalued units will affect your annuity payments beginning on the May 1 following the March 31 on or after the effective date of the transfer. Transfers of monthly revalued units will affect your annuity payments beginning with the first payment due after the payment valuation date (see page 57) on or after the effective date of the transfer. Transfers into TIAA's traditional annuity will be effective with the first payment due after the payment valuation date on or after the effective date of the transfer. Income Options - -------------- Both the number of annuity units you purchase and the amount of your income payments will depend on which income option(s) you pick. Your employer's plan, the IRC and ERISA may limit which income options you can use to receive income from an RA or GRA. You can't begin an income option that is contingent on your life after you turn 90. Ordinarily you'll choose your income option(s) just before you want payments to begin; however, you can make or change your choice(s) at any time before your annuity starting date. Once annuity payments start, you can't change the income option (except in the case of the Minimum Distribution Option annuity, see page 54) for the accumulation or fraction of accumulation on which they're based. If you haven't picked an income option when the annuity starting date arrives for your RA, GRA, SRA, or GSRA, TIAA will assume you want the One-Life Annuity with 10-Year Guaranteed Period if you're unmarried, paid from TIAA's traditional annuity. If you're married, we may assume for you a Survivor Annuity with Half-Benefit to Annuity Partner and 10-Year Guaranteed Period, with your spouse as your annuity partner, paid from TIAA's traditional annuity. See below and "Spousal Rights," page 50. If you haven't picked an income option when the annuity starting date arrives for your IRA, we may assume you want the Minimum Distribution Option annuity. All Real Estate Account income options are variable, and the amount of income you receive will depend in part on the number and value of your accumulation units being converted. The current options are: One-Life Annuity with or without Guaranteed Period (a One-Life Annuity). Pays income as long as you live. If you opt for a guaranteed period and you die before it's over, income - 53 - payments will continue to your beneficiary until the end of the period. If you don't opt for a guaranteed period, all payments end at your death -- so that it would be possible, for example, for you to receive only one payment if you died less than a month after your income started. Annuity for a Fixed Period. (We expect to make this available late in 1997.) Payout for any period you choose from 5 to 30 years. Survivor Annuity Options. Pays income to you as long as you live, then continues at either the same or a reduced level for the life of your annuity partner. There are three types of survivor annuity options, all available with or without a guaranteed period -- Full Benefit to Survivor (a Last Survivor Life Annuity), Two-Thirds Benefit to Survivor (a Joint and Survivor Life Annuity), and a Half-Benefit to Annuity Partner (a Last Survivor Life Annuity). Minimum Distribution Option ("MDO") Annuity. Generally available only if you must begin annuity payments under the IRC minimum distribution requirements (see page 65). The option pays an amount designed to fulfill the distribution requirements under federal tax law. You must apply your entire accumulation under a contract if you want to use the MDO annuity. Some employer plans allow you to elect this option earlier -- contact TIAA for more information. See "Contacting TIAA," page 66. Under the MDO annuity, it's possible you won't receive income for life. Up to age 90, you can apply any remaining part of an accumulation applied to the MDO annuity to any other income option for which you're eligible. Using the option won't affect your right to take a cash withdrawal of any remaining accumulation not yet distributed. With respect to any of the income options described above, current federal tax law says that your guaranteed period can't exceed the joint life expectancy of you and your beneficiary or annuity partner (if you have one). Other income options may become available in the future, subject to the terms of your retirement plan and relevant federal and state laws. For more information about any annuity option, please contact TIAA. See "Contacting TIAA," page 66. Retirement Transition Benefit. Under TIAA's current practice, and if your employer's plan allows, you may be able to get a "transition benefit" of up to 10% of the value of any part of an RA or GRA accumulation being converted to annuity income. The benefit is paid in a single sum on the annuity starting date. Of course, if your employer's plan allows cash withdrawals, you - 54 - can take a larger amount (up to 100%) of your accumulation in the Real Estate Account as a cash payment (see page 47). Keep in mind that the retirement transition benefit will be subject to current federal income tax requirements and possible early distribution penalties. See "Federal Income Taxes," page 61, as well as "Spousal Rights," page 50. Death Benefits - -------------- You can add, remove, or change a beneficiary at any time before you die, although under certain circumstances you may need your spouse's written consent. Under a survivor annuity option, your annuity partner can change the beneficiary after you die, unless you've stipulated otherwise. You can choose in advance the method by which death benefits should be paid, or you can leave it up to your beneficiaries. You can later change the method of payment you've chosen, and you can stipulate that your beneficiary not change the method you've specified in advance. (To choose, change, or restrict the method by which death benefits are to be paid, you or your beneficiary has to notify us in writing.) We can require that any death benefit be paid under a method that provides an initial monthly payment of at least $25. (We'll calculate the actual amount using formulas you can find on page 58.) You or your beneficiary can use more than one method of payment, but each has to meet the same $25 minimum payment requirement. Once death benefits start under a lifetime annuity (see above), the method of payment can't be changed. Ordinarily a beneficiary has to request that death benefits begin within a year of your death. Otherwise we'll start them automatically on the first day of the month in which the first anniversary of your death occurs, making payments over five years unless a beneficiary opts otherwise. If you're married at the time of your death, even if you name a beneficiary who isn't your spouse, federal law or your plan may require that your spouse receive an amount actuarially equivalent to one-half the value of any part of your accumulation subject to REACT. Your spouse may, however, consent in writing to waive the right to death benefits. For more on spousal beneficiary rights, contact us or consult your employer's benefits office. Unless your employer's plan provides otherwise, if you die before converting your entire accumulation to annuity income and without naming a beneficiary, your surviving spouse (if any) will receive a death benefit, available under any method of payment (see below), actuarially equivalent to half the value of your accumulation. The other half will go to your estate in a - 55 - single sum. If there is no surviving spouse, the entire death benefit will go in one sum to your estate. If you and your annuity partner, if any, die with payments still due under a lifetime annuity with a guaranteed period, your beneficiary(ies) can take the remaining payments as scheduled or as a single-sum payment equal to their commuted value. If you name an estate as your beneficiary, if you haven't named a beneficiary, or if your beneficiary has died, TIAA will pay the commuted value of your payments to your estate in a single sum. Under a survivor annuity, such benefits go to the estate of you or your annuity partner, whoever lives longer. If your beneficiary dies before receiving all payments due, we'll pay the commuted value of the remaining payments to anyone else named to receive it. If no one has been named, the commuted value will be paid to the estate of the last person to receive payments. To pay a death benefit, TIAA must have received all necessary forms and documentation. For more information, contact TIAA (see page 66). Your accumulation will continue participating in the investment experience of your account up to and including the day when your beneficiary's chosen method of payment becomes effective. Single-sum payments are effective at the end of the business day when TIAA has received all the required information and documentation from your beneficiary -- or if he or she chooses, at the end of the last calendar day of the current or any future month. Death benefits under any other method of payment will be calculated on the last day of the calendar month when we receive all required information and documentation -- or if your beneficiary prefers, the last day of a future month. Payments will actually begin on the first day of the month after they've been calculated. (Your first check could be delayed while we process your choice of method of payment.) Methods of Payment - ------------------ TIAA limits the methods of payment for death benefits to those suitable under federal income tax law for annuity contracts. (For more information, see "Taxation of Annuity Benefits," page 63.) With methods offering periodic payments, benefits are usually monthly, but your beneficiary can request to receive them quarterly, semi-annually, or annually instead. Federal law may restrict the availability of certain methods to your beneficiary. At present, the available methods of payment for TIAA death benefits are: Single-Sum Payment, in which the entire death benefit is paid to your beneficiary at once; One-Life Annuity with or without Guaranteed Period, in which the death benefit is paid monthly for the life of the beneficiary or through the guaranteed period; Annuity for a Fixed Period of 2 to 30 years (we expect to make this available late in 1997); - 56 - Accumulation-Unit Deposit Option (described below); and the Minimum Distribution Option (described below). Accumulation-Unit Deposit Option ("AUDO"). Pays your beneficiary a lump sum at the end of a fixed period, ordinarily two to five years, during which period the accumulation units deposited participate in investment experience of the Real Estate Account. To use the AUDO method, the value of the death benefit must be at least $5,000 at the time it takes effect. Special rules apply if your spouse is the beneficiary. Contact TIAA for more information about this option and other methods of payment. See "Contacting TIAA," page 66. Minimum Distribution Option ("MDO"). Available only to beneficiaries who must receive income under the IRC's minimum distribution requirements. The MDO death benefit is governed generally by the same rule as the Real Estate Account's MDO annuity (see page ), but there are additional restrictions under federal income tax law. Under the MDO death benefit, it's possible that your beneficiary won't receive income for life. Transfers by a Beneficiary. At the time death benefits begin, or during the AUDO period, your beneficiary can transfer some (at least $1,000, or the entire accumulation if less) or all of the assets in the Real Estate Account to TIAA's traditional annuity or to CREF. The beneficiary of an employee at an eligible institution who used another company for his retirement plan savings also may transfer death benefits from the other company to the Real Estate Account for payout under any of the available methods of payment for death benefits. Transfers are effective on the last calendar day of the month when we receive all required information and documentation; however, your beneficiary can have us make the transfer effective on the last day of any future month instead. (With the AUDO method, it can be any day of the month.) Currently beneficiaries can make transfers at no charge. We also reserve the right to limit how often a beneficiary can transfer Real Estate Account units and to decline any transfer that would reduce the value of the units still on deposit to less than $5,000. For tax issues concerning death benefits, especially those paid as single sums, see "Taxation of Annuity Benefits," page 63. ANNUITY PAYMENTS The amount of annuity payments paid to you or your beneficiary ("annuitant") will depend upon the number and the value of the annuity units payable. The number of annuity units - 57 - is first determined on the day before the annuity starting date. The amount of the annuity payments will change according to the revaluation method chosen. Separate annuity units will be maintained for payments being made under each of the two revaluation methods. Annuitants bear no mortality risk under their contracts. Under the annual revaluation method, the value of an annuity unit is redetermined on March 31 of each year -- the payment valuation date. 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 revaluation method (expected to be available, subject to regulatory approval, in the first half of 1998), the value of an annuity unit is redetermined daily. The daily changes in the value of an annuity unit reflect the net investment experience of the Real Estate Account. The amount of each annuity payment is determined on the payment valuation date, which is the 20th day of the month preceding the payment due date. However, if the 20th is not a business day, the payment valuation date will be the preceding business day. The formulas for calculating the number and value of annuity units payable are set forth below. Calculation of the Number of Annuity Units Payable - -------------------------------------------------- When a participant or a beneficiary converts the value of all or a portion of his or her accumulation into an income-paying contract, the number of annuity units payable from the Real Estate Account is determined by dividing the value of the accumulation in the Account to be applied to provide the annuity payments by the product of the annuity unit value and an annuity factor. The annuity factor as of the annuity starting date is the value of an annuity in the amount of $1.00 per month beginning on the first day such annuity units are payable, and continuing for as long as such annuity units are payable. The annuity factor will reflect interest assumed at the effective annual rate of 4%, and the mortality assumptions for the person(s) on whose life (lives) the annuity payments will be based. Mortality assumptions will be based on the then-current settlement mortality schedules for this Account. TIAA guarantees that actual mortality experience will not reduce annuity payments after they have started. TIAA does, however, reserve the right to change, from time to time, the mortality assumptions used to determine the number of annuity units payable for any future conversions of accumulations to provide annuity payments. - 58 - When you or any beneficiary receiving annuity income transfers annuity units from a CREF account to the Real Estate Account or vice versa, the number of annuity units added to the account to which units are being transferred will be determined by multiplying the number of annuity units to be transferred by A and B and then dividing that result by the product of C and D as follows: A. the annuity unit value, determined on the effective date of the transfer, for the account from which annuity units are being transferred. B. an annuity factor. Under the annual revaluation method, the annuity factor is equal to the value, as of the effective date of the transfer, of an annuity in the amount of $1.00 per month beginning on the following May 1 (for an April transfer, the May 1 in the subsequent calendar year) and continuing for as long as such annuity units are payable. Under the monthly revaluation method, the annuity factor is equal to the value, as of the effective date of the transfer, of an annuity in the amount of $1.00 per month beginning with the first payment due after the payment valuation date on or after the effective date of the transfer and continuing for as long as such annuity units are payable. These annuity factors will reflect the mortality assumptions then in use in the account from which the transfer is being made. C. the annuity unit value, determined on the effective date of the transfer, for the account to which the annuity units are being transferred. D. an annuity factor calculated in the same manner as that described in item B. above, except reflecting the mortality assumptions then in use in the account to which the transfer is being made. Value of Annuity Units - ---------------------- The value of the Real Estate Account's annuity units is determined as of the last calendar day of each month. Beginning in the first half of 1998, the value of the Account's annuity units will also be determined as of each business day. The annuity unit value is determined by multiplying the value of the annuity unit as of the previous valuation day by the net investment factor (as defined on page ) for the current valuation period and then dividing by the value of $1.00 accumulated with interest at the effective annual rate of 4% for the number of days in the current valuation period. On the last - 59 - calendar day of each month, the result is then multiplied by A and divided by B, where A and B are defined as follows: A. the value of the annuity fund at the end of the day minus the dollar amount of payments scheduled to be made from the Account on the following day. B. the value of the annuity fund at the end of the day minus the product of the value of one annuity unit just prior to this calculation and the number of annuity units scheduled to be paid from the Account on the following day. We plan to offer monthly payment revaluation in the first half of 1998, subject to regulatory approval. At that time, the annuity fund will become the annually revalued annuity fund, and we will introduce a monthly revalued annuity fund with its own annuity units. The value of an annuity unit under the monthly revalued fund will be determined each business day by multiplying the value of the annuity unit as of the previous business day by the net investment factor (as defined on page 46) for the current valuation period and then dividing by the value of $1.00 accumulated with interest at the effective annual rate of 4% for the number of calendar days in the current valuation period. On the last calendar day of each month, the result will be multiplied by A and B, defined as follows: A. the value of the monthly annuity fund at the end of the day minus the dollar amount of payments scheduled to be made from the Account on the following day. B. the value of the monthly annuity fund at the end of the day minus the product of the value of one annuity unit just prior to this calculation and the number of annuity units scheduled to be paid under the monthly revaluation method from the Account on the following day. 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 revaluation method, the value of the annuity unit 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 revaluation method, the value of the annuity unit changes on the payment valuation - 60 - date of each month for the payment due on the first of the following month. The value of annuity units transferred from the Real Estate Account under the annual revaluation method to CREF or the TIAA traditional annuity is equal to A plus B, where A and B are defined as follows: A. the present value of the payments due from the first payment due after the payment valuation date on or after the effective date of the transfer, and continuing to the following April 1, but not longer than such annuity units are payable. B. the present value of one annuity unit multiplied by the number of annuity units, payable beginning on the May 1 following the March 31 on or after the effective date of the transfer, and continuing for as long as such annuity units are payable. The present values will be calculated assuming interest at an effective annual rate of 4%, and the same mortality assumptions then in use in the Real Estate Account. Currently such transfers are effective on March 31 only. Subject to regulatory approval, beginning in the first half of 1998, we plan to allow transfers on a more frequent basis (see page 52). At that time we also plan to make the monthly revaluation method available. The value of annuity units transferred from the Real Estate Account under the monthly revaluation method to CREF or to the TIAA traditional annuity will be equal to the number of annuity units multiplied by the current value of one annuity unit in the monthly revalued annuity fund multiplied by an annuity factor. The annuity factor is the value of an annuity in the amount of $1.00 per month beginning on the first of the month after the payment valuation date on or after the effective date of the transfer, and continuing for as long as such annuity units are payable. TIAA reserves the right, subject to approval by the Board of Trustees, to modify the manner in which the number and/or value of annuity units is calculated in the future. The valuation of annuity units will be reviewed and approved by the independent fiduciary (see page 28). FEDERAL INCOME TAXES With limited exceptions, the contracts are designed as annuity contracts under sections 72 and 403 of the Internal Revenue Code ("IRC"). - 61 - As a nonprofit institution, TIAA's pension business is exempt from federal income tax under section 501(c)(3) of the IRC. Investment income and gains from our pension business are tax-free unless they are unrelated business income, and we conduct our operations to avoid realizing such unrelated business income. If necessary to maintain our tax-exempt status, we can limit the size of premiums paid to TIAA and the circumstances in which they're paid. Any federal or other tax TIAA does incur with respect to the Real Estate Account will affect the value of your accumulation and/or annuity units. 403(b) Plans - ------------ The contracts are tailored for retirement plans set up under section 403(b) of the IRC. Your total annual contributions to section 403(b) annuities can't exceed certain limits. The annual limit for all of your contributions and your employer's contributions on your behalf is the lower of (a) $30,000, (b) 25% of your compensation or (c) your "maximum exclusion allowance". Your maximum exclusion allowance is generally 20% of your compensation multiplied by your years of service, less certain prior tax deferred retirement plan contributions. You usually can exclude salary reduction contributions of up to $9,500 from your gross taxable income. There are exceptions to this -- contact your tax advisor for more information. 401(a) and 403(a) Plans - ----------------------- RA and GRA contracts are also available for 401(a) and 403(a) retirement plans. Employer contributions to all current defined contribution plans of the employer meeting the requirements of IRC section 401(a) and 403(a) can't exceed an annual contribution limit of $30,000 or 25% of your compensation, whichever is less. You usually can exclude salary reduction contributions of up to $9,500 from your gross taxable income when such contributions are made to a 401(k) plan. Individual Retirement Annuities - ------------------------------- IRC section 408 permits eligible individuals to contribute to an individual retirement program known as an Individual Retirement Annuity or Individual Retirement Account. The amount you can contribute annually is usually limited to $2,000. The New IRA will be designed for these contributions. IRC section 408 also allows money from certain qualified plans to be "rolled-over" to an IRA without losing its tax-deferred status. The Rollover IRA is designed for these rollovers. (The New IRA will also accept them.) There is no limit on the amount that can be rolled over to a Rollover IRA. You can revoke any TIAA IRA up to seven days after you establish it. - 62 - Taxation of Annuity Benefits - ---------------------------- Once you take a cash withdrawal or begin annuity payments, the amount you receive is usually included in your gross income for the year and taxed at the rate for ordinary income. You can exclude from your gross income any part of your payment(s) that represents the return of premiums paid in after-tax dollars, but not the part that comes from the tax-deferred earnings of after-tax premiums. Withholding on Distributions - ---------------------------- We must withhold federal tax at the rate of 20% from the taxable part of most plan distributions paid directly to you. If, however, you tell us to "roll over" the distribution directly to an IRA (offered by TIAA or any other company) or similar employer plan (i.e., to send a check directly to the other company and not to you), we will not withhold any federal tax. The required 20% withholding doesn't apply to payments from IRAs, lifetime annuity payments, substantially equal periodic payments over your life expectancy or over ten or more years, or minimum distribution payments ("noneligible payments"). For the taxable part of noneligible payments, we usually will withhold federal taxes unless you tell us not to. Usually, you have the right to tell us not to withhold federal taxes from your noneligible payments. However, if you tell us not to withhold but we don't have your taxpayer identification number on file, we still have to deduct taxes. Non-resident aliens who pay U.S. taxes are subject to different withholding rules. Contact TIAA for more information. Early Distributions - ------------------- If you want to withdraw funds or begin income from any 401(a), 403(a), or 403(b) retirement plan or an IRA before you reach age 59-1/2, you may have to pay an extra 10% "early distribution" tax on the taxable amount. However, you won't have to pay an early distribution tax on any part of a withdrawal if: (1) the distribution is because you are disabled; (2) you separated from your job at or after age 55 and take your withdrawal after that (not applicable for IRAs); (3) you begin annuity income after you leave your job (termination isn't required for IRAs), as long as your annuity income consists of a series of regular substantially equal payments (at least annually) over your lifetime or life expectancy or the joint lives or life expectancies of you and your beneficiary; - 63 - (4) the withdrawal is less than or equal to your medical expenses in excess of 7-1/2% of your adjusted gross income; (5) you are required to make a payment to someone besides yourself under a Qualified Domestic Relations Order (e.g., a divorce settlement) (not applicable for IRAs); or (6) for IRAs only, you are unemployed (as defined in the IRC) and you use the distribution to pay certain health insurance premiums for yourself, your spouse or your dependents. If you die before age 59-1/2, your beneficiary(ies) won't have to pay the early distribution penalty. Current federal tax law restricts the availability of cash withdrawals and annuity payments from any part of your accumulation under salary reduction agreements (including earnings, if any). If your salary reduction contributions are made to a 403(b) annuity, these restrictions apply only to amounts (and earnings, if any) credited after December 31, 1988. These withdrawals and annuity payments are available only if you reach age 59-1/2, leave your job, become disabled, or die. If your employer's plan permits, you may also be able to take a cash withdrawal if you encounter hardship, as defined by the IRS, but hardship withdrawals can be from contributions only, not investment earnings. In addition, certain 401(k) plans permit distributions of elective deferral amounts upon termination of the plan provided the employer does not establish or maintain another defined contribution plan. These restrictions don't apply to withdrawals from an IRA. Any part of your accumulation that has been transferred from a custodial account under section 403(b)(7) will be subject to additional restrictions. "Excess" Distributions - ---------------------- In 1996, if your combined withdrawals or payments from 401(a), 403(a), and 403(b) retirement plans, IRAs, and other tax-deferred savings programs were more than $155,000 in one year, you would have to pay an "excess distribution" tax of 15 percent of the amount over $155,000. For tax years 1997, 1998 and 1999, the excess distribution tax has been suspended. Death Benefits - -------------- Ordinarily, death benefits are subject to federal estate tax (see "Tax Advice," page 65). Under some retirement programs, an additional 15% estate tax may be imposed on the portion of your accumulation above a certain amount at the time of your death. - 64 - Minimum Distribution Requirements and Taxes - ------------------------------------------- In most cases, payments have to begin from 401(a), 403(a), and 403(b) plans by April 1 of the calendar year after the calendar year when you reach age 70-1/2 or, if later, retirement. Payments from an IRA must begin by April 1 of the calendar year after the calendar year you reach age 70-1/2. Under the terms of certain retirement plans, the plan administrator may direct us to make the minimum distributions required by law to you even if you don't elect to receive them. In addition, if you don't begin distributions on time, you'll be subject to a 50% excise tax on the amount you should have received but didn't. (See "Minimum Distribution Option Annuity," page 54.) Deferred Compensation Plans - --------------------------- TIAA RA contracts are also available for deferred compensation plans. RAs issued under these plans are owned by your employer and subject to the claims of its general creditors. Since special tax rules may apply to these plans, consult with a qualified tax advisor for more information about them. Puerto Rico Residents - --------------------- If you are a resident of Puerto Rico, special tax and withholding rules may apply to your plans, since ordinarily your contracts are issued under plans that qualify under the Puerto Rico tax code, which is not identical to the IRC. For information on your tax situation, consult with your employer or a qualified tax advisor. Tax Advice - ---------- What we tell you here about federal and other taxes isn't comprehensive and is for general information only. It doesn't cover every situation. Taxation varies depending on the circumstances, and state and local taxes may also be involved. For complete information on your personal tax situation, check with a qualified tax advisor. GENERAL MATTERS Choices and Changes - ------------------- As long as your contract permits, you (or your annuity partner, beneficiary, or any other payee) can choose or change any of the following: (1) an annuity starting date; (2) an income option; (3) a transfer; (4) a method of payment for death benefits; (5) a date when the commuted value of an annuity becomes payable; (6) an annuity partner, beneficiary, or other - 65 - person named to receive payments; (7) a cash withdrawal or other distribution; and (8) a repurchase. You have to make your choices or changes via a written notice satisfactory to us and received at our home office (see below). Transfers to TIAA's traditional annuity and CREF can currently be made by telephone and over the Internet (see "Telephone and Internet Transactions," below). You can change the terms of a transfer, cash withdrawal, repurchase, or other cash distribution only before they're scheduled to take place. When we receive a notice of a change in beneficiary or other person named to receive payments, we'll execute the change as of the date it was signed, even if the signer dies in the meantime. We execute all other changes as of the date received. As already mentioned, we will delay the effective date of some transactions until we receive additional documentation (see page 52). Telephone and Internet Transactions - ----------------------------------- You can use our Automated Telephone Service ("ATS") or our Inter/ACT System over the Internet ("Inter/ACT System") 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 the ATS and the Inter/ACT System. Both the ATS and the Inter/ACT System will lead you through the transaction process and will use reasonable procedures to confirm that instructions given are genuine. All transactions made over the ATS and Inter/ACT System are electronically recorded. To use the ATS, you need a touch tone phone. The toll free number for the ATS is 1 800 842-2252. The Inter/ACT System may be accessed through the TIAA-CREF Internet home page at http://www.tiaa-cref.org. Contacting TIAA - --------------- We won't consider any notice, form, request, or payment to have been received by TIAA until it reaches our home office: Teachers Insurance and Annuity Association, 730 Third Avenue, New York, New York 10017-3206. You can ask questions by calling toll-free 1 800 842-2776. Electronic Prospectus - --------------------- If you received this prospectus electronically and would like a paper copy, please call 1 800 842-2733, extension 5509, and we will send it to you. - 66 - Signature Requirements - ---------------------- For some transactions, we may require your signature to be notarized or guaranteed by a commercial bank or a member of a national securities exchange. Overpayment of Premiums - ----------------------- If your employer mistakenly sends more premiums on your behalf than you're entitled to under your employer's retirement plan or the IRC, we'll refund them to your employer as long as we're requested to do so (in writing) before you start receiving annuity income. Any time there's a question about premium refunds, TIAA will rely on information from your employer. If you've withdrawn or transferred the amounts involved from your accumulation, we won't refund them. Payment to an Estate, Guardian, Trustee, etc. - --------------------------------------------- We reserve the right to pay in one sum the commuted value of any benefits due an estate, corporation, partnership, trustee, or other entity not a natural person. Neither TIAA nor the Account will be responsible for the conduct of any executor, trustee, guardian, or other third party to whom payment is made. Benefits Based on Incorrect Information - --------------------------------------- If the amounts of benefits provided under a contract were based on information that is incorrect, benefits will be recalculated on the basis of the correct data. If any overpayments or underpayments have been made by the Account, appropriate adjustments will be made. Proof of Survival - ----------------- We reserve the right to require satisfactory proof that anyone named to receive benefits under a contract is living on the date payment is due. If this proof is not received after a request in writing, the Account will have the right to make reduced payments or to withhold payments entirely until such proof is received. DISTRIBUTION OF THE CONTRACTS The contracts are offered continuously by the personnel of TIAA-CREF Individual & Institutional Services, Inc. ("Services"), which is registered with the SEC as a broker-dealer and is a member of the National Association of Securities Dealers, Inc. ("NASD"). Teachers Personal Investors Services, Inc. ("TPIS"), which is also registered with the SEC and is a member of the NASD, may also participate in the distribution of - 67 - the contracts on a limited basis. Services and TPIS are direct or indirect subsidiaries of TIAA. As already noted, distribution costs are covered by a deduction from the assets of the Account; no commissions are paid in connection with the distribution of the contracts. Anyone distributing the contracts must be a registered representative of Services or TPIS, whose main offices are both at 730 Third Avenue, New York, New York 10017-3206. PERIODIC REPORTS As long as you have an accumulation in the Account, you will be sent a statement each quarter which sets forth the following: (1) premiums paid during the quarter; (2) the number and dollar value of accumulation units in the Real Estate Account credited to you during the quarter and in total; (3) cash withdrawals from the Account during the quarter; (4) any transfers between the Account and TIAA's traditional annuity or CREF during the quarter; (5) any repurchase or transfer to a funding vehicle other than TIAA or CREF during the quarter, if an amount remains in your accumulation after those transactions; and (6) the amount applied to begin annuity payments during the quarter. 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. - 68 - LEGAL MATTERS All matters involving the application of state law to the contracts, including TIAA's right to issue the contracts, have been passed upon by Charles H. Stamm, Executive Vice President and General Counsel of TIAA. Legal matters relating to the federal securities laws have been passed upon by Sutherland, Asbill & Brennan, L.L.P., Washington, D.C. EXPERTS The consolidated financial statements of the TIAA Real Estate Account and the financial statements of certain properties purchased by the Account included in this prospectus, the financial statement schedule to the financial statements of the Account, appearing elsewhere in the registration statement filed with the SEC, and the financial statements of TIAA incorporated herein by reference have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports which appear herein or are incorporated herein by reference, and have been so included or incorporated in reliance upon the reports of such firm, given upon their authority as experts in accounting and auditing. (The report on the financial statements of TIAA expresses an opinion that such financial statements are presented in conformity with statutory accounting practices, a comprehensive basis of accounting as described in Note 2 to the TIAA financial statements, and not in conformity with generally accepted accounting principles). LEGAL PROCEEDINGS The assets of the Real Estate Account are not subject to any material legal actions. TIAA is not involved in any legal action that we consider material to its obligations to the Real Estate Account. ADDITIONAL INFORMATION A registration statement under the Securities Act of 1933 has been filed with the SEC by TIAA on behalf of the Real Estate Account related to the offering described in this prospectus. This prospectus does not include all the information set forth in the registration statement. The omitted information may be obtained at the SEC's principal office in Washington, D.C., upon payment of the prescribed fee, or through the SEC's Web site on the Internet (http://www.sec.gov). Further information may be obtained from TIAA at Teachers Insurance and Annuity Association of America, 730 Third Avenue, New York, New York 10017-3206. - 69 - FINANCIAL STATEMENTS The consolidated financial statements of 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 are available upon request by calling 1 800 842-2733 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. - 70 - INDEX TO FINANCIAL STATEMENTS Page ---- TIAA REAL ESTATE ACCOUNT AUDITED CONSOLIDATED FINANCIAL STATEMENTS: Report of Management Responsibility......................................... F-2 Report of Independent Auditors.............................................. F-3 Consolidated Statements of Assets and Liabilities........................... F-4 Consolidated Statements of Operations....................................... F-5 Consolidated Statements of Changes in Net Assets............................ F-6 Consolidated Statements of Cash Flows....................................... F-7 Notes to Consolidated Financial Statements.................................. F-8 Consolidated Statement of Investments.......................................F-14 PROFORMA CONDENSED FINANCIAL STATEMENTS: Proforma Condensed Statement of Assets and Liabilities...........................................................F-16 Proforma Condensed Statement of Operations..................................F-17 Notes to Proforma Condensed Financial Statements............................F-18 THE MILLBROOK COLLECTION AND THE LYNNWOOD COLLECTION RETAIL CENTERS: Independent Auditors' Report................................................F-19 Combined Statement of Revenues and Certain Expenses.........................F-20 Notes to Combined Statement of Revenues and Certain Expenses.......................................................F-21 ARAPAHOE PARK EAST, WESTCREEK APARTMENTS, PARKVIEW PLAZA, FAIRGATE AT BALLSTON, NEWTON PLACE, AND LONGVIEW EXECUTIVE PARK: Report of Independent Auditors .............................................F-23 Combined Statement of Revenues and Certain Expenses.........................F-24 Notes to Combined Statement of Revenues and Certain Expenses.......................................................F-25 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA Condensed Unaudited Financial Statements....................................F-26 Supplemental Information to Condensed Unaudited Financial Statements.................................................................F-28 F - 1 [TIAA LOGO] REPORT OF MANAGEMENT RESPONSIBILITY To the Participants of the TIAA Real Estate Account: The accompanying consolidated financial statements of the TIAA Real Estate Account ("Account") of Teachers Insurance and Annuity Association of America ("TIAA") are the responsibility of TIAA's management. They have been prepared in accordance with generally accepted accounting principles and have been presented fairly and objectively in accordance with such principles. TIAA has established and maintains a strong system of internal controls designed to provide reasonable assurance that assets are properly safeguarded and transactions are properly executed in accordance with management's authorization, and to carry out the ongoing responsibilities of management for reliable financial statements. In addition, TIAA's internal audit personnel provide a continuing review of the internal controls and operations of TIAA, including its separate account operations. The internal Auditor regularly reports to the Audit Committee of the TIAA Board of Trustees. The accompanying consolidated financial statements have been audited by the independent auditing firm of Deloitte & Touche LLP. The independent auditors' report, which appears on the following page, expresses an independent opinion on the fairness of presentation of these financial statements. The Audit Committee of the TIAA Board of Trustees, consisting of trustees who are not officers of TIAA, meets regularly with management, representatives of Deloitte & Touche LLP and internal auditing personnel to review matters relating to financial reporting, internal controls and auditing. /s/ John H. Biggs --------------------------------- Chairman and Chief Executive Officer /s/ Thomas W. Jones --------------------------------- Vice Chairman, President and Chief Operating Officer /s/ Richard L. Gibbs --------------------------------- Executive Vice President and Principal Accounting Officer F - 2 [letterhead] Deloitte & Touche LLP [LOGO] Two World Financial Center Telephone: (212) 436-2000 New York, New York 10281-1414 Facsimile: (212) 436-5000 REPORT OF INDEPENDENT AUDITORS To the Participants of the TIAA Real Estate Account and the Board of Trustees of Teachers Insurance and Annuity Association of America: We have audited the accompanying consolidated statement of assets and liabilities of the TIAA Real Estate Account ("Account") of Teachers Insurance and Annuity Association of America ("TIAA") as of December 31, 1996 and 1995, the consolidated statement of investments as of December 31, 1996, and the related consolidated statements of operations, changes in net assets and cash flows for the year ended December 31, 1996 and for the period July 3, 1995 (commencement of operations) to December 31, 1995. 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. 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, 1996 and 1995, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Account as of December 31, 1996 and 1995, the results of its operations, the changes in its net assets and its cash flows for the above-stated periods, in conformity with generally accepted accounting principles. Investments in real estate properties are stated at fair value at December 31, 1996 and 1995, as discussed in Note 2 to the consolidated financial statements. Determination of fair value involves subjective judgment because the actual market value of real estate can be determined only by negotiation between the parties in a sales transaction. /s/ Deloitte & Touche LLP February 6, 1997 - ----------------- Deloitte & Touche Tohmatsu International - ----------------- F - 3 TIAA REAL ESTATE ACCOUNT CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES December 31, December 31, 1996 1995 ------------ ------------ ASSETS Investments, at value: Real estate properties (Cost: $130,849,444 and $43,989,665)............ $131,803,204 $ 43,989,665 Marketable securities (Amortized cost: $233,872,445 and $73,972,831).. 236,127,523 73,992,569 Cash.............................................. 3,981,740 396,787 Receivable from securities transactions........... 47,480,000 23,150,000 Other............................................. 6,979,540 1,648,400 ------------ ------------ TOTAL ASSETS 426,372,007 143,177,421 ------------ ------------ LIABILITIES Payable for securities transactions............... 51,354,619 22,788,035 Other............................................. 5,322,335 131,041 ------------ ------------ TOTAL LIABILITIES 56,676,954 22,919,076 ------------ ------------ NET ASSETS Accumulation Fund................................. 366,197,755 120,258,345 Annuity Fund...................................... 3,497,298 - ------------ ------------ TOTAL NET ASSETS $369,695,053 $120,258,345 ============ ============ NUMBER OF ACCUMULATION UNITS OUTSTANDING--Notes 6 and 7........................ 3,295,786 1,172,498 ========= ========= NET ASSET VALUE, PER ACCUMULATION UNIT--Note 6.................... $111.11 $102.57 ======= ======= See notes to consolidated financial statements. F - 4 TIAA REAL ESTATE ACCOUNT CONSOLIDATED STATEMENTS OF OPERATIONS
For the period For the July 3, 1995 Year (Commencement Ended of Operations) to December 31, December 31, 1996 1995 ------------ ------------------- INVESTMENT INCOME Real estate income, net: Rental income...................................................... $10,951,183 $ 165,762 ----------- ---------- Real estate property level expenses and taxes: Operating expenses............................................... 2,116,334 29,173 Real estate taxes................................................ 1,254,163 14,659 ----------- ---------- Total real estate property level expenses and taxes 3,370,497 43,832 ----------- ---------- Real estate income, net 7,580,686 121,930 Interest............................................................ 5,570,907 2,820,229 Dividends........................................................... 456,579 8,671 ----------- ---------- TOTAL INCOME 13,608,172 2,950,830 ----------- ---------- Expenses--Note 3: Investment advisory.................................................. 642,042 227,531 Administrative and distribution...................................... 437,894 66,320 Mortality and expense risk charges................................... 70,535 8,291 Liquidity guarantee charges.......................................... 5,325 8,291 ----------- ---------- TOTAL EXPENSES 1,155,796 310,433 ----------- ---------- INVESTMENT INCOME, NET 12,452,376 2,640,397 ----------- ---------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on marketable securities.......................... 141,439 15,865 ----------- ---------- Net change in unrealized appreciation on: Real estate properties............................................ 953,760 - Marketable securities............................................. 2,235,340 19,738 ----------- ---------- Net change in unrealized appreciation 3,189,100 19,738 ----------- ---------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 3,330,539 35,603 ----------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $15,782,915 $2,676,000 =========== ==========
See notes to consolidated financial statements. F - 5 TIAA REAL ESTATE ACCOUNT CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
For the period For the July 3, 1995 Year (Commencement Ended of Operations) to December 31, December 31, 1996 1995 ------------ ----------------- FROM OPERATIONS Investment income, net .............................................. $ 12,452,376 $ 2,640,397 Net realized gain on marketable securities .......................... 141,439 15,865 Net change in unrealized appreciation on investments ................ 3,189,100 19,738 ------------ ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 15,782,915 2,676,000 ------------ ------------ FROM PARTICIPANT TRANSACTIONS Premiums ............................................................ 9,665,306 500,421 TIAA seed money contributed (withdrawn) -- Note 1 ................... (7,294,134) 100,000,000 Disbursements and transfers: Net transfers from TIAA ............................................ 19,203,309 2,901,675 Net transfers from CREF Accounts ................................... 213,306,573 14,204,597 Annuity and other periodic payments ................................ (336,103) (718) Withdrawals ........................................................ (864,480) (23,630) Death benefits ..................................................... (26,678) -- ------------ ------------ NET INCREASE IN NET ASSETS RESULTING FROM PARTICIPANT TRANSACTIONS 233,653,793 117,582,345 ------------ ------------ NET INCREASE IN NET ASSETS 249,436,708 120,258,345 NET ASSETS Beginning of period.................................................. 120,258,345 -- ------------ ------------ End of period........................................................ $369,695,053 $120,258,345 ============ ============
See notes to consolidated financial statements. F - 6 TIAA REAL ESTATE ACCOUNT CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period For the July 3, 1995 Year (Commencement Ended of Operations) to December 31, December 31, 1996 1995 ------------ ----------------- CASH FLOWS FROM OPERATING ACTIVITIES Net increase in net assets resulting from operations ............... $ 15,782,915 $ 2,676,000 Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: Increase in investments .......................................... (249,948,493) (117,982,234) Increase in receivable from securities transactions .............. (24,330,000) (23,150,000) Increase in other assets ......................................... (5,331,140) (1,648,400) Increase in payable for securities transactions .................. 28,566,584 22,788,035 Increase in other liabilities .................................... 5,191,294 131,041 ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (230,068,840) (117,185,558) ------------ ------------ CASH FLOWS FROM PARTICIPANT TRANSACTIONS Premiums ........................................................... 9,665,306 500,421 TIAA seed money contributed (withdrawn) -- Note 1 ................. (7,294,134) 100,000,000 Disbursements and transfers: Net transfers from TIAA ........................................... 19,203,309 2,901,675 Net transfers from CREF Accounts .................................. 213,306,573 14,204,597 Annuity and other periodic payments ............................... (336,103) (718) Withdrawals ....................................................... (864,480) (23,630) Death benefits .................................................... (26,678) -- ------------ ------------ NET CASH PROVIDED BY PARTICIPANT TRANSACTIONS 233,653,793 117,582,345 ------------ ------------ NET INCREASE IN CASH 3,584,953 396,787 CASH Beginning of period ................................................ 396,787 -- ------------ ------------ End of period ...................................................... $ 3,981,740 $ 396,787 ============ ============
See notes to consolidated financial statements. F - 7 TIAA REAL ESTATE ACCOUNT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1--Organization The TIAA Real Estate Account ("Account") is a segregated investment account of Teachers Insurance and Annuity Association of America ("TIAA") and was established by resolution of TIAA's Board of Trustees on February 22, 1995 under the insurance laws of the State of New York for the purpose of funding variable annuity contracts issued by TIAA. Teachers REA, Inc., a wholly-owned subsidiary of the Account, began operations in July 1996 and holds one property in Virginia. 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 starting 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, TIAA began to redeem its seed money Accumulation Units in monthly installments beginning in September, 1996. These withdrawals, amounting to $7,294,134 in 1996, are made at prevailing daily net asset values and are reflected in the accompanying consolidated financial statements. At December 31, 1996, TIAA retained 933,333 Accumulation Units, with a total value of $103,703,507. 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 and capital expenditures and to make benefit payments. TIAA employees, under the direction of TIAA's Board of Trustees and its Mortgage Committee (which effective January 24, 1997 merged with the Finance Committee to become the 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 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 F - 8 Individual & Institutional Services, Inc. ("Services"), a subsidiary of TIAA which is registered with the Commission as a broker-dealer and is a member of the National Association of Securities Dealers, Inc., provides administrative and distribution services pursuant to a Distribution and Administrative Services Agreement with the Account. Note 2--Significant Accounting Policies The following is a summary of the significant accounting policies followed by the Account, which are in conformity with generally accepted accounting principles. Basis of Presentation: The accompanying consolidated financial statements include the Account and its wholly-owned subsidiary, Teachers REA, Inc. 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 Mortgage Committee (the Investment Committee effective January 24, 1997) 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 that the Account uses. The independent fiduciary can also require additional appraisals if it believes that a property's value has changed materially or otherwise to assure that the Account is valued correctly. TIAA performs a valuation review of each real estate property on a quarterly basis and updates the property value if it believes that the value of the property has changed since the previous valuation review or appraisal. The independent fiduciary reviews and approves any such valuation adjustments which exceed certain prescribed limits. TIAA continues to use the revised value to calculate the Account's net asset value until the next valuation review or appraisal. Valuation of Marketable Securities: Equity securities listed or traded on any United States national securities exchange are valued at the last sales price as of the close of the principal securities exchange on which such securities are traded or, if there is no sale, at the mean of the last bid and asked prices. Short-term money market instruments are stated at market value. Portfolio F - 9 securities for which market quotations are not readily available are valued at fair value as determined in good faith under the direction of the Mortgage Committee (the Investment Committee effective January 24, 1997) of the Board of Trustees and in accordance with the responsibilities of the Board as a whole. Accounting for Investments: Real estate transactions are accounted for as of the date on which the purchase or sale transactions for the real estate properties close (settlement date). Rent from real estate properties consists of all amounts earned under tenant operating leases, including base rent, recoveries of real estate taxes and other expenses and charges for miscellaneous services provided to tenants. Rental income is recognized in accordance with the billing terms of the lease agreements. The Account bears the direct expenses of the real estate properties owned. These expenses include, but are not limited to, fees paid to local property management companies, property taxes, utilities, maintenance, repairs, insurance and other operating and administrative costs. An estimate of the net operating income earned from each real estate property is accrued by the Account on a daily basis and such estimates are adjusted as soon as actual operating results are determined. Realized gains and losses on real estate transactions are accounted for under the specific identification method. Securities transactions are accounted for as of the date the securities are purchased or sold (trade date). Interest income is recorded as earned and, for short-term money market instruments, includes accrual of discount and amortization of premium. Dividend income is recorded on the ex-dividend date. Realized gains and losses on securities transactions are accounted for on the average cost basis. Federal Income Taxes: Based on provisions of the Internal Revenue Code, no federal income taxes are attributable to the net investment experience of the Account. Reclassifications: Certain 1995 amounts in the statement of operations have been reclassified to conform to the 1996 presentation. Note 3--Management Agreements All services necessary for the operation of the Account are provided, at cost, by TIAA and Services. TIAA provides investment management services for the Account, while distribution and administrative services are provided by Services in accordance with a Distribution and Administrative Services Agreement between the Account and Services. TIAA also provides a liquidity guarantee to the Account, for a fee, to ensure that sufficient funds are available to meet participant transfer and cash withdrawal requests in the event that the Account's cash flows and liquid investments F - 10 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 1996 been acquired at the beginning of the year (January 1, 1996), rental income and real estate property level expenses and taxes for the year ended December 31, 1996 would have increased by approximately $5,395,000 and $2,109,000, respectively. In addition, interest income for the year ended December 31, 1996 would have decreased by approximately $2,517,000. Accordingly, the total pro forma effect on the Account's net investment income for the year ended December 31, 1996 would have been an increase of approximately $769,000, if the real estate properties acquired during 1996 had been acquired at the beginning of the year. Note 5--Leases The Account's real estate properties are leased to tenants under operating lease agreements which expire on various dates through 2021. Aggregate minimum annual rentals for the properties owned, excluding short-term residential leases, are as follows: Years Ending December 31, ------------ 1997 $ 7,489,000 1998 7,129,000 1999 6,615,000 2000 6,197,000 2001 4,167,000 Thereafter 29,237,000 ----------- Total $60,834,000 =========== Certain leases provide for additional rental amounts based upon the recovery of actual operating expenses in excess of specified base amounts. F - 11 Note 6--Condensed Consolidated Financial Information Selected condensed consolidated financial information for an Accumulation Unit of the Account is presented below.
For the Period July 3, 1995 For the (Commencement Year Ended of Operations) to December 31, 1996 December 31, 1995 ----------------- ----------------- Per Accumulation Unit Data: Rental income ............................................. $ 6.012 $ 0.159 Real estate property level expenses and taxes ................................. 1.850 0.042 -------- -------- Real estate income, net 4.162 0.117 Dividends and interest .................................... 3.309 2.716 -------- -------- Total income 7.471 2.833 Expense charges (1) ....................................... 0.635 0.298 -------- -------- Investment income, net 6.836 2.535 Net realized and unrealized gain on investments ...................................... 1.709 0.031 -------- -------- Net increase in Accumulation Unit Value ................................... 8.545 2.566 Accumulation Unit Value: Beginning of period ....................................... 102.566 100.000 -------- -------- End of period ............................................. $111.111 $102.566 ======== ======== Total return ............................................... 8.33% 2.57% Ratios to Average Net Assets: Expenses (1) .............................................. 0.61% 0.30% Investment income, net .................................... 6.57% 2.51% Portfolio turnover rate: Real estate properties ................................. 0% 0% Securities ............................................. 15.04% 0% Thousands of Accumulation Units outstanding at end of period .............................. 3,296 1,172
(1) Expense charges per Accumulation Unit and the Ratio of Expenses to Average Net Assets exclude real estate property level operating expenses and taxes. If included, the expense charge per Accumulation Unit for the year ended December 31, 1996 would be $2.485 ($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, 1996 would be 2.39% (0.34% for the period July 3, 1995 through December 31, 1995). F - 12 Note 7--Accumulation Units Changes in the number of Accumulation Units outstanding were as follows: For the Period July 3, 1995 For the (Commencement Year Ended of Operations) to December 31, 1996 December 31, 1995 ----------------- ----------------- Accumulation Units: Credited for premiums and TIAA seed money investment.............. 89,841 1,004,905 Credited for transfers, net of disbursements and amounts applied to the Annuity Fund............. 2,033,447 167,593 Outstanding: Beginning of period...................... 1,172,498 - --------- --------- End of period............................ 3,295,786 1,172,498 ========= ========= Note 8--Commitments During the normal course of business, the Account enters into discussions and agreements to purchase or sell real estate properties. As of December 31, 1996, the Account had outstanding commitments to purchase five real estate properties (subject to various closing conditions) totalling approximately $68.8 million. Of that amount, three purchases of real estate property totalling approximately $36.3 million were closed in January 1997. F - 13 TIAA REAL ESTATE ACCOUNT CONSOLIDATED STATEMENT OF INVESTMENTS DECEMBER 31, 1996 REAL ESTATE PROPERTIES--35.82% Location Description Value -------- ----------- ----- Arizona: Phoenix Office building........................ $ 10,500,000 Colorado: Boulder Industrial building.................... 9,920,680 Littleton Apartments............................. 17,750,000 Florida: Ocoee Shopping center........................ 7,400,000 Orlando Apartments............................. 12,800,000 West Palm Beach Apartments............................. 16,072,275 Georgia: Atlanta Apartments............................. 16,000,000 Minnesota: Eagan Industrial building.................... 6,485,249 Fridley Industrial building.................... 4,175,000 North Carolina: Raleigh Shopping center........................ 6,400,000 Raleigh Shopping center........................ 6,600,000 Texas: El Paso(1) Industrial building.................... 4,600,000 Virginia: Woodbridge Shopping center........................ 13,100,000 ------------ TOTAL REAL ESTATE PROPERTIES (Cost $130,849,444)...................................... 131,803,204 ------------ (1) Leasehold interest only MARKETABLE SECURITIES--64.18% Shares Issuer ------ ------ REAL ESTATE INVESTMENT TRUSTS--4.95% 45,000 Associated Estates Realty Corporation......... 1,068,750 45,000 Avalon Properties,Inc......................... 1,293,750 80,000 BrandyWine Realty Trust....................... 1,560,000 29,000 Cali Realty Corporation....................... 895,375 45,000 Camden Property Trust......................... 1,288,125 55,000 CBL & Associates Properties, Inc.............. 1,423,125 40,000 Colonial Properties Trust Co................. 1,215,000 4,434 Homestead Village, Inc. ...................... 79,812 2,975 Homestead Village, Inc. - Wts................. 24,172 40,000 Hospitality Properties Trust.................. 1,160,000 85,000 Innkeepers USA Trust. ........................ 1,179,375 45,000 Security Capital Atlantic, Inc................ 1,102,500 19,900 Security Capital Industrial Trust............. 507,450 15,000 Starwood Lodging.............................. 826,875 40,000 Storage USA, Inc.............................. 1,505,000 40,000 Trinet Corporate Realty Trust, Inc............ 1,420,000 50,000 Weeks Corporation............................. 1,662,500 ------------ TOTAL REAL ESTATE INVESTMENT TRUSTS (Cost $15,886,587)........................................ 18,211,809 ------------ See notes to consolidated financial statements. F - 14 Principal Issuer, Coupon and Maturity Date Value - --------- -------------------------------- ----- COMMERCIAL PAPER--4.05% $ 15,000,000 Morgan Stanley Group 5.37% 02/14/97............................... $ 14,887,875 ------------ TOTAL COMMERCIAL PAPER (Amortized cost $14,901,550)........................... 14,887,875 ------------ CORPORATE BONDS--1.07% 4,000,000 Associates Corporation of North America 5.25% 09/01/98............................... 3,941,560 ------------ TOTAL CORPORATE BONDS (Amortized cost $3,950,280)............................ 3,941,560 ------------ GOVERNMENT AGENCIES--54.11% 2,000,000 Federal Home Loan Bank 5.22% 01/16/97............................... 1,995,200 2,000,000 Federal Home Loan Bank 5.20% 02/04/97............................... 1,989,500 18,500,000 Federal Home Loan Mortgage Corporation 5.40% 01/02/97............................... 18,494,369 2,100,000 Federal Home Loan Mortgage Corporation 5.45% 01/10/97............................... 2,096,850 10,120,000 Federal Home Loan Mortgage Corporation 5.45% 01/21/97............................... 10,088,122 30,000,000 Federal Home Loan Mortgage Corporation 5.27% 01/30/97............................... 29,865,000 8,000,000 Federal Home Loan Mortgage Corporation 5.22% 02/06/97............................... 7,955,600 26,000,000 Federal Home Loan Mortgage Corporation 5.25% 02/13/97............................... 25,828,400 23,200,000 Federal Home Loan Mortgage Corporation 5.26% 02/28/97............................... 22,997,341 11,000,000 Federal National Mortgage Association 5.26% 01/09/97............................... 10,985,150 17,000,000 Federal National Mortgage Association 5.33% 02/03/97............................... 16,913,300 9,500,000 Federal National Mortgage Association 5.33% 02/04/97............................... 9,450,125 10,000,000 Federal National Mortgage Association 5.22% 02/10/97............................... 9,938,500 10,000,000 Federal National Mortgage Association 5.33% 02/10/97............................... 9,938,500 2,000,000 Federal National Mortgage Association 5.20% 03/04/97............................... 1,981,380 15,700,000 Federal National Mortgage Association 5.23% 03/13/97............................... 15,532,952 2,000,000 Federal National Mortgage Association 5.19% 04/03/97............................... 1,972,513 1,100,000 United States Treasury Bill 5.56% 08/21/97............................... 1,063,477 ------------ TOTAL GOVERNMENT AGENCIES (Amortized cost $199,134,028).......................... 199,086,279 ------------ TOTAL MARKETABLE SECURITIES (Amortized cost $233,872,445).................................. 236,127,523 ------------ TOTAL INVESTMENTS--100.00% (Cost $364,721,889)............................................ $367,930,727 ============ See notes to consolidated financial statements. F - 15 TIAA REAL ESTATE ACCOUNT PROFORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES (Unaudited) DECEMBER 31, 1996
Historical Adjustments Proforma ------------ ------------- ------------ ASSETS Investments, at value: Real estate properties .................. $131,803,204 $ 184,717,186 (a) $316,520,390 Marketable securities ................... 236,127,523 (184,717,186)(a) 51,410,337 Receivable from securities transactions ... 47,480,000 -- 47,480,000 Other ..................................... 10,961,280 -- 10,961,280 ------------ ------------- ------------ TOTAL ASSETS ........................... 426,372,007 -- 426,372,007 ------------ ------------- ------------ LIABILITIES Payable for securities transactions ....... 51,354,619 -- 51,354,619 Other ..................................... 5,322,335 -- 5,322,335 ------------ ------------- ------------ TOTAL LIABILITIES ...................... 56,676,954 -- 56,676,954 ------------ ------------- ------------ NET ASSETS Accumulation Fund ......................... 366,197,755 -- 366,197,755 Annuity Fund .............................. 3,497,298 -- 3,497,298 ------------ ------------- ------------ TOTAL NET ASSETS ....................... $369,695,053 -- $369,695,053 ============ ============= ============
See notes to proforma condensed financial statements. F - 16 TIAA REAL ESTATE ACCOUNT PROFORMA CONDENSED STATEMENT OF OPERATIONS (Unaudited) FOR THE YEAR ENDED DECEMBER 31, 1996
Proforma Historical Adjustments Proforma ------------ ------------ ------------ INVESTMENT INCOME Income: Real estate income, net: Rental income ........................ $ 10,951,183 $ 35,374,335(b) $ 46,325,518 ------------ ------------ ------------ Real estate property level expenses and taxes: Operating expenses ................. 2,116,334 8,587,507(b) 10,703,841 Real estate taxes .................. 1,254,163 3,347,105(b) 4,601,268 ------------ ------------ ------------ Total real estate property level expenses and taxes ........... 3,370,497 11,934,612 15,305,109 ------------ ------------ ------------ Real estate income, net ................ 7,580,686 23,439,723 31,020,409 Interest and dividends ................. 6,027,486 (6,027,486)(c) -- ------------ ------------ ------------ TOTAL INCOME ............................... 13,608,172 17,412,237 31,020,409 ------------ ------------ ------------ EXPENSES Interest ................................. -- 8,950,000(d) 8,950,000 Other .................................... 1,155,796 444,000(e) 1,599,796 ------------ ------------ ------------ TOTAL EXPENSES ............................. 1,155,796 9,394,000 10,549,796 ------------ ------------ ------------ INVESTMENT INCOME-NET ...................... 12,452,376 8,018,237 20,470,613 NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ....................... 3,330,539 (2,357,041)(f) 973,498 ------------ ------------ ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................. $ 15,782,915 $ 5,661,196 $ 21,444,111 ============ ============ ============
See notes to proforma condensed financial statements. F - 17 TIAA REAL ESTATE ACCOUNT NOTES TO PROFORMA CONDENSED FINANCIAL STATEMENTS (Unaudited) 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, 1996 through the date of this prospectus. Various assumptions have been made in order to prepare these proforma condensed financial statements; however, such assumptions do not necessarily reflect the intentions or expectations of TIAA. The proforma condensed statement of assets and liabilities has been prepared in order to reflect the Account assuming that real estate properties purchased during the period January 1, 1997 through the date of this prospectus were purchased as of December 31, 1996. The proforma condensed statement of operations has been prepared in order to reflect the Account assuming that all real estate properties purchased during the period January 1, 1996 through the date of this prospectus were purchased as of January 1, 1996. 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, 1997 through the date of this prospectus, assuming such properties were purchased as of December 31, 1996. 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, 1996 through the date of this prospectus, assuming such properties were owned for the period January 1, 1996 through December 31, 1996. (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, 1996 through the date of this prospectus had been purchased as of January 1, 1996. (d) To record the interest expense which would have been incurred in order to borrow cash to purchase, as of January 1, 1996, the real estate properties which were actually purchased during the period January 1, 1996 through the date of this prospectus. (e) To record additional expenses which would have been incurred during 1996, assuming the Account's assets had been fully invested in real estate properties rather than partially in real estate properties and partially in marketable securities. (f) To record the decrease in realized and unrealized gains that would have occurred had the Account not held any marketable securities during 1996 because any amounts invested in marketable securities would have been sold as of January 1, 1996 in order to purchase the real estate properties which were actually purchased during the period January 1, 1996 through the date of this prospectus. F - 18 [letterhead] Deloitte & Touche LLP [LOGO] Two World Financial Center Telephone: (212) 436-2000 New York, New York 10281-1414 Facsimile: (212) 436-5000 INDEPENDENT AUDITORS' REPORT To the Board of Trustees Teachers Insurance and Annuity Association of America: We have audited the accompanying combined statement of revenues and certain expenses of the properties known as The Millbrook Collection and The Lynnwood Collection Retail Centers (collectively, the "Properties") for the year ended December 15, 1995. This financial statement is the responsibility of TIAA Real Estate Account's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying combined statement of revenues and certain expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in the registration statement on Form S-1 of TIAA Real Estate Account) and as described in Note 2 is not intended to be a complete presentation of the Properties' revenues and expenses. In our opinion, the financial statement referred to above presents fairly, in all material respects, the combined statement of revenues and certain expenses of the Properties as described in Note 2 for the year ended December 15, 1995 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP April 12, 1996 - --------------- Deloitte Touche Tohmatsu International - --------------- F - 19 THE MILLBROOK COLLECTION AND THE LYNNWOOD COLLECTION RETAIL CENTERS Combined Statement of Revenues and Certain Expenses Year Ended December 15, 1995 Revenues: Rental income $1,403,947 Other 364,641 ---------- Total revenues 1,768,588 ---------- Certain expenses: Building operating expenses 348,117 Real estate taxes 146,537 Management fees 79,539 ---------- Total expenses 574,193 ---------- Revenues in excess of certain expenses $1,194,395 ========== See notes to combined statement of revenues and certain expenses. F - 20 THE MILLBROOK COLLECTION AND THE LYNNWOOD COLLECTION RETAIL CENTERS Notes to Combined Statement of Revenues and Certain Expenses Year Ended December 15, 1995 1. DESCRIPTION OF PROPERTIES The combined statement of revenues and certain expenses relates to the properties known as The Millbrook Collection ("Millbrook") and The Lynnwood Collection Retail Centers ("Lynnwood") (collectively, the "Properties"). Millbrook and Lynnwood, located in Raleigh, North Carolina, were acquired on March 29, 1996 by TIAA Real Estate Account (the "Account"). 2. BASIS OF PRESENTATION The accompanying financial statement is presented in conformity with Rule 3-14 of Regulation S-X of the Securities and Exchange Commission. Accordingly, the financial statement is not representative of the actual operations for the year ended December 15, 1995 as certain expenses, which may not be comparable to the expenses expected to be incurred in the future operations of the Properties have been excluded. Expenses excluded consist of depreciation, amortization, ground lease, and other costs not directly related to the future operations of the Properties. 3. SIGNIFICANT ACCOUNTING POLICIES Rental Income - Rental income is recognized when due in accordance with the terms of the respective leases. Income Taxes - Based on provisions of the Internal Revenue Code, no federal income taxes are attributable to the net investment income of the Account. Building Operating Expenses - Expenses consist primarily of utilities, insurance, security and safety, cleaning and other rental expenses of the Properties. F - 21 4. LEASES At December 15, 1995, future minimum base rentals to be received for fiscal years ending 1996 through 2000, and the aggregate amount thereafter, under noncancellable operating leases in effect are as follows: 1996 $ 1,285,984 1997 1,191,705 1998 1,054,190 1999 905,454 2000 820,880 Aggregate amount thereafter 8,300,455 ----------- $13,558,668 =========== Rental income from one tenant, which operates a supermarket in each property, amounted to approximately 46% of the total rental income for the year ended December 15, 1995. 5. MANAGEMENT FEES In accordance with the terms of the management agreement, the Properties pay a monthly management fee based on 5% of total monthly collections from the Properties' tenants. These monthly collections include base rent, common area maintenance, real estate taxes, insurance, and other miscellaneous income. F - 22 [letterhead] Deloitte & Touche LLP [LOGO] Two World Financial Center Telephone: (212) 436-2000 New York, New York 10281-1414 Facsimile: (212) 436-5000 REPORT OF INDEPENDENT AUDITORS To the Board of Trustees of Teachers Insurance and Annuity Association of America: We have audited the accompanying combined statement of revenues and certain expenses of the properties known as Arapahoe Park East, Westcreek Apartments, Parkview Plaza, Fairgate at Ballston, Two Newton Place and Longview Executive Park, (collectively, the "Properties") for the year ended December 31, 1996. This financial statement is the responsibility of TIAA Real Estate Account's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying combined statement of revenues and certain expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in the registration statement on Form S-1 of TIAA Real Estate Account) and as described in Note 2 is not intended to be a complete presentation of the Properties' revenues and expenses. In our opinion, the financial statement referred to above presents fairly, in all material respects, the combined statement of revenues and certain expenses of the Properties as described in Note 2 for the year ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP April 29, 1997 - --------------- Deloitte Touche Tohmatsu International - --------------- F - 23 ARAPAHOE PARK EAST WESTCREEK APARTMENTS PARKVIEW PLAZA FAIRGATE AT BALLSTON TWO NEWTON PLACE LONGVIEW EXECUTIVE PARK Combined Statement of Revenues and Certain Expenses Year Ended December 31, 1996 Revenues: Rental income................................................... $17,588,503 Other.......................................................... 2,047,736 ----------- Total revenues 19,636,239 ----------- Certain Expenses: Building operating expenses..................................... 3,418,537 Real estate taxes............................................... 1,642,127 Management fees................................................. 385,726 ----------- Total expenses 5,446,390 ----------- Revenues in excess of certain expenses $14,189,849 =========== See notes to combined statement of revenues and certain expenses. F - 24 ARAPAHOE PARK EAST WESTCREEK APARTMENTS PARKVIEW PLAZA FAIRGATE AT BALLSTON TWO NEWTON PLACE LONGVIEW EXECUTIVE PARK Notes to Combined Statement of Revenues and Certain Expenses Year Ended December 31, 1996 Note 1--Description of Properties The combined statement of revenues and certain expenses relates to the properties known as Arapahoe Park East ("Arapahoe"), Westcreek Apartments ("Westcreek"), Parkview Plaza ("Parkview"), Fairgate at Ballston ("Fairgate"), Two Newton Place ("Newton") and Longview Executive Park ("Longview") (collectively, the "Properties"). Arapahoe, located in Boulder Colorado, was acquired by TIAA Real Estate Account (the "Account") on October 21, 1996. Westcreek, located in Westlake Village, California, was acquired by the Account on January 2, 1997. Fairgate, located in Arlington Virginia, Newton, located in Newton Massachusetts, and Longview, located in Hunt Valley, Maryland were acquired by the Account on April 21, 1997. Parkview, located in Oakbrook Terrace, Illinois, was acquired by the Account on April 29, 1997. Note 2--Basis of Presentation The accompanying financial statement is presented in conformity with Rule 3-14 of Regulation S-X of the Securities and Exchange Commission. Accordingly, the financial statement is not representative of actual operations for the year ended December 31, 1996 as certain expenses, which may not be comparable to the expenses expected to be incurred in future operations of the Properties have been excluded. Expenses excluded consist of depreciation, amortization, ground lease and other costs not directly related to the future operations of the Properties. Note 3--Significant Accounting Policies Rental Income--Rental income is recognized when due in accordance with the terms of the respective leases. Income Taxes--Based on provisions of the Internal Revenue Code, no federal income taxes are attributable to the net investment experience of the Account. Building Operating Expenses--Expenses consist primarily of utilities, insurance, security and safety, cleaning and other rental expenses of the Properties. Note 4--Leases At December 31, 1996, future minimum base rentals, excluding short term residential leases, to be received for years ending 1997 through 2001, and the aggregate amount thereafter, under noncancellable operating leases in effect, are as follows: 1997 $17,267,000 1998 16,301,000 1999 13,435,000 2000 12,092,000 2001 10,380,000 Aggregate amount thereafter 29,550,000 ----------- $99,025,000 =========== Certain leases provide for additional rental amounts based upon the recovery of actual operating expenses in excess of specified base amounts. F - 25 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
(in thousands) December 31, 1996 1995 ----------- ----------- ASSETS Bonds...................................................................... $56,092,131 $48,835,831 Mortgages.................................................................. 20,074,002 21,000,279 Real Estate................................................................ 6,704,889 7,013,053 Stocks..................................................................... 355,093 223,028 Other long-term investments................................................ 500,351 476,804 Cash and short-term investments............................................ 615,082 713,051 Investment income due and accrued.......................................... 1,140,956 1,118,708 Separate Account assets.................................................... 663,458 209,170 Other assets............................................................... 211,516 204,689 ----------- ----------- Total Assets $86,357,478 $79,794,613 =========== =========== LIABILITIES Policy and contract reserves............................................... $75,909,906 $70,983,831 Dividends declared for the following year.................................. 1,636,738 1,493,744 Asset Valuation Reserve.................................................... 2,134,921 1,860,868 Interest Maintenance Reserve............................................... 729,090 621,366 Separate Account liabilities............................................... 559,754 106,512 Other liabilities.......................................................... 636,364 672,112 ----------- ----------- Total Liabilities 81,606,773 75,738,433 ----------- ----------- CAPITAL AND CONTINGENCY RESERVES Capital.................................................................... 2,500 2,500 ----------- ----------- Contingency reserves: For group life insurance............................................... 8,739 7,762 For investment losses, annuity and insurance mortality, and other risks 4,739,466 4,045,918 ----------- ----------- Total Contingency Reserves 4,748,205 4,053,680 ----------- ----------- Total Capital and Contingency Reserves 4,750,705 4,056,180 ----------- ----------- Total Liabilities, Capital and Contingency Reserves $86,357,478 $79,794,613 =========== ===========
F - 26 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA TIAA Condensed Statements of Operations and Changes in Contingency Reserves
(in thousands) For the Years Ended December 31, 1996 1995 ----------- ----------- INCOME Insurance and annuity premiums and deposits............................... $ 2,781,827 $ 2,854,600 Transfers from CREF, net.................................................. 366,920 351,869 Annuity dividend additions................................................ 2,131,890 1,943,614 Net investment income..................................................... 6,525,529 6,108,497 Supplementary contract consideration...................................... 203,770 150,976 ----------- ----------- Total Income $12,009,936 $11,409,556 =========== =========== DISTRIBUTION OF INCOME Policy and contract benefits.............................................. $ 1,916,597 $ 1,718,597 Dividends................................................................. 3,399,581 3,098,931 Increase in policy and contract reserves.................................. 5,097,213 5,329,040 Operating expenses........................................................ 249,000 241,795 Transfers to Separate Accounts, net....................................... 395,686 92,995 Federal income taxes...................................................... 13,154 9,488 Other, net................................................................ 1,112 (4,380) Increase in contingency reserves from operations.......................... 937,593 923,090 ----------- ----------- Total Distribution of Income $12,009,936 $11,409,556 =========== =========== CHANGES IN CONTINGENCY RESERVES: From operations........................................................... $ 937,593 $ 923,090 Net realized capital gain (loss) on investments........................... 163,950 (56,265) Net unrealized capital gain on investments................................ 30,452 52,706 Transfer to the Interest Maintenance Reserve.............................. (167,086) (114,840) Transfers from (to) the Asset Valuation Reserve: Required formula contribution......................................... (246,181) (302,387) Net capital (gains) losses absorbed................................... (27,872) 106,215 Increase in non-admitted assets other than investments.................... (4,764) (803) Other, net................................................................ 8,433 10,640 ------------ ----------- Net Change in Contingency Reserves 694,525 618,356 Contingency Reserves at Beginning of Year 4,053,680 3,435,324 ------------ ----------- Contingency Reserves at End of Year $ 4,748,205 $ 4,053,680 ============ ===========
F - 27 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. 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 assets of the underlying entities. Policy loans are stated at outstanding principal amounts. All investments are stated net of any permanent impairments, which are determined on an individual asset basis. Depreciation is generally computed over a 40 year period on the constant yield method for properties acquired prior to 1991, and on the straight-line method for properties acquired thereafter. Additional Information: 1996 1995 ---- ---- As a percentage of total bond investments: Below investment grade bonds 5% 5% As a percentage of total mortgage investments: Below investment grade mortgage loans 4% 4% Total mortgage investments in California 22% 24% Total mortgage investments in office buildings 41% 41% Total mortgage investments in shopping centers 29% 31% As a percentage of total real estate investments: Total real estate investments in Minnesota 12% 12% Total real estate investments in California 10% 12% Total real estate investments in office buildings 63% 62% 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, 1996 and 1995, TIAA had outstanding foreign currency swap contracts with a total notional value of approximately $337,404,000 and $238,063,000, respectively, and interest rate swap contracts with a total notional value of approximately $187,355,000 and $105,600,000, respectively. At December 31, 1996, TIAA had outstanding foreign currency forward contracts with a total notional value of approximately $12,522,000, swap options with a total notional value of approximately $58,000,000 and interest rate cap contracts with a total notional value of approximately $32,520,000. F - 28 APPENDIX A DESCRIPTION OF PROPERTIES The following table summaries the properties currently held by the Account. Details regarding each property are provided after the table.
Net Year Year Rentable Percent Property Location Built Purchased Area Units Leased - -------- -------- ----- --------- -------- ----- ------- (sq.ft.) MULTI-FAMILY - ------------ The Crest at Shadow Mountain El Paso, TX 1992 1997 NA 232 92% Westcreek Westlake Village, CA 1988 1997 NA 126 94% Royal St. George W. Palm Beach, FL 1995 1996 NA 224 94% Monte Vista Littleton, CO 1995 1996 NA 219 90% Brixworth Atlanta, GA 1989 1995 NA 271 88% The Greens At Metrowest Orlando, FL 1990 1995 NA 200 92% OFFICE BUILDINGS - ---------------- Parkview Plaza* Oakbrook, IL 1990 1997 263,912 NA 98% Fairgate at Ballston* Arlington, VA 1988 1997 143,564 NA 99% Five Centerpointe* Lake Oswego, OR 1988 1997 113,910 NA 92% Two Newton Place* Newton, MA 1987 1997 108,819 NA 97% USF&G Building* Salt Lake City, UT 1988 1997 66,352 NA 100% Northmark Business Center* Blue Ash, OH 1985 1997 105,406 NA 90% Metro Center Office Park* Sacramento, CA 1986 1997 255,858 NA 67% Longview Executive Park* Hunt Valley, MD 1988 1997 257,944 NA 100% Southbank Phoenix, AZ 1995 1996 122,535 NA 100% RETAIL - ------ River Oaks Woodbridge, VA 1995 1996 90,885 NA 94% The Lynnwood Collection Raleigh, NC 1988 1996 86,362 NA 100% The Millbrook Collection Raleigh, NC 1988 1996 102,221 NA 83% Plantation Grove Ocoee, FL 1995 1995 73,655 NA 95% INDUSTRIAL - ---------- Westinghouse Coral Springs, FL NA 1997 75,630 NA 100% Interstate Acres Urbandale, IA 1981-1988 1997 440,000 NA 97% Interstate Crossing Eagan, MN 1995 1996 131,380 NA 100% Arapahoe Park E. Boulder, CO 1979-1982 1996 129,425 NA 100% River Road Fridley, MN 1995 1995 100,584 NA 100% Butterfield El Paso, TX 1980-1981 1995 183,600 NA 100% - ----------------------- * - Purchased in joint venture
MULTI-FAMILY RESIDENTIAL COMPLEXES The Crest At Shadow Mountain Apartments -- El Paso, Texas On January 31, 1997, the Account purchased the fee interest (i.e., ownership of underlying land and all buildings and other improvements on the land) in The Crest at Shadow Mountain Apartments, a first class garden apartment complex located in El Paso, Texas, for a purchase price of approximately $9.2 million. The property is not subject to a mortgage. A - 1 The Crest at Shadow Mountain Apartments was built in 1992 and is located on 9.5 acres of land. The complex contains 232 one-, two- and three- bedroom units in 17 two-story apartment buildings. Buildings are of wood frame construction with stucco and brick exteriors and pitched composition shingle roofs. The project includes a community clubhouse/leasing office with a fitness center, outdoor pool, sports court and sand volleyball court. Apartment units offer fully equipped kitchens, cable, walk-in closets, ceiling fans, thermo-pane windows and are wired for contract security systems. There are 332 parking spaces plus 91 covered carports. The complex is currently 92% occupied with monthly rents averaging $590 per unit. Rents are comparable with competitive complexes and are not subject to rent regulation. The Account is responsible for the expenses of operating the property. The Crest at Shadow Mountain Apartments is located approximately seven miles west of the El Paso central business district. The El Paso metropolitan area, with a current population of almost seven hundred thousand persons has experienced population growth over the past five years that is more than twice the national rate. This growth is expected to continue. Westcreek Apartments -- Westlake Village, California On January 2, 1997, the Account purchased the fee interest in Westcreek Apartments, a luxury garden apartment complex located in Westlake Village, California, for a purchase price of approximately $13.0 million. The property is not subject to a mortgage. Westcreek Apartments was built in 1988 and is located on approximately 10.4 acres of land. The complex contains 126 one- and two-bedroom units in 11 two-story buildings, with each unit containing such amenities as a microwave oven, fireplace, washer and dryer and nine foot ceilings. Building exteriors are stucco with tile roofs. There are 128 covered parking spaces plus 76 uncovered parking spaces. Residents have use of an on-site clubhouse with a fully equipped weight room and a swimming pool. The complex is currently 94% occupied with monthly rents averaging $1,090 per unit. Rents are comparable with competitive complexes and are not subject to rent regulation. The Account is responsible for the expenses of operating the property. Westlake Village is located approximately 38 miles northwest of downtown Los Angeles in Ventura County. Ventura County has enjoyed above-average population growth during the last five years and this growth is expected to continue into the foreseeable future. A - 2 Royal St. George Apartments -- West Palm Beach, Florida On December 20, 1996, the Account purchased the fee interest in Royal St. George Apartments, a first class garden apartment complex located in West Palm Beach, Florida, for a purchase price of approximately $15.9 million. The property is not subject to a mortgage. Royal St. George Apartments was built in 1995 and is located on 10.4 acres of land. The complex contains 224 one-, two- and three-bedroom units in 8 two- and three-story buildings, with each unit containing such amenities as a washer and dryer, patio or solarium, and a security system. Upper level units contain vaulted ceilings. Building exteriors are stucco with tile roofs. There are 388 parking spaces plus 64 detached garages. Residents have use of an on-site clubhouse, a fully equipped exercise center, swimming pool and two lighted tennis courts. The complex is currently 94% occupied with monthly rents averaging $834 per unit. Rents are comparable with competitive complexes and are not subject to rent regulation. The Account is responsible for the expenses of operating the property. Royal St. George Apartments is located three miles south of the West Palm Beach central business district. The West Palm Beach metropolitan area, with a current population of almost one million persons, has experienced population growth over the past five years that is more than twice the national rate. This growth is expected to continue. Monte Vista Apartments -- Littleton, Colorado On June 21, 1996, the Account purchased the fee interest in Monte Vista Apartments, a luxury garden apartment complex located in Littleton, Colorado, for a purchase price of approximately $17.6 million. The property is not subject to a mortgage. Monte Vista Apartments was built in 1995, and is located on approximately 15.1 acres of land. The complex consists of 219 one- and two-bedroom units in 22 two-story buildings, with units containing such amenities as 9 foot ceilings, a gas fireplace and an attached garage. Building exteriors are brick and siding. There are 221 uncovered parking spaces in addition to the garages. Residents have use of an on-site clubhouse, a fully equipped exercise center and swimming pool. The complex is currently 90% occupied with monthly rents averaging $923.00 per unit. Rents are comparable with competitive complexes in the locality and are not subject to rent regulation. The Account is responsible for the expenses of operating the property. Littleton is located 10 miles southwest of downtown Denver. Denver, the capital of Colorado, is the largest city in the seven-state Rocky Mountain region. The population of the Denver A - 3 metropolitan area, which includes Littleton, has grown steadily during the past ten years and is expected to continue to expand into the near future. Brixworth Apartments -- Atlanta, Georgia On December 28, 1995, the Account purchased the fee interest in Brixworth Apartments, a first class garden apartment complex located in Atlanta, Georgia, for a purchase price of approximately $15.6 million. The property is not subject to a mortgage. Brixworth Apartments was built in 1989 and is located on approximately 10.8 acres of land. The complex contains 271 one- and two-bedroom apartment units in 11 three story buildings, with each unit containing such amenities as a washer and dryer and a patio or balcony. Building exteriors are brick and wood. There are 420 parking spaces in the complex. Residents have use of an on-site clubhouse, which includes a fitness center and swimming pool. Brixworth Apartments is currently 88% occupied. Average monthly rents are $785 per unit. Rents are comparable with competitive communities and are not subject to rent regulation. The Account is responsible for the expenses of operating the property. Brixworth Apartments is located in northeast Atlanta in DeKalb County, near several shopping facilities and employment centers. Atlanta has experienced positive population and employment growth over the last 15 years and serves as the financial and administrative center for the southeastern United States. The Greens at Metrowest Apartments -- Orlando, Florida On December 15, 1995, the Account purchased the fee interest in The Greens at Metrowest, a luxury garden apartment complex located in Orlando, Florida, for a purchase price of approximately $12.5 million. The property is not subject to a mortgage. The Greens at Metrowest Apartments was built in 1990, and is located on approximately 16.7 acres of land. The complex consists of 200 one- and two- bedroom units in 27 two story buildings, with each unit containing such amenities as a washer and dryer, a screened porch, and, in many of the units, a fireplace and vaulted ceilings. Building exteriors are stucco with concrete tiled roofs. There are 402 parking spaces in the complex. Residents have use of an on-site clubhouse, which includes an exercise facility and swimming pool. The complex is currently 92% occupied, with monthly rents averaging $815 per unit. Rents are comparable with competitive complexes and are A - 4 not subject to rent regulation. The Account is responsible for the expenses of operating the property. The complex is located in the 1,800 acre master planned development of Metrowest which contains an 18 hole golf course. Its proximity to several major highways gives residents easy access to Orlando's major employment centers. Orlando has experienced strong population and employment growth during the last decade. While tourism and entertainment account for 40% of local jobs, the region's economy is diversifying by attracting "high-tech" industries and is growing in importance as a warehouse and distribution location. OFFICE BUILDINGS Joint Venture To Purchase Eight Office Buildings In April, 1997, the Account purchased in joint venture with Pegasus Partners, Inc., wholly-owned by USF&G Corporation, eight suburban office buildings in various metropolitan locations for a combined total purchase price of approximately $164.5 million. Rents on the properties, which contain 1,315,765 square feet of rentable square feet, average $16.60 per square foot. None of the buildings are subject to a mortgage. TIAA owns 90% of the joint venture and Pegasus owns 10%. USF&G Realty Advisors, Inc. will provide real estate advisory services to the joint venture and assist in the overall management of the eight office properties. Because the asset management services to be performed by USF&G Realty Advisors, Inc. are similar to those which would be performed by TIAA for other properties in the Account, TIAA has determined that it will not charge the Account its standard advisory fee for the Account's investment in the eight properties. TIAA reserves the right to reimpose its advisory fee with respect to those properties at its discretion should circumstances warrant such a change. The following is a summary of each property: Parkview Plaza -- Oakbrook, Illinois The building, completed in 1990, contains approximately 263,912 rentable square feet and is situated on approximately 2.99 acres with 890 parking spaces. The land is subject to an air rights lease that has been fully prepaid and has a remaining term of approximately 90 years. The building is leased to various tenants. Van Kampen American Capital occupies approximately 72% 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. The building is located in Oakbrook, a suburb of Chicago. The market contains over 10 million square feet of Class A office space and at year end 1996, the Class A vacancy rate was 7.8%. A - 5 Fairgate at Ballston -- Arlington, Virginia The building, completed in 1988, contains approximately 143,564 rentable square feet and is situated on approximately 1.3 acres of land with 364 parking spaces. It is approximately 99% leased to various tenants. Scheduled Airlines Traffic Offices, Inc. (SATO) is a major tenant, occupying approximately 57% 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. The building is located in Arlington, Virginia, within the metropolitan Washington, D.C. area and particularly, within the Ballston office submarket. The Ballston submarket contains approximately 3.5 million square feet and presently has a vacancy rate of 9%. Five Centerpointe -- Lake Oswego, Oregon The building, completed in 1988, contains approximately 113,910 rentable square feet and is situated on approximately 5.5 acres of land with 415 parking spaces. It is approximately 92% leased to various tenants, including Pacificare of Oregon and MCI. Although the terms vary under each lease, most of the expenses for operating the property are either borne or reimbursed by the tenants. The building, located in Lake Oswego, is a part of Portland, Oregon's Westside suburban office market which contains approximately 6.8 million square feet and is currently experiencing a 5.5% vacancy rate. Two Newton Place -- Newton, Massachusetts The building, completed in 1987, contains approximately 108,819 rentable square feet and is situated on approximately 1.4 acres of land with 261 parking spaces. It is approximately 97% leased to various tenants with Cahners Publishing Company occupying approximately 42% 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. The building is located in the suburban Boston office market known as the Route 128/Mass Pike market, and more specifically in the Newton submarket. The Route 128/Mass Pike market contains approximately 11.3 million square feet of Class A space which is presently experiencing a 5% vacancy rate. USF&G Building -- Salt Lake City, Utah The building, completed in 1988, contains approximately 66,352 rentable square feet and is situated on approximately 3.0 A - 6 acres of land with 272 parking spaces. It is currently 100% leased to various tenants, including Information Access Tech and USF&G Corporation. Although the terms vary under each lease, most of the expenses for operating the property are either borne or reimbursed by the tenants. The building is located in the suburban Union Park/Murray submarket which is part of the larger Salt Lake City suburban office market. The Salt Lake City market contains approximately 2.1 million square feet of space which is experiencing a 4.8% vacancy rate. Northmark Business Center -- Blue Ash, Ohio The building, completed in 1985, contains approximately 105,406 rentable square feet and is situated on 9.4 acres of land with 539 parking spaces. It is currently 90% leased to various tenants, including Hewlett-Packard and Toyota Motor Credit. Although the terms vary under each lease, most of the expenses for operating the property are either borne or reimbursed by the tenants. The building is located in the suburban Blue Ash submarket which is part of the larger Cincinnati suburban office market. The Cincinnati market contains approximately 5.7 million square feet of Class A space which is currently experiencing a 9% vacancy rate. Metro Center Office Park -- Sacramento, California Three buildings, completed in 1986, contain approximately 255,858 rentable square feet and are situated on 20.8 acres of land with 1,057 parking spaces. They are currently 67% leased to various tenants, including Providian Bankcorp and IBM. Although the terms vary under each lease, most of the expenses for operating the property are either borne or reimbursed by the tenants. The office park is located in the South Natomas suburban office market in Sacramento. The market contains approximately 1.7 million square feet of space which is currently experiencing a 7.3% vacancy rate. Longview Executive Park -- Hunt Valley, Maryland Three buildings, completed in 1988, contain approximately 257,944 rentable square feet and are situated on 16.1 acres of land with 1,086 parking spaces. They are currently 100% leased to various tenants with PHH Vehicle Management Services Corporation (VMS) occupying approximately 77% of the building. Although the terms vary under each lease, most of the expenses A - 7 for operating the property are either borne or reimbursed by the tenants. The property is located in the Hunt Valley submarket of the larger Baltimore County suburban office market. The Baltimore County market contains approximately 13 million square feet of space which is currently experiencing a 9.6% vacancy rate. Southbank Business Park -- Phoenix, Arizona On February 27, 1996, the Account purchased the fee interest in a 122,535 square foot office/service building in Phoenix, Arizona, for a purchase price of approximately $10.05 million. The property is not subject to a mortgage. The building, completed in 1995, is located on approximately 9.9 acres of land with 645 parking spaces. It is currently 100% leased by four tenants in the service industry, with rents averaging $9.01 per square foot. None of the leases expire until the year 2000 and 2001, when leases on 65% of the space expire; those leases together represent total annual rent payments of approximately $727,300. Although the terms vary under each lease, most of the expenses for operating the property are either borne or reimbursed by the tenants. The building is located within the Southbank Business Park adjacent to the Phoenix Airport and is easily accessible from all areas of the metropolitan Phoenix area. Phoenix has experienced positive population and employment growth over the last 15 years. Over 29% of its employment base is comprised of employees in the service industry. NEIGHBORHOOD SHOPPING CENTERS River Oaks Shopping Center -- Woodbridge, Virginia On July 12, 1996, the Account purchased, through a wholly-owned subsidiary, the fee interest in River Oaks Shopping Center, a 90,885 square foot neighborhood shopping center located in Woodbridge, Virginia, for a purchase price of approximately $13.0 million. The property is not subject to a mortgage. The center, built in 1995, is located on approximately 10.42 acres of land with space for 402 cars. It is currently 94% occupied and is anchored by a 64,885 square foot Giant supermarket, a regional supermarket chain. Rents, including a rent guarantee from the seller for the 6% of vacant space, average $14.19 per square foot. Although the terms vary under each lease, most of the expenses for operating the property are either borne or reimbursed by the tenants. Over the next five years, leases on 19% of the center's space expire; those leases together represent total annual rent payments of $352,695 in the A - 8 year of their expiration. The Giant lease expires in the year 2021. The center is located 25 miles south of Washington, D.C. in Prince William County. The Washington, D.C. metropolitan area has grown significantly since 1980, with a current population of approximately 4.5 million people. Woodbridge has been developing as a bedroom community for workers commuting to Washington, D.C. and to neighboring Fairfax County. The Lynnwood Collection -- Raleigh, North Carolina On March 29, 1996, the Real Estate Account purchased the fee interest in The Lynnwood Collection, an 86,362 square foot neighborhood shopping center located in Raleigh, North Carolina, for a purchase price of approximately $6.5 million. The property is not subject to a mortgage. The center, which was built in 1988, is located on approximately 10.3 acres of land and has space for 426 cars. It is currently 100% occupied, and is anchored by a 52,337 square foot Kroger supermarket, a national supermarket chain. Rents average $8.26 per square foot. Although the terms vary under each lease, most of the expenses for operating the property are either borne or reimbursed by the tenants. Over the next five years, leases on 39% of the center's space expire; those leases together represent total annual rent payments of $426,810 in the year of their expiration. The Kroger lease expires in the year 2015. The center is located in north Raleigh, the city's primary growth corridor. Raleigh is the capital of North Carolina and has experienced strong population growth. As part of what is referred to as the "Research Triangle," it has attracted major business and industries and has a large pool of highly educated workers. The Millbrook Collection -- Raleigh, North Carolina On March 29, 1996, the Account purchased the fee interest in The Millbrook Collection, a 102,221 square foot neighborhood shopping center located in Raleigh, North Carolina, for a purchase price of approximately $6.7 million. The property is not subject to a mortgage. The center, which was built in 1988, is located on approximately 11.9 acres of land with space for 670 cars. The center is currently 83% occupied and is anchored by a 52,337 square foot Kroger supermarket. Rents average $7.55 per square foot. Although the terms vary under each lease, most of the expenses for operating the property are either borne or reimbursed by the tenants. Over the next five years, leases on A - 9 29% of the center's space expire; those leases together represent total annual rent payments of $327,066 in the year of their expiration. The Kroger lease expires in the year 2015. The center is located within the city limits of Raleigh, North Carolina in a well-established neighborhood. The Raleigh area is discussed in the description of the Lynnwood Collection set forth above. Plantation Grove Shopping Center -- Ocoee, Florida On December 28, 1995, the Account purchased the fee interest in Plantation Grove Shopping Center, a 73,655 square foot neighborhood shopping center located near Orlando, Florida, for a purchase price of approximately $7.3 million. The property is not subject to a mortgage. The center, built in 1995, is located on approximately 14 acres of land with space for 401 cars. It is currently 95% occupied and is anchored by a 47,955 square foot Publix supermarket, a regional supermarket chain. Rents average $9.86 per square foot. Although the terms vary under each lease, most of the expenses for operating the property are either borne or reimbursed by the tenants. Over the next five years, leases on 30% of the center's space expire; those leases together represent total annual rent payments of $335,600 in the year of their expiration. The Publix lease expires in the year 2015. The Orlando, Florida area is discussed in the description of The Greens at Metrowest Apartments set forth above. INDUSTRIAL PROPERTIES Westinghouse Facility -- Coral Springs, Florida On February 5, 1997, the Account purchased the fee interest in a single-story industrial building located in Coral Springs, Florida for a purchase price of approximately $6.07 million. The improvements which have been recently completed for the Westinghouse Corporation have 75,630 square feet. Westinghouse Corporation occupies 100% of the building area under a ten year net lease. The initial rent is $7.29 per square foot for the first five years of the lease term increasing to $8.02 per square foot for the second five years. Operating expenses for the property are borne or reimbursed by the tenant. The subject property is located in northwest Broward County within the municipality of Coral Springs and is in Corporate Park of Coral Springs, a 600 acre master-planned commercial industrial park. Corporate Park has enjoyed significant success and development in recent years primarily due to the completion of the Sawgrass Expressway, which provides a link to I-95, I-75 and I-595. A - 10 Interstate Acres - Urbandale, Iowa On January 24, 1997, the Account purchased the fee interest in four warehouse distribution buildings located in Urbandale, Iowa, for a purchase price of approximately $13.6 million. Rents on the buildings, which together have 440,000 square feet of rentable space, average $3.19 per square foot. The buildings are not subject to a mortgage. Operating expenses for the properties are borne or reimbursed by the tenants. The buildings, built between 1981 and 1988, are located on approximately 29.6 acres of land with space for 388 cars. The buildings are presently 97% leased to 15 tenants under leases which expire over the eight year period from 1998-2005. Urbandale lies approximately 10 miles northwest of downtown Des Moines. All buildings are located within the Interstate Acres Industrial Park which is approximately 1/2 mile east of a full interchange with Interstates 35 and 80. The population of the Des Moines metropolitan area, which includes Urbandale, has grown steadily during the past five years and is expected to continue to expand consistent with the national average into the near future. Interstate Crossing - Eagan, Minnesota On December 31, 1996, the Account purchased the fee interest in two industrial buildings located in Eagan, Minnesota, for a purchase price of approximately $6.4 million. Rents on the buildings, which together have 131,380 square feet of rentable space, average $5.10 per square foot. Operating expenses for the properties are borne or reimbursed by the tenants. The buildings are not subject to a mortgage. The buildings, built in 1995, are located on approximately 10.6 acres of land with 288 parking spaces. The buildings are presently 100% leased to 10 tenants, with the majority of leases expiring in 2000 and 2001. The subject property is located 10 miles southeast of downtown Minneapolis and 7 miles south of downtown St. Paul. The twin cities of Minneapolis/St. Paul currently have a population of 2.7 million people and enjoy a strong and diverse economy. A - 11 Arapahoe Park East - Boulder, Colorado On October 31, 1996, the Account purchased the fee interest in five research and development buildings located in Boulder, Colorado, for a purchase price of approximately $9.9 million. Rents on the buildings, which together have 129,425 square feet of rentable space, average $8.83 per square foot. The buildings are not subject to a mortgage. The buildings, built between 1979 and 1982, are located on approximately 6.46 acres of land with space for 332 cars. Ball Aerospace Corp., a leading aerospace and telecommunications equipment manufacturer, leases 100% of the five buildings under leases which expire over the three year period from 1998 to 2000. Boulder is located 25 miles northwest of Denver, the largest city in the seven-state Rocky Mountain region and the capital of Colorado. The population of the Denver metropolitan area, which includes Boulder, has grown steadily during the past ten years and is expected to continue to expand into the near future. Boulder's economy has been strengthened in recent years by the establishment of several high tech firms in the area, which have attracted a highly-educated and skilled labor force. Other Warehouse Properties On November 22, 1995, the Account purchased the fee interest in a warehouse property located near Minneapolis, Minnesota for a purchase price of approximately $4.1 million. Rents on the property average $3.77 per square foot. On December 22, 1995, the Account purchased leasehold interests (i.e., interests in the leases on the underlying land and ownership of the buildings and other improvements on the land) in two warehouse properties located in El Paso, Texas for an aggregate purchase price of approximately $4.4 million dollars. Rents on the properties average $2.71 per square foot, after payment of the ground rent. Although the terms vary under each lease, most of the expenses for operating each of the properties are either borne or reimbursed by the tenants. None of the properties are subject to a mortgage. A - 12 Set forth below are further details relating to each facility:
Lease Building Year Current Major Expira- Property Size Built Occupancy Tenants tion Date (sq. ft.) Fridley, Minnesota River Road 100,456 1995 100% Packaging 2005 Distribution Center Materials, Inc. El Paso, Texas Butterfield warehouse 80,000 1980 100% Rockwell 2000 Zane Gray warehouse 103,510 1981 100% D.J. Inc. 2003
A - 13 APPENDIX B MANAGEMENT OF TIAA The Trustees and principal executive officers of TIAA, and their principal occupations during the last five years, are as follows: Trustees David Alexander, 64. American Secretary, Rhodes Scholarship Trust, and Trustees' Professor, Pomona College. Formerly, President, Pomona College, until 1991. Marcus Alexis, 65. Board of Trustees, Professor of Economics and Professor of Management and Strategy, J.L. Kellogg Graduate School of Management, Northwestern University. Willard T. Carleton, 62. Karl L. Eller Professor of Finance, College of Business and Public Administration, University of Arizona. Robert C. Clark, 53. Dean and Royall Professor of Law, Harvard Law School, Harvard University. Flora Mancuso Edwards, 52. Of Counsel to the law firm of Dublirer, Haydon, Straci & Victor since 1996. Professor of English as a Second Language, Middlesex County College, since October 1995. Formerly, President, Middlesex County College until October 1995. Estelle A. Fishbein, 62. General Counsel of The Johns Hopkins University since 1975. Elected Vice President and General Counsel of the University, April 1991. Frederick R. Ford, 61. Executive Vice President and Treasurer, Purdue University. Martin J. Gruber, 59. Chairman of the Department of Finance and Nomura Professor of Finance, New York University Stern School of Business. Ruth Simms Hamilton, 59. Professor, Department of Sociology and Urban Affairs Programs, and Director, African Diaspora Research Project, Michigan State University. B - 1 Dorothy Ann Kelly, O.S.U., 67. President, College of New Rochelle. Robert M. O'Neil, 62. Professor of Law, University of Virginia and Director, The Thomas Jefferson Center for the Protection of Free Expression. Leonard S. Simon, 60. Chairman, President and Chief Executive Officer, RCSB Financial, Inc., since September 1995. Formerly, Chairman and Chief Executive Officer, The Rochester Community Savings Bank, from 1984 until September 1995. Ronald L. Thompson, 47. Chairman of the Board and Chief Executive Officer, Midwest Stamping Co. Formerly, Chairman of the Board and President, The GR Group, until 1993. Paul R. Tregurtha, 61. Chairman, Chief Executive, and Director, Mormac Marine Group, Inc.; Vice Chairman and Director, The Interlake Steamship Company; Chairman and Director, Moran Transportation Company; and Chairman, MAC Acquisitions, Inc. Charles J. Urstadt, 68. Chairman and Chief Executive Officer, HRE Properties (a real estate investment trust) and Trustee Emeritus, Pace University. William H. Waltrip, 59. Chairman and Chief Executive Officer, Bausch & Lomb Inc., since January 1996. Chairman and Chief Executive Officer, Technology Solutions Company, since 1993. Formerly, Chairman and Chief Executive Officer, Biggers Brothers, Inc., and Vice Chairman, Unifax, from 1991 until 1993. Rosalie J. Wolf, 55. Treasurer and Chief Investment Officer, The Rockefeller Foundation since 1994. Formerly, Executive Vice President, Sithe Energies, Inc. from January 1994 to June 1994, and Managing Director, Bankers Trust Company, from 1989 to 1993. Officer-Trustees - ---------------- John H. Biggs, 60. Chairman and Chief Executive Officer, TIAA and CREF, since 1993. Formerly, President and Chief Operating Officer, TIAA and CREF. B - 2 Thomas W. Jones, 47. Vice Chairman, TIAA and CREF, since 1995. President and Chief Operating Officer, TIAA and CREF, since 1993. Formerly, Executive Vice President, Finance and Planning, TIAA and CREF. Martin L. Leibowitz, 60. Vice Chairman and Chief Investment Officer, TIAA and CREF, since November 1995. Executive Vice President, TIAA and CREF, from June 1995 to November 1995. Formerly, Managing Director --Director of Research and member of the Executive Committee, Salomon Brothers, Inc. Other Officers - -------------- Richard L. Gibbs, 50. Executive Vice President, TIAA and CREF, since 1993, and Vice President, TIAA-CREF Investment Management, Inc. ("Investment Management") and TIAA-CREF Individual & Institutional Services, Inc. ("Services"), since 1992; Executive Vice President, Teachers Advisors, ("Advisors") since 1995. Formerly, Vice President, Finance, TIAA and CREF. Albert J. Wilson, 64. Vice President and Chief Counsel, Corporate Secretary, TIAA and CREF, since 1991. Richard J. Adamski, 54. Vice President and Treasurer, TIAA and CREF, since March 1991; Vice President and Treasurer, Investment Management and Services, since 1992; Vice President and Treasurer, Teachers Personal Investors Services, Inc. and Advisors, since 1994. B - 3 PART II INFORMATION NOT REQUIRED IN A PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. -------------------------------------------- SEC Registration Fees $1,515,151.52 Costs of printing and engraving $ 500,000.00* Legal fees $ 2,500.00* Accounting fees $ 5,000.00* ------------- TOTAL $2,022,651.52* - ----------------- * - Approximate Item 14. Indemnification of Directors and Officers. ------------------------------------------ Trustees, officers, and employees of TIAA may be indemnified against liabilities and expenses incurred in such capacity pursuant to Article Six of TIAA's bylaws (see Exhibit 3(B)). Article Six provides that, to the extent permitted by law, TIAA will indemnify any person made or threatened to be made a party to any action, suit or proceeding by reason of the fact that such person is or was a trustee, officer, or employee of TIAA or, while a trustee, officer, or employee of TIAA, served any other organization in any capacity at TIAA's request. To the extent permitted by law, such indemnification could include judgments, fines, amounts paid in settlement, and expenses, including attorney's fees. TIAA has in effect an insurance policy that will indemnify its trustees, officers, and employees for liabilities arising from certain forms of conduct. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers, or employees of TIAA, pursuant to the foregoing provision or otherwise, TIAA has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in that Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment of expenses incurred or paid by a trustee, officer, or employee in the successful defense of any action, suit or proceeding) is asserted by a trustee, officer, or employee in connection with the securities being registered, TIAA will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in that Act and will be governed by the final adjudication of such issue. Item 15. Recent Sales of Unregistered Securities. ---------------------------------------- On July 3, 1995, the Account issued 1,000,000 accumulation units to TIAA, at $100 per unit, in consideration of TIAA's $100,000,000 seed money investment. This transaction was II - 1 exempt from registration under Section 4(2) of the Securities Act of 1933. Item 16. Exhibits and Financial Statement Schedules. ------------------------------------------- (a) Exhibits (1) Distribution and Administrative Services Agreement by and between TIAA and TIAA-CREF Individual & Institutional Services, Inc. (as amended)* (3) (A) Charter of TIAA (as amended)* (B) Bylaws of TIAA (as amended)** (4) (A) Forms of RA, GRA, GSRA, SRA, and IRA Real Estate Account Contract Endorsements* (B) Forms of Income-Paying Contracts* (5) Opinion and Consent of Charles H. Stamm, Esquire (10) (A) Independent Fiduciary Agreement by and among TIAA, the Registrant, and Institutional Property Consultants, Inc. (as amended) (B) Custodial Services Agreement by and between TIAA and Morgan Guaranty Trust Company of New York with respect to the Real Estate Account* (23) (A) Opinion and Consent of Charles H. Stamm, Esquire (filed as Exhibit 5) (B) Consent of Sutherland, Asbill & Brennan, L.L.P. (C) Consent of Deloitte & Touche LLP (27) Financial Data Schedule of the Account's Financial Statements for the year ended December 31, 1996*** - ------------------------------- * - 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-K Annual Report for the year ended December 31, 1996 (File No. 33-92990). *** - Previously filed and incorporated herein by reference to the March 5, 1997 filing of this Registration Statement (File No. 333-22809). II - 2 (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 [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 financial statements of Teachers Insurance and Annuity Association of America ("TIAA") for the year-ended December 31, 1996. As you review these statements, it is also important to note that TIAA continues to maintain the highest possible financial strength ratings from each of the four nationally recognized independent rating organizations. We continue to manage TIAA in a prudent manner with the goal of maximizing our long-term performance within reasonable risk parameters for the long- term benefit of our policyholders. The report of management responsibility, on the following page, demonstrates our ongoing commitment to conduct TIAA's activities in a well-controlled management environment. Additionally, the accompanying audit report indicates an unqualified opinion from the independent auditing firm of Deloitte & Touche LLP regarding TIAA's statutory financial statements. These statements have been prepared consistently in accordance with statutory accounting practices, a comprehensive basis of accounting comprised of accounting policies prescribed or permitted by the New York State Insurance Department. Let me specifically address the reference to generally accepted accounting principles ("GAAP") contained in the auditors' report. GAAP is an overall accounting methodology that, while similar in many respects to statutory accounting, is a separate basis of accounting. As noted in the independent auditors' report, our financial statements are not intended to conform with GAAP. This is the first year that the auditors have referred to this distinction, even though we have not changed the way in which we prepare our financial statements. This reference to GAAP is a change that has been required by the auditors' professional standards. Statutory accounting is the only basis of accounting recognized by the New York State Insurance Department ("Department") for regulatory purposes. It is the only basis of accounting used by the Department in measuring the financial condition and results of operations of an insurance company. It is also the basis for determining insurance company solvency under the New York Insurance Law. While we could prepare a separate set of GAAP financial statements, there is no legal requirement for us to do so. Additionally, TIAA does not believe at this time that it would be a worthwhile expenditure to maintain two separate sets 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 and Chief Executive Officer II - 4 [TIAA logo] REPORT OF MANAGEMENT RESPONSIBILITY To the Policyholders of Teachers Insurance and Annuity Association of America: The accompanying financial statements of Teachers Insurance and Annuity Association of America ("TIAA") are the responsibility of management. They have been prepared on the basis of statutory accounting practices, a comprehensive basis of accounting comprised of accounting policies prescribed or permitted by the New York State Insurance Department. The financial statements of TIAA have been presented fairly and objectively in accordance with such statutory accounting practices. TIAA has established and maintains a strong system of internal controls designed to provide reasonable assurance that assets are properly safeguarded and transactions are properly executed in accordance with management's authorization, and to carry out the ongoing responsibilities of management for reliable financial statements. In addition, TIAA's internal audit personnel provide a continuing review of the internal controls and operations of TIAA, and the internal Auditor regularly reports to the Audit Committee of the TIAA Board of Trustees. The accompanying financial statements of TIAA have been audited by the independent auditing firm of Deloitte & Touche LLP. The independent auditors' report, which appears on the following page, expresses an independent opinion on the fairness of presentation of these financial statements. The Audit Committee of the TIAA Board of Trustees, consisting of trustees who are not officers of TIAA, meets regularly with management, representatives of Deloitte & Touche LLP and internal auditing personnel to review matters relating to financial reporting, internal controls and auditing. In addition to the annual audit of the TIAA financial statements, the New York State Insurance Department and other state insurance departments regularly examine the financial statements of TIAA as part of the periodic corporate examinations. /s/ John H. Biggs ---------------------------- Chairman and Chief Executive Officer /s/ Thomas W. Jones ---------------------------- Vice Chairman, President and Chief Operating Officer /s/ Richard Gibbs ---------------------------- Executive Vice President and Principal Accounting Officer II - 5 [letterhead] Deloitte & Touche LLP [LOGO] Two World Financial Center Telephone: (212) 436-2000 New York, New York 10281-1414 Facsimile: (212) 436-5000 REPORT OF INDEPENDENT AUDITORS To the Board of Trustees of Teachers Insurance and Annuity Association of America: We have audited the accompanying statutory balance sheets of Teachers Insurance and Annuity Association of America ("TIAA") as of December 31, 1996 and 1995, and the related statutory statements of operations, changes in contingency reserves, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of TIAA's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described more fully in Note 2 to these financial statements, TIAA prepared these financial statements using accounting practices prescribed or permitted by the New York State Insurance Department, hereinafter referred to as statutory accounting practices, which is a comprehensive basis of accounting other than generally accepted accounting principles. Accordingly, these financial statements are not intended to be presented in conformity with generally accepted accounting principles. The effects on the financial statements of the differences between statutory accounting practices and generally accepted accounting principles are presumed to be material. In our report dated March 12, 1996, we expressed an opinion that the 1995 and 1994 financial statements, prepared using statutory accounting practices, presented fairly, in all material respects, the financial position of TIAA as of December 31, 1995, and the results of its operations, changes in contingency reserves, and its cash flows for each of the two years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As described in Note 2 to these financial statements, pursuant to the pronouncements of the Financial Accounting Standards Board, the 1995 and 1994 financial statements of TIAA, prepared using statutory accounting practices, are no longer considered to be presentations in conformity with generally accepted accounting principles when presented for comparative purposes with the company's statutory financial statements for periods beginning after December 15, 1995. Accordingly, our present opinion on the presentation of the 1995 and 1994 financial statements in conformity with generally accepted accounting principles, as presented herein, is different from that expressed in our previous report. In our opinion, because of the effects of the matters discussed in the third and fourth paragraphs, the financial statements referred to above do not present fairly, in conformity with generally accepted accounting principles, the financial position of TIAA as of December 31, 1996 and 1995, or the results of its operations, changes in contingency reserves or its cash flows for each of the three years in the period ended December 31, 1996. II - 6 Also, in our opinion, the financial statements referred to above present fairly, in all material respects, the statutory financial position of TIAA at December 31, 1996 and 1995 and the results of its operations, changes in its contingency reserves, and its cash flows for each of the three years in the period ended December 31, 1996 on the basis of statutory accounting practices as described in Note 2. /s/ Deloitte & Touche LLP March 11, 1997 [Deloitte Touche Tohmatsu logo] II - 7 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA BALANCE SHEETS
December 31, -------------------------------------------- 1996 1995 --------------------- --------------------- ASSETS Bonds ...................................................... $56,092,130,827 $48,835,831,058 Mortgages .................................................. 20,074,002,277 21,000,279,330 Real Estate ................................................ 6,704,888,918 7,013,052,678 Stocks ..................................................... 355,093,378 223,028,483 Other long-term investments ................................ 500,351,437 476,803,951 Cash and short-term investments ............................ 615,082,177 713,051,046 Investment income due and accrued .......................... 1,140,956,380 1,118,707,821 Separate Account assets .................................... 663,457,762 209,170,183 Other assets ............................................... 211,515,189 204,688,878 --------------------- --------------------- TOTAL ASSETS $86,357,478,345 $79,794,613,428 ===================== ===================== LIABILITIES, CAPITAL AND CONTINGENCY RESERVES Policy and contract reserves .............................. $75,909,906,253 $70,983,830,958 Dividends declared for the following year ................. 1,636,737,654 1,493,744,768 Asset Valuation Reserve ................................... 2,134,921,269 1,860,867,891 Interest Maintenance Reserve .............................. 729,089,789 621,365,961 Separate Account liabilities .............................. 559,754,255 106,511,880 Other liabilities ......................................... 636,364,432 672,112,096 --------------------- --------------------- Total Liabilities 81,606,773,652 75,738,433,554 --------------------- --------------------- Capital: 2,500 shares of $1,000 par value common stock issued and outstanding .................................. 2,500,000 2,500,000 --------------------- --------------------- Contingency reserves: For group life insurance ................................. 8,738,769 7,761,722 For investment losses, annuity and insurance mortality, and other risks ........................................ 4,739,465,924 4,045,918,152 --------------------- --------------------- Total Contingency Reserves 4,748,204,693 4,053,679,874 --------------------- --------------------- Total Capital and Contingency Reserves 4,750,704,693 4,056,179,874 --------------------- --------------------- TOTAL LIABILITIES, CAPITAL AND CONTINGENCY RESERVES $86,357,478,345 $79,794,613,428 ===================== =====================
See notes to financial statements. II - 8 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA STATEMENTS OF OPERATIONS
For the Years Ended December 31, ------------------------------------------------------------------ 1996 1995 1994 --------------------- --------------------- --------------------- INCOME Insurance and annuity premiums and deposits ......................... $ 2,781,826,827 $ 2,854,599,816 $ 2,785,546,486 Transfers from CREF, net ............... 366,920,403 351,869,029 191,582,916 Annuity dividend additions ............. 2,131,889,910 1,943,614,354 1,844,416,805 Net investment income .................. 6,525,528,935 6,108,496,984 5,486,071,238 Supplementary contract consideration ... 203,769,996 150,975,982 104,999,526 --------------------- --------------------- --------------------- TOTAL INCOME $12,009,936,071 $11,409,556,165 $10,412,616,971 ===================== ===================== ===================== DISTRIBUTION OF INCOME Policy and contract benefits ........... $ 1,916,596,781 $ 1,718,596,923 $ 1,538,301,850 Dividends .............................. 3,399,581,218 3,098,930,945 2,874,077,216 Increase in policy and contract reserves 5,097,213,011 5,329,040,178 5,043,786,384 Operating expenses ..................... 249,000,231 241,795,245 216,465,411 Transfers to Separate Accounts, net .... 395,686,225 92,995,463 4,270,646 Federal income taxes ................... 13,153,881 9,487,967 9,843,630 Other, net ............................. 1,111,320 (4,380,395) (2,972,008) Increase in contingency reserves from operations ...................... 937,593,404 923,089,839 728,843,842 --------------------- --------------------- --------------------- TOTAL DISTRIBUTION OF INCOME $12,009,936,071 $11,409,556,165 $10,412,616,971 ===================== ===================== =====================
See notes to financial statements. II - 9 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA STATEMENTS OF CHANGES IN CONTINGENCY RESERVES
For the Years Ended December 31, ------------------------------------------------------------------ 1996 1995 1994 --------------------- --------------------- --------------------- Changes in Contingency Reserves: From operations ...................................... $ 937,593,404 $ 923,089,839 $ 728,843,842 Net realized capital gain (loss) on investments ...... 163,950,475 (56,264,893) (95,070,954) Net unrealized capital gain on investments ........... 30,452,145 52,706,109 38,906,936 Transfer to the Interest Maintenance Reserve ......... (167,086,192) (114,840,183) (170,430,156) Transfers from (to) the Asset Valuation Reserve: Required formula contribution ....................... (246,181,408) (302,387,557) (249,405,235) Net capital (gains) losses absorbed ................. (27,871,970) 106,215,365 226,638,932 Voluntary contribution (193,508,281) Increase in non-admitted assets other than investments (4,763,942) (802,629) (22,194,906) Change in valuation basis of policy reserves ......... 2,314,689 Other, net ........................................... 8,432,307 10,639,807 1,522,064 --------------------- --------------------- --------------------- NET CHANGE IN CONTINGENCY RESERVES 694,524,819 618,355,858 267,616,931 CONTINGENCY RESERVES AT BEGINNING OF YEAR 4,053,679,874 3,435,324,016 3,167,707,085 --------------------- --------------------- --------------------- CONTINGENCY RESERVES AT END OF YEAR $4,748,204,693 $4,053,679,874 $3,435,324,016 ===================== ===================== =====================
See notes to financial statements. II - 10 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA STATEMENTS OF CASH FLOWS
For the Years Ended December 31, ------------------------------------------------------------------ 1996 1995 1994 --------------------- --------------------- --------------------- CASH PROVIDED By operating activities: Insurance and annuity premiums, deposits and considerations ........................... $ 2,973,898,849 $ 2,999,426,179 $ 2,886,724,538 Transfers from CREF, net ................... 366,920,403 351,869,029 191,582,916 Annuity dividend additions ................. 2,131,889,910 1,943,614,354 1,844,416,805 Investment income, net ..................... 6,485,402,589 5,998,015,040 5,372,299,141 --------------------- --------------------- --------------------- Total Receipts 11,958,111,751 11,292,924,602 10,295,023,400 --------------------- --------------------- --------------------- Policy and contract benefits ............... 2,084,121,901 1,715,727,236 1,500,323,250 Dividends .................................. 3,251,329,333 2,987,866,832 2,819,852,489 Operating expenses ......................... 247,250,730 240,323,235 214,008,001 Federal income taxes ....................... 14,984,747 8,510,881 10,114,286 Transfers to Separate Accounts, net ........ 396,239,152 92,270,003 4,164,199 Separate Accounts seed money investment contributed (withdrawn), net ............. (7,387,104) 66,747,895 25,000,000 Other, net ................................. 48,215,232 6,823,917 6,798,405 --------------------- --------------------- --------------------- Total Disbursements 6,034,753,991 5,118,269,999 4,580,260,630 --------------------- --------------------- --------------------- Cash Provided by Operating Activities 5,923,357,760 6,174,654,603 5,714,762,770 --------------------- --------------------- --------------------- By investing activities: Sales and redemptions of bonds and stocks .. 4,480,206,152 3,863,412,778 3,810,787,301 Repayment of mortgage principal ............ 3,481,965,154 1,166,625,456 1,684,113,871 Sales of real estate ........................ 834,010,275 1,084,222,765 1,610,589,922 Other, net ................................. 276,394,277 135,661,132 243,837,007 --------------------- --------------------- --------------------- Cash Provided by Investing Activities 9,072,575,858 6,249,922,131 7,349,328,101 --------------------- --------------------- --------------------- TOTAL CASH PROVIDED 14,995,933,618 12,424,576,734 13,064,090,871 --------------------- --------------------- --------------------- DISBURSEMENTS FOR NEW INVESTMENTS Investments acquired: Bonds and stocks ........................... 11,577,235,443 8,696,169,089 10,084,139,605 Mortgages .................................. 2,761,896,596 2,352,232,441 2,217,021,154 Real Estate ................................ 488,543,147 866,388,613 1,495,492,478 Other, net ................................. 266,227,301 228,181,527 352,457,763 --------------------- --------------------- --------------------- TOTAL DISBURSEMENTS FOR NEW INVESTMENTS 15,093,902,487 12,142,971,670 14,149,111,000 --------------------- --------------------- --------------------- INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (97,968,869) 281,605,064 (1,085,020,129) CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF YEAR 713,051,046 431,445,982 1,516,466,111 --------------------- --------------------- --------------------- CASH AND SHORT-TERM INVESTMENTS AT END OF YEAR $ 615,082,177 $ 713,051,046 $ 431,445,982 ===================== ===================== =====================
See notes to financial statements. II - 11 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS Note 1--Organization Teachers Insurance and Annuity Association of America ("TIAA") was established as a legal reserve life insurance company under the insurance laws of the State of New York in 1918. TIAA was formed by the Carnegie Foundation for the Advancement of Teaching for the express purpose of aiding and strengthening nonprofit educational and research organizations by providing retirement and insurance benefits for their faculties and other staff members, and by counseling these organizations and their employees on benefit plans and other measures of economic security. All of the outstanding common stock of TIAA is collectively held by the TIAA Board of Overseers, a nonprofit corporation created solely for the purpose of holding the stock of TIAA. Note 2--Significant Accounting Policies TIAA's financial statements have been prepared on the basis of accounting policies prescribed or permitted by the New York State Insurance Department ("Department"). Such policies are hereinafter referred to as statutory accounting practices, a comprehensive basis of accounting that differs from generally accepted accounting principles ("GAAP"). The 1995 and 1994 financial statements presented for comparative purposes were previously described as being in conformity with GAAP, but they are no longer considered to be prepared in accordance with GAAP. (Refer to the separate sections, entitled "Generally Accepted Accounting Principles" and "Permitted Statutory Accounting Policies", within this note.) The preparation of TIAA's financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results could differ from those estimates. The following is a summary of the significant accounting policies consistently followed by TIAA. Valuation of Investments: Bonds and short-term investments (debt securities with maturities of one year or less at the time of acquisition) not in default are generally stated at amortized cost; medium to highest quality preferred stocks at cost; common stocks at market value; and all other bond, short-term and preferred stock investments at the lower of amortized cost or market value. Mortgages are stated at amortized cost, and directly-owned real estate at depreciated cost (net of encumbrances). Investments in wholly-owned subsidiaries, real estate limited partnerships and securities limited partnerships are stated at TIAA's equity in the net assets of the underlying entities. Policy loans are stated at outstanding principal amounts. All investments are stated net of any permanent impairments, which are determined on an individual asset basis. Depreciation is generally computed over a 40 year period on the constant yield method for properties acquired prior to 1991, and on the straight-line method for properties acquired thereafter. Accounting for Investments: Investment transactions are accounted for as of the date the investments are purchased or sold (trade date) for publicly traded common stocks and as of the date the investment transactions are settled (settlement date) for all other investments. Realized capital gains and losses on investment transactions are accounted for under the specific identification method. II - 12 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 2--Significant Accounting Policies--(Continued) 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 short-term investments in which the cash collateral is invested and such short-term investments and the equivalent liability are not reflected in the balance sheet caption, "Cash and short-term investments". TIAA may bear the risk of delay in recovery of, or loss of rights in, the securities loaned should a borrower of securities fail to return the securities in a timely manner. 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 II - 13 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 2--Significant Accounting Policies--(Continued) 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, 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 adjustable rate 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 for certain adjustable rate products. 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, 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 for certain adjustable rate products. 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. 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 over the life of the interest rate cap contract. 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. Covered Call Options: TIAA writes (sells) covered call options on selected bonds as part of TIAA's asset and liability management program for certain adjustable rate products. When an option is written, the premium received is recorded as a liability. Premiums received on options which expire are recorded as realized capital gains. II - 14 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 2--Significant Accounting Policies--(Continued) Premiums received from writing options which are exercised are added to the proceeds from the sale of the underlying bond in recognizing the net realized capital gain or loss on the disposition. In writing options, it is assumed that the option may be exercised at any time prior to the expiration of TIAA's obligation as a writer, and that in such circumstances the net proceeds of the sale of the underlying bond pursuant to the call option may be below the prevailing market value. Investment Income Due and Accrued: Investment income due and accrued excludes non-admitted amounts of approximately $291,742,000 and $311,279,000 at December 31, 1996 and 1995, respectively. Non-Admitted Assets Other than Investments: Certain non-investment assets, such as furniture and fixtures and various receivables, are designated as non-admitted assets by the Department and, as such, cannot be included in life insurance company balance sheets filed with the Department. Such non-admitted assets approximated $179,363,000 at December 31, 1996 and $174,603,000 at December 31, 1995. Policy and Contract Reserves: TIAA offers a range of group and individual retirement annuities and group and individual life and other insurance products. Policy and contract reserves for such products are determined in accordance with standard valuation methods approved by the Department. Reserves are stated at account balances for annuities in the accumulation phase, at the present value of all future guaranteed benefits for annuities in the payout phase and, for insurance policies, are computed in accordance with standard actuarial formulas. The reserves established utilize assumptions for interest (at an average rate of approximately 3%), mortality and other risks insured. Such reserves establish a sufficient provision for all contractual benefits guaranteed under policy and contract provisions. Dividends Declared for the Following Year: Dividends on insurance policies and pension annuity contracts in the payout phase are generally declared by the TIAA Board of Trustees ("Board") in November of each year, and such dividends are credited to policyholders in the following calendar year. Dividends on pension annuity contracts in the accumulation phase are generally declared by the Board in February of each year and such dividends on the various existing vintages of pension annuity contracts in the accumulation phase are credited to policyholders during the ensuing twelve month period beginning March 1. Asset Valuation Reserve: The Asset Valuation Reserve ("AVR"), which covers all invested asset classes, is an explicit liability reserve required by the National Association of Insurance Commissioners ("NAIC") and is intended to provide for potential future credit and equity losses. Reserve components of the AVR are maintained for bonds, stocks, mortgages, real estate and other invested assets. Realized and unrealized credit and equity capital gains and losses, net of capital gains taxes, are credited to or charged against the related components of the AVR. Formula calculations determine the required contribution amounts for each component. Insurance companies may also make voluntary contributions to any component as long as the resulting ending balance does not exceed the computed maximum reserve for that component. TIAA makes voluntary contributions to the mortgage and real II - 15 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 2--Significant Accounting Policies--(Continued) estate reserves of the AVR as necessary to keep the reserve balances at least equal to the aggregate differences between carrying value and the most recent valuation for mortgage and real estate investments under valuation review. Contributions to the AVR are reported as transfers from Contingency Reserves. Interest Maintenance Reserve: The Interest Maintenance Reserve ("IMR") is a liability reserve required by the NAIC which accumulates realized capital gains and losses resulting from interest rate fluctuations. Such capital gains and losses are amortized out of the IMR as an adjustment to net investment income over the remaining lives of the assets sold. Contingency Reserves: By Charter, TIAA operates without profit to the corporation or its sole shareholder, the TIAA Board of Overseers. As a result, all contingency reserves are held solely for the benefit of TIAA's policyholders. Income and Expenses: Premiums, investment income and expenses are reported as incurred. Federal Income Taxes: TIAA is a nonprofit educational organization exempt from federal income taxation under Section 501(c)(3) of the Internal Revenue Code. However, any non-pension related income is subject to federal income taxation as unrelated business income. The federal income tax provision in the accompanying statements of operations is based on taxes actually paid or anticipated to be paid with the tax return filing. Separate Accounts: The balance sheet captions for Separate Account assets and liabilities (which include participant account values) are stated at market value. The Separate Accounts' operating results are reflected in the changes to these assets and liabilities. TIAA Separate Account VA-1 ("VA-1") is a segregated investment account and was organized on February 16, 1994 under the insurance laws of the State of New York for the purpose of issuing and funding variable annuity contracts. VA-1 was registered with the Securities and Exchange Commission ("Commission") effective November 1, 1994 as an open-end, diversified management investment company under the Investment Company Act of 1940. Currently, VA-1 consists of a single investment portfolio, the Stock Index Account ("SIA"), which invests in a diversified portfolio of equity securities selected to track the overall United States stock market. SIA was established on October 3, 1994 with a $25,000,000 seed money investment by TIAA. TIAA purchased 1,000,000 Accumulation Units of SIA and such units 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. At December 31, 1995, the value of TIAA's 2,685 units in SIA was approximately $92,000, and TIAA redeemed its remaining units during 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. II - 16 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 2--Significant Accounting Policies--(Continued) REA was registered with the Commission under the Securities Act of 1933 effective October 2, 1995. REA's target is to invest between 70% and 80% of its assets directly in real estate or in real estate-related investments, with the remainder of its assets invested in publicly-traded securities to maintain adequate liquidity. REA was established on July 3, 1995 with a $100,000,000 seed money investment by TIAA. TIAA purchased 1,000,000 Accumulation Units of REA and such units share in the pro rata investment experience of REA and are subject to the same valuation procedures and expense deductions as all other Accumulation Units in REA. On October 2, 1995, TIAA began to offer Accumulation Units of REA to participants other than TIAA. At December 31, 1996 and 1995, the number of units retained by TIAA in REA were 933,333 and 1,000,000, respectively, with a total value of approximately $103,704,000 and $102,566,000, respectively. Generally Accepted Accounting Principles: The Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 40, entitled "Applicability of Generally Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises" ("Interpretation"), in April 1993. The Interpretation clarifies that financial statements that are intended to be in conformity with GAAP should follow all authoritative accounting pronouncements except to the extent that a pronouncement explicitly exempts a particular type of enterprise or that enterprise does not have the transaction, event, or circumstance addressed in the pronouncement. The Interpretation, as amended, is effective for 1996 annual financial statements. The effect of the Interpretation is that, beginning in 1996, TIAA (and mutual life insurance and other enterprises) can no longer refer to financial statements prepared in accordance with statutory accounting practices as having been prepared in accordance with GAAP. Furthermore, financial statements prepared in conformity with statutory accounting practices for periods prior to the effective date of the Interpretation are no longer considered to be GAAP statements when presented in comparative form with financial statements for periods subsequent to the Interpretation's effective date. Accordingly, TIAA's 1995 and 1994 statutory financial statements, while presented in full conformance with statutory accounting practices, are no longer considered to be presented in conformity 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: (bullet) 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; (bullet) 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; (bullet) 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; II - 17 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 2--Significant Accounting Policies--(Concluded) (bullet) The "non-admitted" asset designation is not utilized; (bullet) Policy acquisition costs are deferred and amortized over the lives of the policies issued rather than being charged to operations as incurred; (bullet) Policy and contract reserves are based on estimates of expected mortality and interest rather than being based on statutory mortality and interest requirements; (bullet) 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; (bullet) Long-term bond investments considered to be "available for sale" are carried at fair value rather than at amortized cost. Management believes that the effects of these differences on TIAA's financial statements, if GAAP were implemented, would increase TIAA's capital. Permitted Statutory Accounting Policies: Statutory accounting policies prescribed by the Department include accounting practices reflected in New York State Insurance Laws and Regulations as well as in NAIC publications. Permitted statutory accounting policies encompass all accounting practices which are allowed by the Department but have not been prescribed. TIAA does not utilize any statutory accounting practices which depart from prescribed statutory accounting practices; however, TIAA does follow certain permitted statutory accounting practices. The following permitted statutory accounting policies have been approved by the Department: inclusion of real estate subsidiaries and real estate limited partnerships in the Real Estate caption in the accompanying balance sheets; determination of permanent impairments; and netting of securities lending collateral against short-term investments. The NAIC issued prescribed accounting requirements for loan-backed securities, including collateralized mortgage obligations ("CMO's"), in 1993. The new accounting requirements stipulated that loan-backed securities should be accounted for using the interest method. Under the interest method, actual and anticipated cash flows of a security are utilized to determine the carrying value of that security. TIAA elected the prospective method for determining yields and carrying values for interest-only CMO's and the retrospective method for all other CMO's. Certain provisions of these statutory accounting policies were required to be implemented in 1994; the remaining provisions were required for 1995. TIAA implemented the required provisions of the new accounting policies in 1994 and also adopted the provisions in 1994 for TIAA's public market CMO portfolio. This early adoption for public market CMO's represented a permitted accounting practice which was also approved by the Department. The required provisions of the new accounting policies for TIAA's private market CMO portfolio were implemented in 1995. The effect of this change in accounting in 1995 and 1994 was to increase contingency reserves by approximately $11 million and $50 million, respectively. Reclassifications: Certain amounts in the 1995 and 1994 financial statements have been reclassified to conform with the 1996 presentations. II - 18 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 3--Investments Securities Investments: At December 31, 1996 and 1995, the carrying values (balance sheet amounts) and estimated market values of long-term bond investments, and gross unrealized gains and losses with respect to such market values, are shown below:
Gross Gross Carrying Unrealized Unrealized Estimated December 31, 1996 Value Gains Losses Market Value ------------------------------------ ----------------- ----------------- ----------------- ------------------- U.S. Treasury securities and obligations of U.S. government agencies and corporations ........ $ 708,002,451 $ 58,453,457 $101,219,004 $ 665,236,904 Debt securities issued by foreign governments ...................... 1,318,580,240 160,530,266 5,770,226 1,473,340,280 Corporate securities ............... 29,838,430,523 1,723,358,249 236,333,975 31,325,454,797 Mortgage-backed securities ......... 18,880,847,006 1,360,640,261 224,627,980 20,016,859,287 Asset-backed securities ............ 5,346,270,607 539,946,158 78,199,108 5,808,017,657 ----------------- ----------------- ----------------- ------------------- Total .......................... $56,092,130,827 $3,842,928,391 $646,150,293 $59,288,908,925 ================= ================= ================= =================== December 31, 1995 ------------------------------------ U.S. Treasury securities and obligations of U.S. government agencies and corporations ........ $ 805,105,863 $ 195,202,463 $ 1,000,308,326 Debt securities issued by foreign governments ...................... 1,456,997,622 226,995,685 $ 1,494,536 1,682,498,771 Corporate securities ............... 28,094,698,003 2,942,081,089 78,607,386 30,958,171,706 Mortgage-backed securities ......... 15,163,886,154 1,547,907,663 45,110,081 16,666,683,736 Asset-backed securities ............ 3,315,143,416 317,275,533 4,448,112 3,627,970,837 ----------------- ----------------- ----------------- ------------------- Total .......................... $48,835,831,058 $5,229,462,433 $129,660,115 $53,935,633,376 ================= ================= ================= ===================
At December 31, 1996 and 1995, approximately 95.4% and 94.9%, respectively, of the long-term bond portfolio was comprised of investment grade securities. At December 31, 1996, outstanding forward commitments for future long-term bond investments approximated $1,171,942,000, and it is anticipated that all commitments will be disbursed during 1997. The funding of bond commitments is contingent upon the continued favorable financial performance of the potential borrowers. Debt securities amounting to approximately $2,610,000 and $237,943,000 at December 31, 1996 and 1995, respectively, were on deposit with governmental authorities or trustees as required by law. II - 19 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 3--Investments--(Continued) The carrying values and estimated market values of long-term bond investments at December 31, 1996, by contractual maturity, are shown below:
Carrying Estimated Value Market Value ----------------- ------------------ Due in one year or less ................ $ 369,061,445 $ 375,202,319 Due after one year through five years .. 3,760,546,344 3,972,202,814 Due after five years through ten years . 12,148,746,120 12,582,733,274 Due after ten years .................... 15,586,659,305 16,533,893,574 ----------------- ------------------ Subtotal ........................... 31,865,013,214 33,464,031,981 Mortgage-backed securities ............. 18,880,847,006 20,016,859,287 Asset-backed securities ................ 5,346,270,607 5,808,017,657 ----------------- ------------------ Total .............................. $56,092,130,827 $59,288,908,925 ================= ==================
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, 1996 and 1995, the carrying values of long-term bond investments were diversified by industry classification as follows: 1996 1995 -------- ------- Mortgage-backed securities ..... 33.7% 31.1% Manufacturing .................. 13.0 14.0 Public utilities ............... 12.9 15.5 Asset-backed securities ........ 9.5 6.8 Finance and financial services . 8.9 8.8 Government ..................... 4.8 5.7 Retail and wholesale trade ..... 4.3 5.1 Oil and gas .................... 4.0 3.9 Communications ................. 3.7 4.3 Other .......................... 5.2 4.8 -------- ------- Total ...................... 100.0% 100.0% ======== ======= II - 20 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 3--Investments--(Continued) The approximate carrying values and market values of debt securities loaned, and the cash collateral received in connection therewith, were as follows: Carrying Market Cash Value Value Collateral ----------------- ----------------------------------- December 31, 1996 $1,625,029,000 $1,678,166,000 $1,746,346,000 December 31, 1995 $1,345,534,000 $1,410,965,000 $1,482,603,000 At December 31, 1996 and 1995, TIAA had interest rate swap contracts outstanding with a total notional value of $187,355,000 and $105,600,000, respectively. At December 31, 1996 and 1995, TIAA had foreign currency swap contracts outstanding with a total notional value of approximately $337,404,000 and $238,063,000, respectively. The net change in unrealized gains (losses) on foreign currency swap contracts was approximately $1,367,000, $(1,099,000) and $(7,635,000) for the years ended December 31, 1996, 1995 and 1994, respectively. During 1996, TIAA entered into five foreign currency forward contracts with a total notional value of approximately $12,522,000, and recorded total premiums of approximately $188,000. All five forward contracts remained outstanding at December 31, 1996, and the unamortized value of the premiums was approximately $188,000. Unrealized gains on the forward contracts were approximately $28,000 for the year ended December 31, 1996. During 1996, TIAA wrote four swap options with a total notional value of $132,000,000, and received a total premium of approximately $554,000. One of these swap options expired and one was exercised during the year, with total notional values of $30,000,000 and $44,000,000, respectively. The interest rate swap contract created from the exercise of the swap option is reflected in the aggregate totals for interest rate swap contracts disclosed in the related paragraph above. At December 31, 1996, the unamortized value of the premiums was approximately $434,000, and two swap options remained outstanding with a total notional value of $58,000,000. During 1996, TIAA purchased three interest rate cap contracts with a total notional value of $32,520,000, and paid a total premium of approximately $553,000. All three interest rate cap contracts remained outstanding at December 31, 1996, and the unamortized value of the premiums was approximately $507,000. TIAA received no payments under the interest rate cap contracts during 1996. During 1995, TIAA wrote two covered call options related to $13,500,000 par value of bonds and received premiums of approximately $142,000. The options were exercised and the premiums were recorded as additional proceeds on the dispositions. There were no outstanding covered call options at December 31, 1996 and 1995. Mortgage Loan and Real Estate Investments: TIAA makes mortgage loans, principally collateralized by commercial real estate, and direct investments in real estate. TIAA's mortgage underwriting standards generally limit mortgage investments to first mortgage liens on completed income-producing properties for which the loan-to- value ratio at the time of closing generally ranges between 65% and 75%. TIAA employs a system to monitor II - 21 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 3--Investments--(Continued) the effects of current and expected market conditions and other factors on the collectability of mortgage loans and the realizability of real estate investments. This system is utilized to identify and quantify any permanent impairments in value and to determine the appropriate level of mortgage and real estate reserves in the AVR. At December 31, 1996 and 1995, the carrying values of mortgage loan investments were diversified by property type and geographic region as follows: Property Type 1996 1995 - --------------------- --------------- ---------------- Office buildings ...... 41.3% 41.1% Shopping centers ...... 29.4 30.6 Mixed-use projects .... 10.7 9.9 Apartments ............ 7.3 8.1 Industrial buildings .. 5.4 3.9 Hotels ................ 4.2 4.6 Other ................. 1.7 1.8 --------------- ---------------- Total ............. 100.0% 100.0% =============== ================ Geographic Region --------------------- West .................. 28.1% 29.2% Northeast ............. 22.5 23.1 Midwest ............... 20.5 20.4 Southeast ............. 18.6 17.1 Southwest/Plains ...... 10.3 10.2 --------------- ---------------- Total ............. 100.0% 100.0% =============== ================ At December 31, 1996 and 1995, approximately 22% and 24%, respectively, of the mortgage portfolio was invested in California and is included in the West region shown above. At December 31, 1996, the contractual maturity schedule of mortgage loans is shown below: Carrying Value ------------------ Due in one year or less ............... $ 1,467,338,932 Due after one year through five years . 3,710,129,134 Due after five years through ten years 9,137,638,879 Due after ten years ................... 5,758,895,332 ------------------ Total ............................. $20,074,002,277 ================== II - 22 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 3--Investments--(Continued) 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, 1996, outstanding forward commitments for future mortgage loan investments approximated $1,217,430,000, including commitments under litigation. Of this, $836,936,000 is scheduled for disbursement in 1997, $309,276,000 in 1998 and $71,218,000 in later years. The funding of mortgage loan commitments is contingent upon the underlying properties meeting specified construction, leasing, occupancy and other requirements. Of the total commitments scheduled for disbursement in 1997, $250,000,000 is related to a mortgage loan refinancing which occurred in 1993. In connection with the refinancing, a third party made a five year, interest-only loan to a TIAA borrower and the borrower made a partial repayment to TIAA. TIAA made a one year forward commitment to loan $250,000,000 to the borrower. The loan commitment may be extended, at TIAA's option, for additional one year periods, up to a total of five years, provided that the borrower's first mortgage to the third party is not in default at the time the loan commitment is extended. The loan commitment has been extended to 1997. At December 31, 1996, 1995 and 1994, the aggregate carrying values of mortgages with restructured or modified terms, as defined by generally accepted accounting principles, were approximately $621,056,000, $872,377,000 and $913,551,000, respectively. For the years ended December 31, 1996, 1995 and 1994, the investment income earned on such mortgages was approximately $43,408,000, $57,142,000 and $41,643,000, respectively, which would have been approximately $68,371,000, $96,625,000 and $101,394,000, respectively, if they had performed in accordance with their original terms. When restructuring mortgage loans, TIAA generally requires participation features, yield maintenance stipulations, and/or the establishment of property specific escrow accounts funded by the borrowers. At December 31, 1996 and 1995, the carrying values of real estate investments were diversified by property type and geographic region as follows:
Property Type 1996 1995 - ----------------------------------------------------- --------------- ---------------- Office buildings .................................... 63.2% 61.7% Shopping centers .................................... 16.3 15.2 Mixed-use projects .................................. 7.3 7.3 Industrial buildings ................................ 3.5 3.4 Income-producing land underlying improved real estate 3.5 3.3 Land held for future development .................... 1.8 2.0 Apartments .......................................... 0.4 0.7 Other ............................................... 4.0 6.4 --------------- ---------------- Total ........................................... 100.0% 100.0% =============== ================
II - 23 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 3--Investments--(Concluded) Geographic Region 1996 1995 - ----------------- ------------ ------------ Midwest 34.6% 34.8% Southeast 26.0 24.7 Northeast 14.5 14.2 West 14.4 16.2 Southwest/Plains 10.5 10.1 ------------ ------------ Total 100.0% 100.0% ============ ============ At December 31, 1996 and 1995, approximately 12% of the real estate portfolio was invested in Minnesota and included in the Midwest region shown above. At December 31, 1995, approximately 12% of the real estate portfolio was also invested in California and included in the West region shown above. The percentage of the portfolio invested in California declined to 10% at December 31, 1996. At December 31, 1996, outstanding forward commitments for future real estate investments approximated $99,640,000. Under these commitments, it is estimated that $79,412,000 will be disbursed in 1997 and $20,228,000 in later years. The funding of real estate investment commitments is contingent upon the properties meeting specified construction, leasing, occupancy and other requirements. Depreciation expense on real estate investments for the years ended December 31, 1996, 1995 and 1994, was approximately $135,982,000, $98,198,000 and $84,872,000, respectively; the amount of accumulated depreciation at December 31, 1996 was approximately $646,662,000. Asset Valuation Reserves: The AVR balances at December 31, 1996 and 1995 were comprised of the following asset-specific reserves: 1996 1995 ------------------- ------------------- Bonds and preferred stock $ 692,863,748 $ 673,859,636 Mortgages 647,666,546 564,444,067 Real Estate 707,054,921 514,833,826 Common stock 53,869,704 62,372,040 Other invested assets 33,466,350 45,358,322 ------------------- ------------------- Total $2,134,921,269 $1,860,867,891 =================== =================== II - 24 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 4--Investment Income and Capital Gains and Losses Net Investment Income: For the years ended December 31, 1996, 1995 and 1994, the components of net investment income were as follows:
1996 1995 1994 ----------------- ----------------------------------- Gross Investment Income: Bonds ........................................... $4,397,330,653 $4,113,077,743 $3,591,625,656 Mortgages ....................................... 1,704,612,536 1,688,836,730 1,613,072,996 Real Estate (net of property expenses, taxes and depreciation) ................................. 349,550,153 279,016,562 298,290,866 Stocks .......................................... 14,512,747 24,460,434 12,296,076 Other long-term investments ..................... 16,299,166 16,706,459 10,794,114 Cash and short-term investments ................. 64,600,106 52,050,980 37,997,294 Other ........................................... 30,748,262 8,500,640 9,894,077 ----------------- ----------------------------------- Total ........................................ 6,577,653,623 6,182,649,548 5,573,971,079 Less investment expenses ......................... (111,487,052) (112,287,010) (102,523,873) ----------------- ----------------------------------- Net investment income before amortization of net IMR gains ...................................... 6,466,166,571 6,070,362,538 5,471,447,206 Plus amortization of net IMR gains ............... 59,362,364 38,134,446 14,624,032 ----------------- ----------------------------------- Net investment income ............................ $6,525,528,935 $6,108,496,984 $5,486,071,238 ================= ===================================
Participation income received on securities, mortgages and real estate included in the above table was approximately $21,121,000, $28,088,000 and $27,488,000 in 1996, 1995 and 1994, 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 8.17%, 8.29% and 8.11% in 1996, 1995 and 1994, respectively. Future rental income expected to be received during the next five years under existing real estate leases in effect as of December 31, 1996 is approximately $510,962,000 in 1997, $460,487,000 in 1998, $396,760,000 in 1999, $322,444,000 in 2000 and $244,048,000 in 2001. II - 25 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 4--Investment Income and Capital Gains and Losses--(Concluded) Realized Capital Gains and Losses: For the years ended December 31, 1996, 1995 and 1994, the net realized capital gains (losses) on sales, redemptions and writedowns of investments computed under the specific identification method were as follows:
1996 1995 1994 ------------------- ------------------- ------------------- Bonds ................................................. $ 83,521,853 $ 32,698,203 $ 23,169,838 Mortgages ............................................. (120,569,347) (204,033,034) (103,763,171) Real Estate ........................................... 62,836,567 99,207,556 (24,555,825) Stocks ................................................ 123,374,256 9,808,562 5,435,716 Other long-term investments ........................... 27,068,040 7,885,199 1,550,624 Cash and short-term investments ....................... (13,797,036) (758,274) 2,377,735 Other ................................................. 14,400 1,360,695 714,129 ------------------- ------------------- ------------------- Total realized gains (losses) before capital gains tax 162,448,733 (53,831,093) (95,070,954) Capital gains (tax) benefit ........................... 1,501,742 (2,433,800) 0 ------------------- ------------------- ------------------- Total ............................................. $ 163,950,475 $ (56,264,893) $ (95,070,954) =================== =================== ===================
Proceeds from sales and redemptions of long-term bond investments during 1996, 1995 and 1994 were approximately $4,329,771,000, $3,822,394,000 and $3,685,078,000, respectively. Gross gains of approximately $133,807,000, $122,093,000 and $96,579,000 and gross losses of approximately $45,397,000, $49,736,000 and $75,097,000 were realized on these sales and redemptions during 1996, 1995 and 1994, respectively. Unrealized Capital Gains and Losses: For the years ended December 31, 1996, 1995 and 1994, the net changes in unrealized capital gains (losses) on investments, resulting in a net increase (decrease) in the valuation of investments, were as follows:
1996 1995 1994 ------------------- ------------------- ------------------- Bonds $ 3,982,108 $ 51,534,565 $ 64,026,744 Mortgages 2,393,812 (1,807,561) (3,125,696) Real Estate 20,766,890 (42,391,326) (37,141,679) Stocks (26,004,886) 26,290,762 19,432,861 Other long-term investments 10,306,026 22,455,069 824,045 Cash and short-term investments 8,605 0 1,285,511 Other 18,999,590 (3,375,400) (6,394,850) ------------------- ------------------- ------------------- Total $ 30,452,145 $ 52,706,109 $ 38,906,936 =================== =================== ===================
II - 26 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 5--Disclosures About Fair Value of Financial Instruments The estimated fair value amounts of financial instruments presented in the following tables have been determined by TIAA using market information available as of December 31, 1996 and 1995 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.
Notional Carrying Estimated December 31, 1996 Value Value Fair Value ----------------------------------------- ------------------- ------------------- ------------------- Assets Bonds $56,092,130,827 $59,288,908,925 Mortgages 20,074,002,277 20,605,405,622 Stocks 355,093,378 355,093,378 Cash and short-term investments 615,082,177 615,082,177 Policy loans 187,636,651 187,636,651 Liabilities Teachers Personal Annuity--Fixed Account 700,580,748 700,580,748 Other financial instruments Foreign currency swap contracts $337,403,818 (6,031,762) (26,524,318) Foreign currency forward contracts 12,522,424 216,215 30,162 Interest rate swap contracts 187,355,000 8,463,177 Swap options 58,000,000 (433,554) (308,108) Interest rate cap contracts 32,520,000 506,579 443,878 Stock warrants -- December 31, 1995 ----------------------------------------- Assets Bonds $48,835,831,058 $53,935,633,376 Mortgages 21,000,279,330 22,600,402,237 Stocks 223,028,483 223,028,483 Cash and short-term investments 713,051,046 713,051,046 Policy loans 134,538,623 134,538,623 Liabilities Teachers Personal Annuity--Fixed Account 580,720,683 580,720,683 Other financial instruments Foreign currency swap contracts $238,063,450 (7,398,975) (27,116,738) Interest rate swap contracts 105,600,000 15,152,000 Stock warrants 6,532,500
II - 27 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 5--Disclosures About Fair Value of Financial Instruments--(Continued) Bonds: Fair values for publicly traded long-term bond investments were determined using quoted market prices. For privately placed long-term bond investments without a readily ascertainable market value, such values were determined with the assistance of an independent pricing service utilizing a discounted cash flow methodology based on coupon rates, maturity provisions and assigned credit ratings. The aggregate carrying values and estimated fair values of publicly traded and privately placed bonds at December 31, 1996 and 1995 were as follows:
1996 1995 --------------------------------------- ---------------------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ------------------- ------------------- ------------------- ------------------- Publicly traded bonds $33,088,013,741 $34,773,725,991 $28,152,735,556 $31,029,476,823 Privately placed bonds 23,004,117,086 24,515,182,934 20,683,095,502 22,906,156,553 ------------------- ------------------- ------------------- ------------------- Total $56,092,130,827 $59,288,908,925 $48,835,831,058 $53,935,633,376 =================== =================== =================== ===================
Mortgages: The fair value of mortgages was determined with the assistance of an independent pricing service utilizing a discounted cash flow methodology based on coupon rates, maturity provisions and assigned credit ratings. Stocks, Cash and Short-Term Investments, and Policy Loans: The carrying values are reasonable estimates of fair values. Teachers Personal Annuity--Fixed Account: The carrying values of the liabilities are reasonable estimates of fair values. Foreign Currency Swap Contracts: The fair value of foreign currency swap contracts, which are used for hedging purposes, is the estimated net gain or (loss) that TIAA would record if the foreign currency swaps were liquidated at year-end. The fair value of foreign currency swap contracts was estimated by external parties, including TIAA's counterparties, based on future cash flows and anticipated exchange relationships, and such values were reviewed internally for reasonableness. Foreign Currency Forward Contracts: The fair value of foreign currency forward contracts, which are used for hedging purposes, is the estimated net gain or (loss) that TIAA would record if the foreign currency forward contracts were liquidated at year-end. The fair value of the foreign currency forward contracts was estimated internally based on future cash flows and anticipated exchange relationships, and such values were reviewed for reasonableness with estimates from external parties, including TIAA's counterparties. Interest Rate Swap Contracts: The fair value of interest rate swap contracts, which are used for hedging purposes, is the estimated net gain or (loss) that TIAA would record if the interest rate swaps were liquidated at year- end. The swap agreements have no carrying value. The fair value of interest rate swap contracts was estimated internally using modeling software developed by independent third parties, and such values were reviewed for reasonableness with estimates from external parties, including TIAA's counterparties. II - 28 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 5--Disclosures About Fair Value of Financial Instruments--(Continued) Swap Options: The fair value of swap options, which are used for hedging purposes, is the estimated amount that TIAA would receive or (pay) if the swap options were liquidated at year-end. The fair value of the swap options was estimated by external parties, including TIAA's counterparties, using option pricing models, and such values were reviewed internally for reasonableness using option pricing software developed by independent third parties. Interest Rate Cap Contracts: The fair value of interest rate cap contracts, which are used for hedging purposes, is the estimated amount that TIAA would receive or (pay) if the interest rate cap contracts were liquidated at year-end. The fair value of the interest rate cap contracts was estimated by external parties, including TIAA's counterparties, using option pricing models, and such values were reviewed internally for reasonableness using option pricing software developed by independent third parties. Stock Warrants: The fair value of stock warrants represents the excess, if any, of the market value of the related stock over the exercise price associated with the stock warrant. The stock warrants have no carrying value. Commitments to Extend Credit or Purchase Investments: TIAA does not charge commitment fees on these agreements, and the related interest rates reflect market levels at the time of the commitments. Insurance and Annuity Contracts: TIAA's insurance and annuity contracts, other than the Teachers Personal Annuity--Fixed Account disclosed above, entail mortality risks and are, therefore, exempt from the fair value disclosure requirements related to financial instruments. Note 6--Management Agreements All services necessary for the operation of College Retirement Equities Fund (CREF), a companion organization, are provided, at cost, by two subsidiaries of TIAA, TIAA-CREF Investment Management, Inc. ("Investment Management") and TIAA-CREF Individual & Institutional Services, Inc. ("Services"), which provide investment advisory, administrative and distribution services for CREF. Such services are provided in accordance with an Investment Management Services Agreement between CREF and Investment Management, and in accordance with a Principal Underwriting and Administrative Services Agreement between CREF and Services. Investment Management is registered with the Commission as an investment adviser; Services is registered with the Commission as a broker-dealer and is a member of the National Association of Securities Dealers, Inc. Investment Management and Services receive management fee payments from each CREF account on a daily basis according to formulas established each year with the objective of keeping the management fees as close as possible to each account's actual expenses. Any differences between actual expenses and the management fees are adjusted quarterly. Such fees and the equivalent allocated expenses, which amounted to approximately $274,447,000, $226,645,000 and $199,396,000 in 1996, 1995 and 1994, respectively, are not included in the statements of operations and had no effect on TIAA's operations. II - 29 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 6--Management Agreements--(Continued) All services necessary for the operation of REA are provided, at cost, by TIAA and Services. TIAA provides investment management services for REA, while distribution and administrative services are provided by Services in accordance with a Distribution and Administrative Services Agreement between REA and Services. TIAA also provides a liquidity guarantee to REA, for a fee, to ensure that funds are available to meet participant transfer and cash withdrawal requests in the event that REA's cash flows and liquid investments are insufficient to fund such requests. TIAA also receives a fee for assuming certain mortality and expense risks. Fee payments are made from REA on a daily basis to TIAA and Services according to formulas established annually. Any differences between actual expenses and daily charges are adjusted quarterly. Teachers Advisors, Inc. ("Advisors"), a subsidiary of TIAA VA Holdings, Inc. ("Holdings"), which is itself a wholly-owned subsidiary of TIAA (see Note 11), provides investment advisory services for VA-1 in accordance with an Investment Management Agreement between TIAA, Advisors and VA-1. TIAA provides all administrative services for VA-1 in accordance with an Administrative Services Agreement with VA-1 and also receives a fee for assuming certain mortality and expense risks. Teachers Personal Investors Services, Inc. ("TPIS"), a subsidiary of Holdings, distributes contracts for VA-1. Expense deductions are made from VA-1 on a daily basis. Advisors is registered with the Commission as an investment adviser; TPIS is registered with the Commission as a broker- dealer and is a member of the National Association of Securities Dealers, Inc. Note 7--Pension Plan and Postretirement Benefits TIAA maintains a qualified, noncontributory defined contribution pension plan covering substantially all employees. All pension plan liabilities are fully funded through individually owned retirement annuity contracts. Contributions are made semi-monthly to each participant's contract based on a percentage of salary, with the applicable percentage varying by attained age. All contributions are fully vested after five years of service. Forfeitures arising from terminations prior to vesting are used to reduce future employer contributions. The accompanying statements of operations include contributions to the pension plan of approximately $20,808,000, $19,467,000 and $17,828,000 in 1996, 1995 and 1994, respectively. In addition to the pension plan, TIAA provides certain other postretirement life and health insurance benefits to eligible retired employees who meet prescribed age and service requirements. The cost of such benefits reflected in the accompanying statements of operations were approximately $3,022,000, $2,273,000 and $2,307,000 for 1996, 1995 and 1994, respectively. TIAA also maintains a deferred compensation plan for non-officer trustees and members of the TIAA Board of Overseers. Under this plan, an eligible board member who has served at least five years is eligible for a single-sum payment upon leaving the board equal to 50% of the annual stipend in effect during the last term multiplied by the number of years of credited service, up to a maximum of 20 years. II - 30 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 8--Unconsolidated Subsidiaries and Other Affiliates TIAA's wholly-owned subsidiaries primarily involve real estate investment activities and are primarily included in real estate assets on the accompanying balance sheets. At December 31, 1996 and 1995, the carrying values of TIAA's investments in real estate subsidiaries and other affiliates were approximately $4,234,818,000 and $4,599,673,000, respectively. Subsidiary total assets, liabilities and gross rental income of real estate subsidiaries, as of and for the years ended December 31, 1996 and 1995, were approximately as follows:
1996 1995 ------------------- ------------------- Assets $5,149,487,000 $5,523,739,000 Liabilities 933,678,000 981,438,000 Gross rental income 760,704,000 841,970,000
Earnings of approximately $238,313,000, $164,676,000 and $210,302,000 in 1996, 1995 and 1994, 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, 1996 and 1995, the carrying values of TIAA real estate subsidiaries that are partners in joint ventures were approximately $2,242,791,000 and $2,371,931,000. Joint venture total assets, liabilities and gross rental income, as of and for the years ended December 31, 1996 and 1995, were approximately as follows:
1996 1995 ------------------- ------------------- Assets $3,099,467,000 $3,437,761,000 Liabilities 1,116,222,000 1,233,262,000 Gross rental income 484,657,000 608,507,000
The subsidiaries' equity share in these total assets, liabilities and gross rental income were approximately as follows:
1996 1995 ------------------- ------------------- Assets $2,981,156,000 $3,307,523,000 Liabilities 778,312,000 937,673,000 Gross rental income 455,196,000 551,259,000
Net income earned by the subsidiaries from joint venture investments was approximately $130,887,000, $60,689,000 and $92,342,000 in 1996, 1995 and 1994, respectively. Some of the real estate joint ventures have mortgage loans from TIAA. At December 31, 1996 and 1995, the unpaid principal of such mortgage loans was approximately $782,460,000 and $826,216,000, respectively. II - 31 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA NOTES TO FINANCIAL STATEMENTS-(Continued) Note 9--Termination of Business in Canada Effective January 1, 1996, TIAA ceased conducting insurance and annuity operations in Canada and reinsured all existing business with an independent third party insurer under an assumption reinsurance agreement. Under this agreement, TIAA transferred approximately $129 million (U.S.) of assets to the independent third party insurer, and, under the reinsurance agreement, this transfer released all of TIAA's Canadian policy reserves and other liabilities. The financial effect of TIAA's withdrawal from Canada is reflected in the 1996 statement of operations, and the transaction had no material effect on TIAA's financial results. TIAA has no continuing material obligation associated with its withdrawal from the Canadian insurance market. Note 10--Contingencies It is the opinion of management that any liabilities which might arise from litigation, state guaranty fund assessments, and other matters, over and above amounts already provided for in the financial statements, are not considered material in relation to TIAA's financial position or the results of its operations. Note 11--Subsequent Events Effective January 1, 1997, TIAA VA Holdings, Inc. merged into TIAA Holdings, Inc. ("THI"), a wholly-owned subsidiary of TIAA, and TIAA VA Holdings, Inc. ceased to exist. THI was established in 1996 as a holding company for various subsidiaries of TIAA. In addition, effective January 1, 1997, TIAA contributed all of the outstanding stock of its wholly-owned subsidiary, Macallister Holdings, Inc. ("Macallister") to THI. Macallister is a holding company that owns various real estate subsidiaries. II - 32 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 29th day of April, 1997. TIAA REAL ESTATE ACCOUNT By: TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA By: /s/ Peter C. Clapman -------------------- Peter C. Clapman Senior Vice President and Chief Counsel, Investments Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons, trustees and officers of Teachers Insurance and Annuity Association of America, in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ John H. Biggs Chairman of the Board and 4-29-97 - ----------------------------- Chief Executive Officer John H. Biggs (Principal Executive Officer) and Trustee /s/ Thomas W. Jones Vice Chairman, President and 4-29-97 - ----------------------------- Chief Operating Officer Thomas W. Jones (Principal Financial Officer) and Trustee /s/ Martin L. Leibowitz Vice Chairman, Chief 4-29-97 - ----------------------------- Investment Officer and Trustee Martin L. Leibowitz /s/ Richard L. Gibbs Executive Vice President 4-29-97 - ----------------------------- (Principal Accounting Officer) Richard L. Gibbs II - 33 Signature of Trustee Date Signature of Trustee Date - -------------------- ---- -------------------- ---- /s/ David Alexander 4-29-97 - ------------------------- ------------------------- David Alexander Dorothy Ann Kelly, O.S.U. /s/ Marcus Alexis 4-29-97 /s/ Robert M. O'Neil 4-29-97 - ------------------------- ------------------------- Marcus Alexis Robert M. O'Neil /s/ Willard T. Carleton 4-29-97 /s/ Leonard S. Simon 4-29-97 - ------------------------- ------------------------- Willard T. Carleton Leonard S. Simon /s/ Robert C. Clark 4-29-97 /s/ Ronald L. Thompson 4-29-97 - ------------------------- ------------------------- Robert C. Clark Ronald L. Thompson - ------------------------- ------------------------- Flora Mancuso Edwards Paul R. Tregurtha /s/ Charles J. Urstadt 4-29-97 - ------------------------- ------------------------- Estelle A. Fishbein Charles J. Urstadt /s/ Frederick R. Ford 4-29-97 /s/ William H. Waltrip 4-29-97 - ------------------------- ------------------------- Frederick R. Ford William H. Waltrip /s/ Martin J. Gruber 4-29-97 /s/ Rosalie J. Wolf 4-29-97 - ------------------------- ------------------------- Martin J. Gruber Rosalie J. Wolf /s/ Ruth Simms Hamilton 4-29-97 - ------------------------- Ruth Simms Hamilton II - 34 [letterhead] Deloitte & Touche LLP [LOGO] Two World Financial Center Telephone: (212) 436-2000 New York, New York 10281-1414 Facsimile: (212) 436-5000 REPORT OF INDEPENDENT AUDITORS To the Participants of the TIAA Real Estate Account and the Board of Trustees of Teachers Insurance and Annuity Association of America: We have audited the consolidated financial statements of the TIAA Real Estate Account ("Account") of Teachers Insurance and Annuity Association of America ("TIAA") as of December 31, 1996, and for the period July 3, 1995 (commencement of operations) to December 31, 1995, and have issued our report thereon dated February 6, 1997. Our audit also included the financial statement schedule - Schedule III - Real Estate Owned. This financial statement schedule is the responsibility of 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 consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP February 6, 1997 - --------------- Deloitte Touche Tohmatsu International - --------------- S-1 TIAA REAL ESTATE ACCOUNT Schedule III - Real Estate Owned December 31, 1996
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) 1996 Completed Acquired ------------- ------- ------------ ----------------- ------------ ------------ --------- River Road Distribution Center $-0- $ 4,166,787 $ 8,213 $ 4,175,000 1995 11/22/95 Industrial Building Fridley, Minnesota The Greens At Metrowest -0- 12,490,895 309,105 12,800,000 1990 12/15/95 Apartments Orlando, Florida Butterfield Industrial Park -0- 4,431,166 168,834 4,600,000 1980 12/22/95 Industrial Building El Paso, Texas (1) Brixworth Apartments -0- 15,574,647 425,353 16,000,000 1989 12/28/95 Apartments Atlanta, Georgia Plantation Grove Shopping Center -0- 7,326,170 73,830 7,400,000 1995 12/28/95 Shopping Center Ocoee, Florida Southbank Business Park -0- 10,069,898 430,102 10,500,000 1995 02/27/96 Office Building Phoenix, Arizona Millbrook Collection -0- 6,774,711 (374,711) 6,400,000 1988 03/29/96 Shopping Center Raleigh, North Carolina Lynnwood Collection -0- 6,708,120 (108,120) 6,600,000 1988 03/29/96 Shopping Center Raleigh, North Carolina S-2 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) 1996 Completed Acquired ------------- ------- ------------ ----------------- ------------ ------------ --------- Monte Vista Apartments -0- 17,664,247 85,753 17,750,000 1995 06/21/96 Apartments Littleton, Colorado River Oaks Shopping Center -0- 13,036,153 63,847 13,100,000 1995 07/12/96 Shopping Center Woodbridge, Virginia Arapahoe Park East -0- 9,920,680 -0- 9,920,680 1979 10/31/96 Industrial Building Boulder, Colorado Royal St. George Apartments -0- 16,072,275 -0- 16,072,275 1995 12/20/96 Apartments West Palm Beach, Florida Interstate Crossing -0- 6,485,249 -0- 6,485,249 1995 12/31/96 Industrial Building Eagan, Minnesota ---- ------------ ---------- ------------ $-0- $130,720,998 $1,082,206 $131,803,204 ==== ============ ========== ============ (1) Leasehold interest only
Reconciliation of investment property owned: Balance at beginning of period $ 43,989,665 Acquisitions 86,731,333 Capital improvements and carrying costs 1,082,206 ------------ (including unrealized gains and losses) Balance at end of period $131,803,204 ============ S-3 Exhibit Index ------------- (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) (23)(B) Consent of Sutherland, Asbill & Brennan, L.L.P. (C) Consent of Deloitte & Touche LLP EX-5 2 OPINION [TIAA LOGO] Teacher Insurance and Annuity Association 730 Third Avenue New York, New York 10017-3206 212 490-9000 April 18, 1997 Board of Trustees of Teachers Insurance and Annuity Association 730 Third Avenue New York, New York 10017-3206 Ladies and Gentlemen: This opinion is furnished in connection with the Registration Statement on Form S-1 (File No. 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. April 18, 1997 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 EX-10.(A) 3 INDEPENDENT FIDUCIARY AGMT TEACHER INSURANCE AND ANNUITY ASSOCIATION 730 Third Avenue New York, New York 10017-3206 (212) 490-9000 June 9, 1995 Institutional Property Consultants, Inc. 4330 La Jolla Village Drive, Suite 310 San Diego, California 92122 RE: Teachers Insurance and Annuity Association of America Real Estate Separate Account; ERISA Independent Fiduciary ------------------------------ Dear Sirs: This letter sets forth the terms and conditions under which Teachers Insurance and Annuity Association of America (the "Company") offers to appoint Institutional Property Consultants, Inc. ("IPC") to serve as the Independent Fiduciary, as defined below, under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") for a new real estate pooled separate account (the "Account") designed primarily for investment by participants in defined contribution plans qualified under (Section) 401(a) and (Section) 403(a) of the Internal Revenue Code of 1986, as amended, ("Code"), Code (Section) 403(b) plans, and certain individual retirement annuities under (Section) 408 of the Code. 1. Background ---------- On December 22, 1994 the Company filed an application (the "Application") with the Department of Labor ("DOL") for exemption from certain potential prohibited transactions under (Section) 406 of ERISA and (Section) 4975 of the Code with respect to certain transactions or classes of transactions involving the establishment and subsequent administration by the Company of the Account. Among other features, the Account offers a stand-by liquidity mechanism under which units of interest in the Account ("Units") may be purchased or sold by the Company. The Application contemplates that various Institutional Property Consultants, Inc. Page 2 June 9, 1995 aspects of the Account's operation will be subject to the oversight of an independent fiduciary ("Independent Fiduciary") which will be a business organization with substantial real estate investment experience and which will be familiar with the responsibilities of a fiduciary with respect to benefit plans under ERISA. The Independent Fiduciary will act for the exclusive benefit of the plan participants who elect to participate in the Account. As of this date, the Application has yet to be approved by the DOL, although on the basis of discussions to date with the representatives of the DOL, the Company has no reason to believe that an exemption with respect to the Account will not be issued in due course. However, prior to the final disposition of the Application by the DOL, the Company intends to appoint an Independent Fiduciary who will undertake responsibility for such activities and such classes of transactions as are described in the Application, pages 16-33, and for such other matters as the Company may from time to time request. Included in the Application are descriptions of the responsibilities of the Independent Fiduciary. The proposed valuation procedures and rules for the Account are described in the Application and in Exhibit A to this Agreement. 2. Compensation ------------ Compensation for services rendered by IPC pursuant to this Agreement shall be paid from the Account in the amounts and in accordance with the terms and conditions set forth in Schedule 1 attached hereto. 3. Duties and Responsibilities of the Company ------------------------------------------ The Company is an investment manager, as defined in Section 3(38) of ERISA, with respect to the Account, and shall be primarily responsible, as a fiduciary under ERISA, for all aspects of the establishment and administration of the Account. The Company alone shall be responsible for making determinations with respect to the acquisition and disposition of properties by the Account and for all other aspects of the investment of Account assets, subject to the duties and responsibilities of IPC specifically set forth in the Application and paragraph 4 hereof. Institutional Property Consultants, Inc. Page 3 June 9, 1995 4. Duties and Responsibilities of IPC ---------------------------------- A. IPC's duties and responsibilities under this Agreement shall be those set forth in the Application and as described below: (1) IPC will review and approve the valuation of the Account and of the properties held in the Account as outlined on pages 24-27 of the Application and as more specifically described in Valuation Procedures and Rules which shall be adopted for the Account by the Company and which shall be subject to the approval of IPC. (A copy of the current draft of the valuation procedures and rules for the Account is attached as Exhibit A.) (2) IPC will approve the appointment of all independent appraisers retained by the Company to perform periodic valuations of Account properties. For this purpose, the Company will forward to IPC information provided to the Company with respect to the background, education and experience of each such independent appraiser. (3) IPC may require an appraisal in addition to those conducted by an independent appraiser appointed as provided in clause (2) above, when it believes that the characteristics of a particular property have changed materially or with respect to any property where it deems an additional appraisal to be necessary or appropriate in order to assure a correct Account valuation. IPC will perform such reviews of Account properties as it may determine to be necessary or desirable in establishing the necessity of such additional appraisals. IPC shall have the authority to designate independent appraisers to be hired by the Company to perform any such additional appraisals, but the Company hereby reserves the right to disapprove any such selection. Accordingly, IPC shall notify the Company at least fourteen (14) days prior to the anticipated hiring of any appraiser not previously approved by the Company. Any such appraiser will be deemed approved by the Company if the Company fails to object within fourteen (14) days of receipt of the aforesaid notice and the Company will, thereupon, hire such appraiser. The Company may in its sole discretion withdraw its approval Institutional Property Consultants, Inc. Page 4 June 9, 1995 of an appraiser at any time prior to hiring such appraiser for future appraisals by giving a notice of withdrawal of its approval. (4) IPC shall review purchases and sales of Units by Account participants and the Company to assure that correct Account values are applied. IPC shall also review the fixed repayment schedule applicable to the redemption of Seed Money Units during the Start Up Period, as defined in the Application, as approved by the New York Insurance Department. With respect to the foregoing, IPC may rely upon the truth, completeness and correctness of information provided to it by the Company or by the independent auditor designated by the Company with respect to the Account. (5) After (and, if necessary, during) the Start Up Period, as defined in the Application, IPC will determine with the Company the appropriate "trigger" guidelines relating to the level of the Company's ongoing ownership of Liquidity Units in the Account, as defined in the Application, and the manner in which any reduction of the Company's participation in excess of such guidelines is to be effected as contemplated under the Application. If IPC and the Company agree that asset sales may be required in order to reduce the Company's ownership of Units in the Account, IPC will participate in the planning of any such program of sales, including the selection of the properties to be sold and the guidelines to be followed in making such sales. (6) In the event of the termination of the Account as described on pages 27-29 of the Application, IPC will approve the sale of Account properties and supervise Account operation during the Wind Down Period (as defined in the Application). Such period will commence with the Company's notice to Account participants of its termination of the Account and will end on the date that no Units are held by any Participant (and, if applicable, Participating Plans), as defined in the Application. (7) IPC will review and approve the investment Institutional Property Consultants, Inc. Page 5 June 9, 1995 guidelines established by the Company for the Account and will monitor the conformity of all property acquisitions and sales with the requirements of such guidelines. (8) With respect to any other transaction or matter involving the Account that is submitted to IPC by the Company, IPC will review said transaction or matter in order to determine whether it is fair to the Account and in the Account's best interests. B. In the event that the Company or the DOL or any other governmental agency requires or requests IPC to perform additional functions reasonably related to the type of review described herein, or to undertake duties with respect to the Account beyond those specifically enumerated herein, these additional duties and functions shall be deemed to be included among the duties of IPC under this Agreement, provided that: (1) The Company requests IPC to perform such activity in writing; and (2) IPC and the Company determine the nature and amount of any additional compensation that may be appropriate with respect to such additional duties. If IPC and the Company are not able to agree upon the nature and amount of any additional compensation, IPC and the Company hereby agree to submit any disputed issues to arbitration and to be bound by the results thereof; provided, however, that IPC shall nevertheless perform the additional duties described above during the time required for a final determination to be made with respect to the nature and/or amount of any additional compensation that it may receive. C. IPC will meet with the Company on a quarterly basis to review the activities of the Account and the actions that IPC has taken under this Agreement. IPC will submit to the Company a summary report from time to time as it may deem necessary or appropriate, but no less frequently than annually. Such report shall be a written report that summarizes and explains all actions and activities that IPC has undertaken since the submission of the last such report or the commencement of its terms, except those actions and activities that IPC in its judgment deems to be not material. All or Institutional Property Consultants, Inc. Page 6 June 9, 1995 any part of any such report may, after consultation with IPC, be provided by the Company to any Account participant or to the DOL or any other governmental agency. IPC shall maintain appropriate records of its actions and activities under this Agreement and will allow the Company to review such records during normal business hours upon reasonable prior request by the Company, and the Company, after consultation with IPC, may provide the results of any such review to the DOL or to any other governmental agency. D. IPC may make all reasonable inquiries, consult with whomever it reasonably deems necessary, do all acts that are reasonably necessary to the performance of its duties, and review such Company documents as are reasonably appropriate for carrying out its responsibilities under this Agreement. All work to be performed pursuant to this paragraph 5, may be performed during normal business hours at the Company's Home Office, 730 Third Avenue, New York, New York 10017 or such other place as may be reasonably designated by IPC, including IPC's offices. 5. Representations --------------- IPC represents and agrees that: A. IPC has at least five years of experience with respect to commercial real estate investments. B. The gross income which is received by IPC (or any partnership or corporation of which IPC is a 10 percent or more partner or shareholder) from the Company and its affiliates (as defined in any proposed exemption issued with respect to the Account) for any fiscal year ending during the term of this Agreement shall not exceed 5 percent of its annual gross income from all sources for the preceding fiscal year. Such income limitation will include services rendered to the Account as the Independent Fiduciary under any prohibited transaction exemption granted by the DOL. IPC will provide, on an annual basis, a report to the Company of the gross income it receives from the Company as a percentage of the gross income received during the preceding fiscal year. C. IPC shall not (i) acquire any property from, sell any Institutional Property Consultants, Inc. Page 7 June 9, 1995 property to or borrow any funds from, the Company or any of its affiliates during the period for which it serves as an Independent Fiduciary under this Agreement and for a period of six months thereafter, or (ii) negotiate any such transaction described in (i) during the period that IPC serves as the Independent Fiduciary. D. In the event that the DOL requires additional representations by IPC, it is agreed that IPC will make any such reasonably required representations that are true in fact. 6. Independent Status ------------------ As the Independent Fiduciary, IPC shall not be an agent of the Company. In keeping with this status, IPC shall be free to control its method of fulfilling its responsibilities within the framework of its obligations to the Participants and their beneficiaries (and, if applicable, Participating Plans), as defined in the Application, and to the Company. 7. Fiduciary Standards/Confidentiality ----------------------------------- Notwithstanding any other provision of this Agreement, it is understood that IPC will act as a fiduciary, as defined in ERISA, with respect to the Participants and their beneficiaries (and, if applicable, Participating Plans) that invest in the Account, and that IPC will perform its duties under this Agreement for the exclusive benefit of such Participants, their beneficiaries and Participating Plans and in conformity with the legal requirements imposed upon it by ERISA. It is understood that IPC will not unnecessarily engage in any activity in connection with this appointment that is adverse to the interest of the Company. IPC may provide similar independent fiduciary services with respect to other benefit plans subject to ERISA; provided that IPC does not use or disclose in such relationships confidential information obtained by it in the course of providing services under this Agreement. Upon termination of this Agreement, IPC will disclose to the Company all material in its possession that has been Institutional Property Consultants, Inc. Page 8 June 9, 1995 released to it by the Company or produced pursuant to this Agreement. Such material may be retained by IPC if it deems such retention to be necessary to protect its interests or the interests of the Participants and their beneficiaries (and, if applicable, Participating Plans) that have invested in the Account. If IPC retains any such material, it shall promptly notify the Company in writing of such action. The aforesaid notice shall include an itemized list of all retained documents and other materials. Upon receipt of the aforesaid notice, or at any time thereafter, the Company may at its option, require that IPC deliver all such retained material to the person who succeeds to its position as Independent Fiduciary. However, IPC may retain any materials that it deems necessary to protect its interests, provided that copies of said materials are furnished to either the Company or IPC's successor as Independent Fiduciary, upon request. IPC will not at any time during the term of this Agreement or thereafter disclose any of the Company's trade secrets, confidential business methods, or any other confidential information which it may have acquired during its service as Independent fiduciary under this Agreement. 8. Personnel --------- IPC agrees that, without limiting its responsibilities under this Agreement or under ERISA, primary responsibility for the performance of the services contemplated under this Agreement shall be assigned to Barbara R. Cambon and that it will use its best efforts to assure that Barbara R. Cambon continues to act in such capacity during the term of this Agreement. In the event that Barbara R. Cambon does not, for any reason, continue to serve in such capacity, IPC agrees that it will assign primary responsibility for the duties contemplated under this Agreement to a senior employee of similar experience and ability. 9. Effective Date/Termination/Notice --------------------------------- A. This Agreement shall become effective on the date of receipt by the Company of a copy of this Agreement that has been executed by IPC and by an authorized officer of the Company. B. IPC's appointment shall commence on the date this Agreement becomes effective for a five year term, and Institutional Property Consultants, Inc. Page 9 June 9, 1995 shall be renewable by the Company, from time to time and without limitation on the number of renewals, for additional three (3) year terms. Upon expiration of IPC's appointment without renewal this Agreement shall terminate. IPC may terminate this Agreement at any time but must give at least 180 days prior written notice to the Company. The Company may terminate this Agreement and IPC's appointment prior to the expiration of the term of its appointment if: (1) a special subcommittee of the Company's Mortgage Committee, after an annual revue, decides to terminate the Agreement upon 180 days prior written notice; or (2) if the Company determines that IPC has breached any representation set forth in paragraph 5 or that IPC has failed to carry out its responsibilities under this Agreement in an effective manner, or is unable to do so. The Company may terminate this agreement if it determines that a merger or restructuring of IPC with or into another entity may cause a conflict of interest that shall impair IPC's ability to carry out its responsibilities under this Agreement in an effective manner. The Company may terminate this Agreement at any time prior to the date on which Units are acquired by a Participant (or, if applicable, Participating Plan). In the event that IPC's term shall terminate as described in this paragraph 9B, IPC shall be compensated only for services performed by it prior to the date of such termination. C. Unless otherwise expressly provided herein, any notice, demand or request under this Agreement shall be deemed to have been properly given and served by depositing the same in the United States mail, addressed as provided herein, postpaid and registered or certified with return receipt requested. Any such notice, demand or request shall be effective upon being deposited in the United States mail. However, the time period in which a response or action to any such notice, demand or request must be given or taken shall commence to run from the date of receipt on the return receipt of the notice, demand or request by the addressee thereof. Rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given shall be deemed to be receipt of the notice, demand or request. Notice to the Company shall be addressed to Joan H. Fallon, Director, Teachers Insurance and Annuity Association of America, 730 Third Avenue, New York, New York, 10017-3206, with a copy to Institutional Property Consultants, Inc. Page 10 June 9, 1995 Jeanne Cullinan Ray, Vice President and Chief Counsel, Teachers Insurance and Annuity Association of America, 730 Third Avenue, New York, New York, 10017-3206, (or such other person or persons as the Company may designate). Notice to IPC shall be addressed to Barbara R. Cambon, Institutional Property Consultants, Inc., 4330 La Jolla Village Drive, Suite 310, San Diego, California 92122. 10. Indemnification and Insurance ----------------------------- A. Subject to the limitations in clause C of this paragraph 10, IPC shall be indemnified and saved harmless by the Account from and against any and all claims of liability arising in connection with the exercise of its duties and responsibilities to the Account by reason of any act or omission, including all expenses reasonably incurred in the defense of such act or omission, unless (1) it shall be established by final judgement of a court of competent jurisdiction that such act or omission involved a violation of the duties imposed by Part 4 of Title I of ERISA on the part of IPC or (2) in the event of a settlement or other disposition of such claim involving the Account, it is determined by written opinion of independent counsel acceptable to both parties that such act or omission involved a violation of the duties imposed by Part 4 of Title I of ERISA on the part of IPC. B. Subject to the limitation in clause C of this paragraph 10, the Account shall pay expenses (including reasonable attorneys' fees and disbursements), judgments, fines and amounts paid in settlement incurred by IPC in connection with any of the proceedings described above, in advance of the final disposition of such proceedings, provided that (1) IPC shall repay such advances to the Account, plus reasonable interest, if it is established by a final judgment of a court of competent jurisdiction, or by written opinion of independent counsel under the circumstances described in section A above, that IPC violated its duties under Part 4 of Title I of ERISA, and (2) IPC shall, in the discretion and upon the request of the Company, provide a bond or make other appropriate arrangements for repayment of advances. Notwithstanding the foregoing, no such advances shall be made in connection with any claim against IPC that Institutional Property Consultants, Inc. Page 11 June 9, 1995 is made by the Account or the Company, provided that upon the final disposition of such claim, the expenses (including reasonable attorneys' fees and disbursements), judgments, fines and amounts paid in settlement incurred by IPC shall be reimbursed by the Account to the extent provided above. C. The indemnification provided under clauses A and B of this paragraph 10 shall apply only to claims and expenses not actually covered by insurance. IPC agrees to maintain professional liability coverage that includes coverage for its responsibilities under this Agreement, with limits of at least $1 million, throughout the term of this Agreement. 11. Entire Agreement ---------------- This letter contains the entire agreement between the parties. However, where the text of this Agreement contains express reference to the Application, or specific paragraphs of the Application, it is the intention of the parties that the Application be incorporated in this Agreement for the purpose of construing the meaning of such express references. This Agreement may not be changed orally or by conduct but only by agreement in writing signed by both parties. 12. No Waiver --------- Failure to insist upon strict compliance with any of the terms, covenants, or conditions of this Agreement shall not be deemed a waiver of such term, covenant, or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. 13. Severability ------------ The invalidity or unenforceability of any provision of this Agreement shall in no way affect the validity or enforceability of any other provision. Institutional Property Consultants, Inc. Page 12 June 9, 1995 14. Choice of Law ------------- This Agreement and performance hereunder is subject to ERISA. However, to the extent that this Agreement and performance hereunder is not governed by ERISA or other applicable federal law, the laws of the State of New York shall apply. The choice of law embodied in this paragraph 15 shall be effective irrespective of the jurisdiction in which any suit, action or proceeding may be instituted. Please signify your acceptance by signing below and returning a copy of this letter to the Company. Sincerely, TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA By /s/ Joan H. Fallon ------------------ Joan H. Fallon Accepted: Institutional Property Consultants, Inc. By: /s/ Barbara R. Cambon Date: June 9, 1995 ---------------------- ------------ Barbara R. Cambon SCHEDULE 1 TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA FIDUCIARY COMPENSATION SCHEDULE FOR REAL ESTATE SEPARATE ACCOUNT -------------------------------- The annual fee payable to IPC shall be $100,000 per year plus its reasonable direct out-of-pocket expenses. The annual fee shall be paid quarterly, on first business day of each quarter, in advance, with the first quarterly payment due on July 3, 1995. Direct out-of-pocket expenses shall be reimbursed as incurred and shall be limited to reasonable travel-related expenses, including transportation, hotels, and meals incurred in the performance of IPC's duties. IPC shall, however, bear the cost of all operating and administrative expenses relating to the performance of its obligations and duties under this Agreement. EXHIBIT A TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA VALUATION PROCEDURES AND RULES FOR REAL ESTATE ACCOUNT ----------------------- This outline summarizes the basic elements of the valuation procedures and rules for the Account. Basic Principles - ---------------- 1. The valuation of equity real estate holdings is not an exact science; it requires appraisals which are independent estimates of market value. A. Sales are the best measure of the value of equity real estate holdings, but since they don't occur frequently, appraisals are generally believed to be the best estimate of value at a given point in time. B. Independent appraisals are expensive, and a balance is required between the accuracy of the estimate of value and the cost to the Account of additional appraisals. 2. The Account's valuation procedures and rules are under the direct supervision of an Independent Fiduciary and operate within guidelines and limits established by the Independent Fiduciary. Valuation Procedures for the Account - ------------------------------------ 1. Independent Fiduciary. The valuation of Account properties is conducted under the supervision of the Independent Fiduciary. A. The valuation procedures and rules will be approved by the Independent Fiduciary. They cannot be changed without the consent of the Independent Fiduciary. B. The rules will limit the extent to which a property's value can change without the prior approval of the Independent Fiduciary. C. The Independent Fiduciary may require a new independent appraisal of any property at any time. 2. Initial Valuation. The initial value of each property will be the price at which it is acquired (including all expenses relating to purchase, such as acquisition fees, legal fees and expenses, and other closing costs). 3. Scheduled Valuations. --------------------- A. Independent Appraisals. Each property will be valued by an independent appraiser at least once per year. (i) The appraisal cycle will be set up so that properties will be independently appraised in as even a pattern as practical over the course of a calendar year. This will be done by assigning to each property, at the time it is purchased, the month in which its independent appraisal will occur each year. (ii) The independent appraisers selected by TIAA must be approved by the Independent Fiduciary. (iii) The following would be among the factors generally considered in the annual appraisal: - description and condition of the property - regional and local market conditions - current and projected occupancy levels - highest and best use of the property - cost approach - sales comparison approach - income approach including discounted cash flow analysis B. Quarterly Updates. TIAA's staff will update the independent appraisals on a quarterly basis. (i) Appraisal assumption (e.g. discount rates and rates of inflation) will be reviewed and revised as necessary. (ii) Occupancy levels, cash flow, etc. will be reviewed as well as regional and local market conditions. C. Accruals. The Accumulation, Seed and Liquidity Unit Values of the Account may change by a daily accrual of projected income and expenses during a given month. The Annuity Unit values of the Account may change on the last calendar day of each month by the accrual of projected income and expenses for that month. 4. Special Adjustments. The value of a given property could be adjusted at any time to reflect any immediate or significant changes in value. 5. Limits and Supervision A. The Independent Fiduciary receives quarterly valuation reports from TIAA which, in addition to their involvement, detail Account activity. The format of these reports will be developed with the Independent Fiduciary. The Fiduciary will, therefore, be familiar with Account properties. B. Daily accruals of income and expenses, as well as incremental adjustments in property value (from quarterly updates), will be reported to the Independent Fiduciary as they are included in the Unit value calculation. C. Material changes in value (as described in D. below) and all independent appraisals will be approved by the Fiduciary prior to inclusion in a Unit Value calculation. D. TIAA cannot, without the prior approval of the Independent Fiduciary, change the values of one or more properties if such changes would exceed the following limits: (i) The adjustment would result in a 6 percent increase or decrease in the value of a given property since the last independent appraisal of that property; (ii) The adjustments would result in a greater than 2 percent change in the value of the Account since the prior monthly valuation date; or (iii) The adjustments would result in a greater than 4 percent change in the value of the Account within any quarter. In addition, the Independent Fiduciary will approve any adjustments made within the first three months after the receipt of the annual appraisal performed by an independent qualified appraiser. TEACHER INSURANCE AND ANNUITY ASSOCIATION 730 Third Avenue New York, New York 10017-3206 (212) 490-9000 October 5, 1995 Institutional Property Consultants, Inc. 4330 La Jolla Village Drive San Diego, California 92122 Re: Teachers Insurance and Annuity Association of America Real Estate Separate Account; ERISA Independent Fiduciary ------------------------------------------ Dear Sirs: This letter supplements the June 9, 1995 letter setting forth the terms and conditions under which Teachers Insurance and Annuity Association of America (the "Company") appointed Institutional Property Consultants, Inc. ("IPC") to serve as an Independent Fiduciary under the Employee Retirement Income Security Act of 1974 ("ERISA") for its Real Estate Account ("Account"). Section 4A. of the June 9, 1995 letter setting forth the duties and responsibilities of IPC is amended by the addition of new subparagraph (9) to read as follows: (9) IPC will review and approve in advance any exercise of discretion by the Company to accelerate the fixed repayment schedule applicable to the redemption of Seed Money Units and will only give its approval upon determining that it would be to the benefit of the Account's participants to do so. Sincerely, TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA By: /s/ Joan H. Fallon ------------------ Joan H. Fallon Accepted: INSTITUTIONAL PROPERTY CONSULTANTS, INC. By: /s/ Barbara R. Cambon Date: October 5, 1995 --------------------- --------------- Barbara R. Cambon TEACHER INSURANCE AND ANNUITY ASSOCIATION 730 Third Avenue New York, New York 10017-3206 (212) 490-9000 June 24, 1996 Institutional Property Consultants, Inc. 4330 La Jolla Village Drive San Diego, California 92122 Re: Teachers Insurance and Annuity Association of America Real Estate Separate Account; ERISA Independent Fiduciary ------------------------------------------ Dear Sir or Madam: This letter supplements the June 5, 1995 and the October 5, 1995 letters setting forth the terms and conditions under which Teachers Insurance and Annuity Association of America (the "Company") appointed Institutional Property Consultants, Inc. ("IPC") to serve as an Independent Fiduciary under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") for its Real Estate Account ("Account"). Section 9B. of the June 9, 1995 letter setting forth the termination provisions is deleted and replaced by a new Section 9B. to read as follows: IPC's appointment shall commence on the date this Agreement becomes effective for a five year term, and shall be renewable by the Company, from time to time, and without limitation on the number of renewals, for additional three (3) year terms. The Company shall delegate to a special subcommittee of the Company's Mortgage Committee (the "Subcommittee") the sole power to renew any such appointment and the Subcommittee shall not renew the appointment if forty percent (40%) of the Subcommittee members disapprove Institutional Property Consultants, Inc. Page 2 June 24, 1996 of such renewal. Upon expiration of IPC's appointment without renewal this Agreement shall terminate. IPC may terminate this Agreement at any time but must give at least 180 days prior written notice to the Company. The Company must terminate this Agreement and IPC's appointment prior to the expiration of the term of its appointment if a majority of the Special Subcommittee members determines that: (1) IPC has breached any representation set forth in paragraph 5; (2) that IPC has failed to carry out its responsibilities under this Agreement in an effective manner, or is unable to do so; or (3) that a merger or restructuring of IPC with or into another entity may cause a conflict of interest that shall impair IPC's ability to carry out its responsibilities under this Agreement in an effective manner. In the event that IPC's term shall terminate as described in this paragraph 9B., IPC shall be compensated only for services performed by it prior to the date of such termination. Sincerely, TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA By: /s/ Joan H. Fallon ------------------ Joan H. Fallon Accepted: INSTITUTIONAL PROPERTY CONSULTANTS, INC. By: /s/ Barbara R. Cambon Date: June 27, 1996 --------------------- ------------- Barbara R. Cambon TEACHERS INSURANCE AND ANNUITY ASSOCIATION 730 Third Avenue New York, New York 10017-3206 (212) 490-9000 February 11, 1997 Institutional Property Consultants, Inc. 4330 La Jolla Village Drive San Diego, California 92122 Re: Teachers Insurance and Annuity Association of America Real Estate Separate Account; ERISA Independent Fiduciary ------------------------------------------ Dear Sir or Madam: This letter supplements the June 5, 1995, the October 5, 1995, and the June 24, 1996 letters setting forth the terms and conditions under which Teachers Insurance and Annuity Association of America (the "Company") appointed Institutional Property Consultants, Inc. ("IPC") to serve as an Independent Fiduciary under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") for its Real Estate Account ("Account"). Section 9B. of the June 9, 1995 letter, as amended by the June 24, 1996 letter, setting forth the termination provisions is deleted and replaced by a new Section 9B. to read as follows: IPC's appointment shall commence on the date this Agreement becomes effective for a five year term, and shall be renewable by the Company, from time to time, and without limitation on the number of renewals, for additional three (3) year terms. The Company shall delegate to a special subcommittee of the Company's Investment Committee (the "Subcommittee") the sole power to renew any such appointment and the Subcommittee shall not renew the appointment if forty percent (40%) of the Subcommittee members disapprove of such renewal. Upon expiration of IPC's appointment without renewal this Agreement shall terminate. IPC may terminate this Agreement at any time but must give at least 180 days prior written notice to the Company. The Company must terminate this Agreement and IPC's appointment prior to the expiration of the term of its appointment if a majority of the Special Subcommittee members determines that: (1) IPC has breached any representation set forth in paragraph 5; (2) Institutional Property Consultants, Inc. Page 2 February 11, 1997 that IPC has failed to carry out its responsibilities under this Agreement in an effective manner, or is unable to do so; or (3) that a merger or restructuring of IPC with or into another entity may cause a conflict of interest that shall impair IPC's ability to carry out its responsibilities under this Agreement in an effective manner. In the event that IPC's term shall terminate as described in this paragraph 9B., IPC shall be compensated only for services performed by it prior to the date of such termination. Sincerely, TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA By: /s/ Joan H. Fallon ------------------------- Joan H. Fallon Accepted: INSTITUTIONAL PROPERTY CONSULTANTS, INC. By: /s/ Barbara R. Cambon Date: 3/1/97 --------------------- Barbara R. Cambon EX-23.(B) 4 CONSENT Sutherland, Asbill & Brennan, L.L.P. 1275 Pennsylvania Avenue, N.W. Washington, D.C. 20004-2404 STEVEN B. BOEHM DIRECT LINE: (202) 383-0176 TEL: (202) 383-0100 Internet: sboehm@sablaw.com FAX: (202) 637-3593 April 29, 1997 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, L.L.P. By: /s/ Steven B. Boehm -------------------------- Steven B. Boehm EX-23.(C) 5 CONSENT INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement on Form S-1 of our report dated February 6, 1997 relating to the TIAA Real Estate Account, our report dated April 12, 1996 relating to The Millbrook Collection and The Lynnwood Collection Retail Centers, and our report dated April 29, 1997, relating to Arapahoe Park East, Westcreek Apartments, Parkview Plaza, Fairgate at Ballston, Two Newton Place, and Longview Executive Park, appearing in the Prospectus, which is a part of this Registration Statement and of our report dated February 6, 1997 relating to the financial statement schedule, Schedule III--Real Estate Owned, appearing elsewhere in this Registration Statement. We also consent to the incorporation by reference into this Registration Statement of our report dated March 11, 1997 relating to Teachers Insurance and Annuity Association of America ("TIAA"). Such report expresses our opinion that the financial statements present fairly the financial position, results of operations, changes in contingency reserves and cash flows of TIAA in conformity with statutory accounting practices, a comprehensive basis of accounting described in Note 2 of those financial statements, and not in conformity with generally accepted accounting principles. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP New York, New York April 29, 1997 -----END PRIVACY-ENHANCED MESSAGE-----