As filed with the Securities and Exchange Commission on April 30, 2002
Registration No. 333-83964
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)
COPY TO:
Lisa Snow, Esquire Steven B. Boehm, Esquire
Teachers Insurance and Annuity Sutherland Asbill & Brennan LLP
Association of America 1275 Pennsylvania Avenue, N.W.
730 Third Avenue Washington, D.C. 20004-2415
New York, New York 10017-3206
(212) 490-9000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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, 333-13477, 333-22809 and 333-59778.
MAY 1, 2002
TIAA REAL ESTATE ACCOUNT
PROSPECTUS
A TAX-DEFERRED VARIABLE ANNUITY OPTION OFFERED BY
TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
THIS PROSPECTUS TELLS YOU ABOUT THE TIAA REAL ESTATE ACCOUNT, AN INVESTMENT
OPTION OFFERED THROUGH INDIVIDUAL AND GROUP VARIABLE ANNUITY CONTRACTS ISSUED BY
TIAA. PLEASE READ IT CAREFULLY BEFORE INVESTING AND KEEP IT FOR FUTURE
REFERENCE.
The Real Estate Account invests primarily in real estate and real
estate-related investments. TIAA, one of the largest and most experienced
mortgage and real estate investors in the nation, manages the Account's assets.
The value of your investment in the Real Estate Account will go up or down
depending on how the Account performs and you could lose money. The Account's
performance depends mainly on the value of the Account's real estate and other
real estate-related investments, and the income generated by those investments.
The Account's returns could go down if, for example, real estate values or
rental and occupancy rates decrease due to general economic conditions or a weak
market for real estate generally. Property operating costs and government
regulations, such as zoning or environmental laws, could also affect a
property's profitability. TIAA does not guarantee the investment performance of
the Account, and you bear the entire investment risk. For a detailed discussion
of the specific risks of investing in the Account, see "Risks," page 4.
We take deductions daily from the Account's net assets for the Account's
operating and investment management expenses. The Account also pays TIAA for
bearing mortality and expense risks and for providing a liquidity guarantee. The
current estimated annual expense deductions from Account's net assets total
0.630%.
The Real Estate Account is designed as an option for retirement and
tax-deferred savings plans for employees of nonprofit institutions. TIAA offers
the Real Estate Account under the following annuity contracts:
o RA and GRAs (Retirement and Group Retirement Annuities)
o SRAs (Supplemental Retirement Annuities)
o GSRAs (Group Supplemental Retirement Annuities)
o Classic and Roth IRAs (Individual Retirement Annuities)
o GAs (Group Annuities) and institutionally-owned GSRAs
o Keoghs
THE SECURITIES AND EXCHANGE COMMISSION (SEC) HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THE INFORMATION IN THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE REAL ESTATE ACCOUNT IS NOT A BANK DEPOSIT AND IS NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
TIAA Real Estate Account PROSPECTUS | 1 |
TABLE OF CONTENTS
2 About the Real Estate Account and TIAA
2 The Account's Investment Objective and Strategy
2 About the Account's Investments -- In General
3 General Investment and Operating Policies
4 Risks
6 Establishing and Managing the Account -- the Role of TIAA
8 Description of Properties
12 Selected Financial Data
13 Management's Discussion and Analysis of Account's Financial Condition and
Operating Results
14 Valuing the Account's Assets
15 Expense Deductions
16 The Contracts
17 How to Transfer and Withdraw Your Money
18 Receiving Annuity Income
20 Death Benefits
21 Taxes
21 General Matters
22 Distributor
22 State Regulation
22 Legal Matters
22 Experts
23 Additional Information
23 Financial Statements
23 Index to Financial Statements
40 Appendix A-- Management of TIAA
40 Appendix B-- Special Terms
ABOUT THE REAL ESTATE ACCOUNT
AND TIAA
The TIAA Real Estate Account was established in February 1995 as a separate
account of Teachers Insurance and Annuity Association of America (TIAA). TIAA is
a life insurance company founded in 1918 by the Carnegie Foundation for the
Advancement of Teaching. Its home office is at 730 Third Avenue, New York, NY
10017-3206 and its telephone number is (212) 490-9000. In addition to issuing
variable annuities, whose returns depend upon the performance of certain
specified investments, TIAA also offers traditional fixed annuities.
With its 50 years in the real estate business and interests in properties
located across the U.S., TIAA is one of the nation's largest and most
experienced investors in mortgages and real estate equity interests. As of
December 31, 2001, TIAA's general account had a mortgage and real property
portfolio of approximately $27 billion.
TIAA is the companion organization of the College Retirement Equities Fund
(CREF), the first company in the United States to issue a variable annuity.
Together, TIAA and CREF form the principal retirement system for the nation's
education and research communities and one of the largest pension systems in the
U.S., based on assets under management. TIAA-CREF serves approximately 2.4
million people at over 12,000 institutions. As of December 31, 2001, TIAA's
assets were approximately $129.7 billion; the combined assets for TIAA and CREF
totaled approximately $269.4 billion.
THE REAL ESTATE ACCOUNT OFFERED BY THIS PROSPECTUS IS ONLY BEING OFFERED IN
THOSE JURISDICTIONS WHERE IT IS LEGAL TO DO SO. NO PERSON MAY MAKE ANY
REPRESENTATION TO YOU OR GIVE YOU ANY INFORMATION ABOUT THE OFFERING THAT IS NOT
IN THE PROSPECTUS. IF ANYONE PROVIDES YOU WITH INFORMATION ABOUT THE OFFERING
THAT IS NOT IN THE PROSPECTUS, YOU SHOULDN'T RELY ON IT.
THE ACCOUNT'S INVESTMENT OBJECTIVE AND STRATEGY
INVESTMENT OBJECTIVE: The Real Estate Account seeks favorable long term returns
primarily through rental income and appreciation of real estate investments
owned by the Account. The Account also will invest in publicly-traded securities
and other investments that are easily converted to cash to make redemptions,
purchase or improve properties or cover other expenses.
INVESTMENT STRATEGY: The Account seeks to invest between 70 percent to 95
percent of its assets directly in real estate or real estate-related
investments. The Account's principal strategy is to purchase direct ownership
interests in income-producing real estate, such as office, industrial, retail,
and multi-family residential properties. The Account can also invest in other
real estate or real estate-related investments, through joint ventures, real
estate partnerships or real estate investment trusts (REITs). To a limited
extent, the Account can also invest in conventional mortgage loans,
participating mortgage loans, common or preferred stock of companies whose
operations involve real estate (i.e., that primarily own or manage real estate),
and collateralized mortgage obligations (CMOs).
The Account will invest the remaining portion of its assets in government and
corporate debt securities, money market instruments and other cash equivalents,
and, at times, stock of companies that don't primarily own or manage real
estate. In some circumstances, the Account can increase the portion of its
assets invested in debt securities or money market instruments. This could
happen if the Account receives a large inflow of money in a short period of
time, there is a lack of attractive real estate investments available on the
market, or the Account anticipates a need to have more cash available.
The amount the Account invests in real estate and real estate-related
investments at a given time will vary depending on market conditions and real
estate prospects, among other factors. On December 31, 2001, the Account had
approximately 83 percent of its portfolio invested in real estate and real
estate-related investments (including REITs).
ABOUT THE ACCOUNT'S INVESTMENTS--
IN GENERAL
DIRECT INVESTMENTS IN REAL ESTATE
DIRECT PURCHASE: The Account will generally buy direct ownership interests in
existing or newly constructed income-producing properties, including office,
industrial, retail, and multi-family residential properties. The Account will
invest mainly in established properties with existing rent and expense schedules
or in newly-constructed properties with predictable cash flows or in which a
seller agrees to provide certain minimum income levels. On occasion the Account
might invest in real estate development projects.
PURCHASE-LEASEBACK TRANSACTIONS: The Account can enter into
purchase-leaseback transactions (leasebacks) in which it typically will buy land
and income-producing improvements on the land (such as buildings), and
simultaneously lease the land and improvements to a third party (the lessee).
Leasebacks are generally for very long terms. Usually, the lessee is responsible
for operating the property and paying all operating costs, including taxes and
mortgage debt. The Account can also give the lessee an option to buy the land
and improvements.
In some leasebacks, the Account may purchase only the land under an
income-producing building and lease the land to the
building owner. In
| 2 | TIAA Real Estate Account PROSPECTUS
those cases, the Account will often seek to share (or "participate") in any
increase in property value from building improvements or in the lessee's
revenues from the building above a base amount. The Account can invest in
leasebacks that are subordinated to other interests in the land, buildings, and
improvements (e.g., first mortgages); in that case, the leaseback interest will
be subject to greater risks.
INVESTMENTS IN MORTGAGES
GENERAL: The Account can originate or acquire interests in mortgage loans,
generally on the same types of properties it might otherwise buy. These mortgage
loans may pay fixed or variable interest rates or have "participating" features
(as described below). Normally the Account's mortgage loans will be secured by
properties that have income-producing potential. They usually will not be
insured or guaranteed by the U.S. government, its agencies or anyone else. They
usually will be non-recourse, which means they won't be the borrower's personal
obligations. Most will be first mortgage loans on existing income-producing
property, with first-priority liens on the property. These loans may be
amortized, or may provide for interest-only payments, with a balloon payment at
maturity.
PARTICIPATING MORTGAGE LOANS: The Account may make mortgage loans which
permit the Account to share (have a "participation") in the income from or
appreciation of the underlying property. These participations let the Account
receive additional interest, usually calculated as a percentage of the revenues
the borrower receives from operating, selling or refinancing the property. The
Account may also have an option to buy an interest in the property securing the
participating loan.
MANAGING MORTGAGE LOAN INVESTMENTS: TIAA can manage the Account's mortgage
loans in a variety of ways, including:
o renegotiating and restructuring the terms of a mortgage loan
o extending the maturity of any mortgage loan made by the Account
o consenting to a sale of the property subject to a mortgage loan
o financing the purchase of a property by making a new mortgage loan in
connection with the sale
o selling them, or portions of them, before maturity
OTHER REAL ESTATE-RELATED INVESTMENTS
REAL ESTATE INVESTMENT TRUSTS: The Account may invest in real estate investment
trusts (REITs), publicly-owned entities that lease, manage, acquire, hold
mortgages on, and develop real estate. Normally the Account will buy the common
or preferred stock of a REIT, although at times it may purchase REIT debt
securities. REITs seek to optimize share value and increase cash flows by
acquiring and developing new projects, upgrading existing properties or
renegotiating existing arrangements to increase rental rates and occupancy
levels. REITs must distribute 90% of their net earnings to shareholders in order
to benefit from a special tax structure, which means they may pay high
dividends. The value of a particular REIT can be affected by such factors as its
need for cash flow, the skill of its management team, and defaults by its
lessees or borrowers.
STOCK OF COMPANIES INVOLVED IN REAL ESTATE ACTIVITIES: The Account can invest
in common or preferred stock of companies whose business involves real estate.
These stocks may be listed on U.S. or foreign stock exchanges or traded
over-the-counter in the U.S. or abroad.
COLLATERALIZED MORTGAGE OBLIGATIONS: The Account can invest in collateralized
mortgage obligations (CMOs) that are fully collateralized by a portfolio of
mortgages or mortgage-related securities. CMO issuers distribute principal and
interest payments on the mortgages to CMO holders according to the distribution
schedules of each CMO. CMO interest rates can be fixed or variable. Some classes
of CMOs may be entitled to receive mortgage prepay ments before other classes
do. Therefore, the prepayment risk for a particular CMO may be different than
for other mortgage-related securities. CMOs may also be harder to sell than
other securities.
INVESTMENT VEHICLES INVOLVED IN REAL ESTATE ACTIVITIES: The Account can hold
interests in limited partnerships, funds, and other commingled investment
vehicles involved in owning, financing, managing or developing real estate.
NON-REAL ESTATE-RELATED INVESTMENTS
The Account can also invest in:
o U.S. government or government agency securities
o Money market instruments and other cash equivalents. These will usually be
high-quality short-term debt instruments, including U.S. government or
government agency securities, commercial paper, certificates of deposit,
bankers' acceptances, repurchase agreements, interest-bearing time deposits,
and corporate debt securities.
o Corporate debt or asset-backed securities of U.S. or foreign entities, or
debt securities of foreign governments or multi-national organizations, but
only if they're investment-grade and rated in the top four categories by a
nationally recognized rating organization (or, if not rated, deemed by TIAA
to be of equal quality)
o Common or preferred stock, or other ownership interests, of U.S. or foreign
companies that aren't involved in real estate, to a limited extent
FOREIGN REAL ESTATE AND OTHER FOREIGN INVESTMENTS
The Account may invest in foreign real estate or real estate-related
investments. It might also invest in securities or other instruments of foreign
government or private issuers. While the percentage will vary, we expect that
foreign investments will be no more than 25 percent of the Account's portfolio.
Depending on investment opportunities, the Account's foreign investments could
at times be concentrated in one or two foreign countries. We will consider the
special risks involved in foreign investing before investing in foreign real
estate and won't invest unless our standards are met.
GENERAL INVESTMENT AND OPERATING POLICIES
STANDARDS FOR REAL ESTATE INVESTMENTS
GENERAL CRITERIA FOR BUYING REAL ESTATE OR MAKING MORTGAGE LOANS: Before the
Account purchases real estate or makes a mortgage loan, TIAA will consider such
factors as:
o the location, condition, and use of the underlying property
o its operating history, and its future income-producing capacity
o the quality, operating experience, and creditworthiness of the borrower
TIAA will analyze the fair market value of the underlying real estate, taking
into account the property's operating cash flow (based on the historical and
projected levels of rental and occupancy rates, and expenses), as well as the
general economic conditions in the area where the property is located.
DIVERSIFICATION: We haven't placed percentage limitations on the type and
location of properties that the Account can buy. However, the Account seeks to
diversify its investments by type of property and geographic location. How much
the Account diversifies will depend upon whether suitable investments are
available and how much the Account has available to invest.
SPECIAL CRITERIA FOR MAKING MORTGAGE LOANS: Ordinarily, the Account will only
make a mortgage loan if the loan, when added to any existing debt, will not
exceed 85 percent of the appraised value of the mortgaged property when the loan
is made, unless the Account is compensated for taking additional risk.
TIAA Real Estate Account PROSPECTUS | 3 |
SELLING REAL ESTATE INVESTMENTS: The Account doesn't intend to buy and sell
its real estate investments simply to make short-term profits. But the Account
may sell investments if market conditions are favorable or to raise cash. The
Account will reinvest any sale proceeds that it doesn't need to pay operating
expenses or to meet redemption requests (e.g., cash withdrawals or transfers).
OTHER REAL ESTATE-RELATED POLICIES
APPRAISALS: The Account will rely on TIAA's own analysis to appraise a property
when it first buys it. After that, normally the Account's properties and
participating mortgage loans will be appraised or valued once a year by an
independent state-certified appraiser who is a member of a professional
appraisal organization. While the Account usually won't receive an independent
appraisal before it buys real estate, it will get an independent appraisal when
it makes mortgage loans.
BORROWING: The Account may borrow money and assume or obtain a mortgage on a
property -- i.e., make leveraged real estate investments -- under the following
limited circumstances:
o The Account may borrow money when it buys a property that is already subject
to existing mortgage loans
o The Account may take out a mortgage on a property with a joint venture
partner
o The Account may take out a construction loan on a property with a joint
venture partner, provided that if there is a default under the loan, the
lender's recourse is limited to the assets of that joint venture
o To meet short-term cash needs, the Account may obtain a line of credit whose
terms require that the Account secure a loan with one or more of its
properties
The Account's total borrowings may not exceed 20% of the Account's total net
asset value. (In calculating the 20% limit, we will include only the Account's
actual percentage interest in any borrowings and not that of any joint venture
partner.) The Account may only borrow up to 70% of the then current value of a
property, although construction loans may be for 100% of costs incurred in
developing the property. Except for construction loans, any mortgage loans on a
property will be non-recourse, meaning that if the Account defaults on its loan,
the lender will have recourse only to the property encumbered or the joint
venture owning the property, and not to any other assets of the Account. When
possible, the Account will seek to have loans mature at different times to limit
the risks of borrowing.
The Account will not obtain mortgage financing from TIAA or any of its
affiliates. However, on a limited basis, the Account may place a mortgage on an
Account property held by a subsidiary for tax planning or other purposes. This
type of mortgage will not be subject to the general limitations on borrowing
described above.
When the Account assumes or obtains a mortgage on a property, it will bear
the expense of mortgage payments. It will also be exposed to certain additional
risks, which are described under "Risks of Borrowing" on page 5.
JOINT INVESTMENTS: The Account can hold property jointly through general or
limited partnerships, joint ventures, leaseholds, tenancies-in-common, or other
legal arrangements. However, the Account will not hold real property jointly
with TIAA or its affiliates.
DISCRETION TO EVICT OR FORECLOSE: TIAA may, in its discretion, evict
defaulting tenants or foreclose on defaulting borrowers to maintain the value of
an investment, when it decides that it's in the Account's best interests.
PROPERTY MANAGEMENT AND LEASING SERVICES: The Account usually will hire a
local management company to perform the day-to-day management services for the
Account's properties, including supervising any on-site personnel, negotiating
maintenance and service contracts, and providing advice on major repairs and
capital improvements. The local manager will also recommend changes in rent
schedules and create marketing and advertising programs to attain and maintain
good occupancy rates by responsible tenants. The Account may also hire leasing
companies to perform or coordinate leasing and marketing services to fill any
vacancies. The fees paid to the local management company, along with any leasing
commissions and expenses, will reduce the Account's cash flow from a property.
INSURANCE: We will try to arrange for, or require proof of, comprehensive
insurance, including liability, fire, and extended coverage, for the Account's
real property and properties securing mortgage loans or subject to
purchase-leaseback transactions. The Account's insurance currently includes some
coverage for terrorist acts, but we can't assure you that it will be adequate to
cover all losses. We also can't assure you that we will be able to obtain
coverage for terrorist acts at an acceptable cost, if at all, when the current
policy expires this year.
OTHER POLICIES
LIQUID ASSETS: At times, a significant percentage of the Account may be invested
in liquid assets (which may or may not be real estate-related) while we look for
suitable real property investments. The Account can temporarily increase the
percentage of its liquid assets under some circumstances, including the rapid
inflow of participants' funds, lack of suitable real estate investments, or a
need for greater liquidity.
INVESTMENT COMPANY ACT OF 1940: We intend to operate the Account so that it
will not have to register as an "investment company" under the Investment
Company Act of 1940 (the 1940 Act). This will require monitoring the Account's
portfolio so that it won't have more than 40 percent of total assets, other than
U.S. government securities and cash items, in investment securities. As a
result, the Account may be unable to make some potentially profitable
investments.
CHANGING OPERATING POLICIES OR WINDING DOWN: TIAA can decide to change the
operating policies of the Account or wind it down. If the Account is wound down,
you may need to transfer your accumulations or annuity income to TIAA's
traditional annuity or any CREF account available under your employer's plan. If
you don't tell us where to transfer your accumulations or annuity income, we'll
automatically transfer them to the CREF Money Market Account. You will be
notified in advance if we decide to change a significant policy or wind down the
Account.
RISKS
THE VALUE OF YOUR INVESTMENT IN THE ACCOUNT WILL GO UP AND DOWN BASED ON THE
VALUE OF THE ACCOUNT'S ASSETS AND THE INCOME THE ASSETS GENERATE. The potential
risk of investing in the Account is moderate. You can lose money by investing in
the Account. The Account's assets and income (particularly its real estate
assets and rental income) can be affected by many factors, and you should
consider the specific risks presented below before investing in the Account.
RISKS OF REAL ESTATE INVESTING
GENERAL RISKS OF OWNING REAL PROPERTY: The Account will be subject to the risks
inherent in owning real property, including:
o The Account's property values or rental and occupancy rates could go down due
to general economic conditions, a weak market for real estate generally,
changing supply and demand for certain types of properties, and natural
disasters or man-made events.
o A property may be unable to attract and retain tenants, which means that
rental income would decline.
| 4 | TIAA Real Estate Account PROSPECTUS
o The Account could lose revenue if tenants don't pay rent, or if the Account
is forced to terminate a lease for nonpayment. Any disputes with tenants
could also involve costly litigation.
o A property's profitability could go down if operating costs, such as property
taxes, utilities, maintenance and insurance costs, go up in relation to gross
rental income, or the property needs unanticipated repairs and renovations.
GENERAL RISKS OF SELLING REAL ESTATE INVESTMENTS: Among the risks of selling
real estate investments are:
o The sale price of an Account property might differ from its estimated or
appraised value, leading to losses or reduced profits to the Account.
o Because of the nature of real estate, the Account might not be able to sell a
property at a particular time for its full value, particularly in a poor
market. This might make it difficult to raise cash quickly and also could
lead to Account losses.
o The Account may need to provide financing if no cash buyers are available.
RISKS OF BORROWING: Among the risks of borrowing money and investing in a
property subject to a mortgage are:
o The Account may not be able to make its loan payments, which could result in
a default on its loan. The lender then could foreclose on the underlying
property and the Account would lose the value of its investment in the
foreclosed property.
o If the Account obtains a mortgage loan that involves a balloon payment, there
is a risk that the Account may not be able to make the lump sum principal
payment due under the loan at the end of the loan term, or otherwise obtain
adequate refinancing. The Account then may be forced to sell the property or
other properties under unfavorable market conditions or default on its
mortgage.
o If the Account takes out variable-rate loans, the Account's returns may be
volatile when interest rates are volatile.
REGULATORY RISKS: Government regulation, including zoning laws, property
taxes, fiscal, environmental or other government policies, could operate or
change in a way that hurts the Account and its properties. For example,
regulations could raise the cost of owning and maintaining properties or make it
harder to sell, rent, finance, or refinance properties due to the increased
costs associated with regulatory compliance.
ENVIRONMENTAL RISKS: The Account may be liable for damage to the environment
caused by hazardous substances used or found on its properties. Under various
environmental regulations, the Account may also be liable, as a current or
previous property owner or mortgagee, for the cost of removing or cleaning-up
hazardous substances found on a property, even if it didn't know of and wasn't
responsible for the hazardous substances. If any hazardous substances are
present or the Account doesn't properly clean up any hazardous substances, or if
the Account fails to comply with regulations requiring it to actively monitor
the business activities on its premises, the Account may have difficulty selling
or renting a property or be liable for monetary penalties. The cost of any
required clean-up and the Account's potential liability for environmental damage
to a single real estate investment could exceed the value of the Account's
investment in a property, the property's value, or in an extreme case, a
significant portion of the Account's assets.
UNINSURABLE LOSSES: Certain catastrophic losses (e.g., from earthquakes,
wars, terrorist acts, nuclear accidents, floods, or environmental or industrial
hazards or accidents) are uninsurable or so expensive to insure against that it
doesn't make sense to buy insurance for them. If a disaster that we haven't
insured against occurs, the Account could lose both its original investment and
any future profits from the property affected. In addition, some leases may
permit a tenant to terminate its obligations in certain situations, regardless
of whether those events are fully covered by insurance. In that case, the
Account would not receive rental income from the property while that tenant's
space is vacant.
RISKS OF DEVELOPING REAL ESTATE OR BUYING RECENTLY-CONSTRUCTED PROPERTIES: If
the Account chooses to develop a property or buys a recently-constructed
property, it may face the following risks:
o If developing real estate, there may be delays or unexpected increases in the
cost of property development and construction due to strikes, bad weather,
material shortages, increases in material and labor costs, or other events.
o Because external factors may have changed from when the project was
originally conceived (e.g., slower growth in local economy, higher interest
rates, or overbuilding in the area), the property, if purchased when
unleased, may not operate at the income and expense levels first projected or
may not be developed in the way originally planned.
o The seller or other party may not be able to carry out any agreement to
provide certain minimum levels of income, or that agreement could expire,
which could reduce operating income and lower returns.
RISKS OF JOINT OWNERSHIP: Investing in joint venture partnerships or other
forms of joint property ownership may involve special risks.
o The co-venturer may have interests or goals inconsistent with those of the
Account.
o If a co-venturer doesn't follow the Account's instructions or adhere to the
Account's policies, the jointly-owned properties, and consequently the
Account, might be exposed to greater liabilities than expected.
o A co-venturer can make it harder for the Account to transfer its property
interest, particularly if the co-venturer has the right to decide whether and
when to sell the property.
o The co-venturer may become insolvent or bankrupt.
RISKS WITH PURCHASE-LEASEBACK TRANSACTIONS: The major risk of purchase-
leaseback transactions is that the third party lessee will not be able to make
required payments to the Account. If the leaseback interest is subordinate to
other interests in the real property, such as a first mortgage or other lien,
the risk to the Account increases because the lessee may have to pay the senior
lienholder to prevent foreclosure before it pays the Account. If the lessee
defaults or the leaseback is terminated prematurely, the Account might not
recover its investment unless the property is sold or leased on favorable terms.
APPRAISAL RISKS
Real estate appraisals are only estimates of property values based on a
professional's opinion and may not be accurate predictors of the amount the
Account would actually receive if it sold a property. If an appraisal is too
high, the Account's value could go down upon reappraisal or if the property is
sold for a lower price than the appraisal. If appraisals are too low, those who
redeem prior to an adjustment to the valuation or a property sale will have
received less than the true value of the Account's assets.
RISKS OF MORTGAGE LOAN INVESTMENTS
GENERAL RISKS OF MORTGAGE LOANS. The Account will be subject to the risks
inherent in making mortgage loans, including:
o The borrower may default, requiring that the Account foreclose on the
underlying property to protect the value of its mortgage loan. Since its
mortgage loans are usually non-recourse, the Account must rely solely on the
value of a property for its security. The larger the mortgage loan compared
to the value of the property securing it, the greater the loan's risk. Upon
default, the Account may not be able to sell the property for its esti-
TIAA Real Estate Account PROSPECTUS | 5 |
mated or appraised value. Also, certain liens on the property, such as
mechanic's or tax liens, may have priority over the Account's security
interest.
o The borrower may not be able to make a lump sum principal payment due under a
mortgage loan at the end of the loan term, unless it can refinance the
mortgage loan with another lender.
o If interest rates are volatile during the loan period, the Account's
variable-rate mortgage loans could have lower yields.
PREPAYMENT RISKS. The Account's mortgage loan investments will usually be
subject to the risk that the borrower repays the loan early. Prepayments can
change the Account's return because we may be unable to reinvest the proceeds at
as high an interest rate as the original mortgage loan rate.
INTEREST LIMITATIONS. The interest rate we charge on mortgage loans may
inadvertently violate state usury laws that limit rates, if, for example, state
law changes during the loan term. If this happens, we could incur penalties or
may not be able to enforce payment of the loan.
RISKS OF PARTICIPATIONS. Participating mortgages are subject to the following
additional risks:
o The participation element might generate insufficient returns to make up for
the higher interest rate the loan would have obtained without the
participation feature.
o In very limited circumstances, a court could possibly characterize the
Account's participation interest as a partnership or joint venture with the
borrower and the Account could lose the priority of its security interest, or
be liable for the borrower's debts.
RISKS OF REIT INVESTMENTS
REITs are subject to many of the same general risks associated with direct real
property ownership. In particular, equity REITs may be affected by changes in
the value of the underlying property owned by the trust, while mortgage REITs
may be affected by the quality of any credit extended. In addition to these
risks, because REIT investments are securities, they may be exposed to market
risk-price volatility due to changing conditions in the financial markets and,
in particular, changes in overall interest rates.
RISKS OF LIQUID INVESTMENTS
The Account's investments in securities and other liquid investments may be
subject to:
o FINANCIAL RISK -- for debt securities, the possibility that the issuer won't
be able to pay principal and interest when due, and for common or preferred
stock, the possibility that the issuer's current earnings will fall or that
its overall financial soundness will decline, reducing the security's value.
o MARKET RISK -- price volatility due to changing conditions in the
financial markets and, particularly for debt securities, changes in overall
interest rates.
o INTEREST RATE VOLATILITY, which may affect current income from an
investment.
RISKS OF FOREIGN INVESTMENTS
Foreign investments present the following special risks:
o Foreign real estate markets may have different liquidity and volatility
attributes than U.S. markets.
o The value of foreign investments or rental income can go up or down from
changes in currency rates, currency exchange control regulations, possible
expropriation or confiscatory taxation, political, social, and economic
developments, and foreign regulations.
o The Account may (but is not required to) seek to hedge its exposure to
changes in currency rates, which could involve extra costs. Hedging might not
be successful.
o It may be more difficult to obtain and collect a judgment on foreign
investments than on domestic ones.
NO OPPORTUNITY FOR PRIOR REVIEW OF PURCHASE
You won't have the opportunity to evaluate the economic merit of a property
purchase before the Account completes the purchase, so you will need to rely
solely on TIAA's judgment and ability to select investments consistent with the
Account's investment objective and policies.
ESTABLISHING AND MANAGING THE ACCOUNT-- THE ROLE OF TIAA
ESTABLISHING THE ACCOUNT
TIAA's Board of Trustees established the Real Estate Account as a separate
account of TIAA under New York law on February 22, 1995. The Account is
regulated by the State of New York Insurance Department (NYID) and the insurance
departments of some other jurisdictions in which the annuity contracts are
offered. Although TIAA owns the assets of the Real Estate Account, and the
Account's obligations are obligations of TIAA, the Account's income, investment
gains, and investment losses are credited to or charged against the assets of
the Account without regard to TIAA's other income, gains, or losses. Under New
York insurance law, we can't charge the Account with liabilities incurred by any
other TIAA business activities or any other TIAA separate account.
MANAGING THE ACCOUNT
TIAA employees, under the direction and control of TIAA's Board of Trustees and
its Investment Committee, manage the investment of the Account's assets,
following investment management procedures TIAA adopted for the Account. TIAA's
investment management responsibilities include:
o identifying, recommending and purchasing appropriate real estate-related and
other investments
o providing all portfolio accounting, custodial, and related services for the
Account
o arranging for others to provide certain advisory or other management services
to the Account's joint ventures or other investments
TIAA provides all services to the Account at cost. For more about the charge
for investment management services, see "Expense Deductions" page 15.
You don't have the right to vote for TIAA Trustees directly. See "Voting
Rights" page 22. For information about the Trustees and principal executive
officers of TIAA, see Appendix A on page 40 of this prospectus.
TIAA'S ERISA FIDUCIARY STATUS. To the extent that assets of a plan subject to
ERISA are allocated to the Account, TIAA will be acting as an "investment
manager" and a fiduciary under ERISA with respect to those assets.
LIQUIDITY GUARANTEE
TIAA provides the Account with a liquidity guarantee -- TIAA ensures that the
Account has funds available to meet participant transfer or cash withdrawal
requests. If the Account can't fund participant requests from the Account,
TIAA's general account will fund them by purchasing Account accumulation units
(liquidity units). TIAA guarantees that you can redeem your accumulation units
at their then current daily net asset value. Of course, you can make a cash
withdrawal only if allowed by the terms of your
| 6 | TIAA Real Estate Account PROSPECTUS
plan. The Account pays TIAA for the liquidity guarantee through a daily
deduction from net assets. See "Expense Deductions," page 15.
An independent fiduciary (described below) monitors the Account to ensure
that TIAA does not own too much of the Account and may require TIAA to redeem
some of its liquidity units, particularly when the Account has uninvested cash
or liquid investments available. The independent fiduciary may also propose
properties for the Account to sell so that TIAA can redeem liquidity units. TIAA
does not currently own liquidity units.
CONFLICTS OF INTEREST
TIAA does not accept acquisition or placement fees for the services it provides
to the Account. However, TIAA employees who manage the Account's investments may
also manage TIAA's general account investments. It may therefore at times face
various conflicts of interest.
For example, TIAA's general account may sometimes compete with the Real
Estate Account in the purchase or sale of investments. A special TIAA Allocation
Committee will seek to resolve any conflict by determining which account has
cash available to make the purchase, the effect the purchase or sale will have
on the diversification of each account's portfolio, the estimated future cash
flow of the portfolios with regard to both purchases or sales, and other
relevant legal or investment policy factors. If this analysis does not clearly
determine which account should participate in a transaction, a rotation system
will be used.
Conflicts could also arise because some properties in TIAA's general account
may compete for tenants with the Account's properties. We will seek to resolve
this conflict by determining the tenant's preference between the two properties,
how much the tenant is willing to pay for rent, and which property can best
afford to pay any required costs associated with such leasing.
Many of the personnel of TIAA involved in performing services to the Real
Estate Account will have competing demands on their time. The personnel will
devote such time to the affairs of the Account as TIAA's management determines,
in its sole discretion exercising good faith, is necessary to properly service
the Account. TIAA believes that it has sufficient personnel to discharge its
responsibility to both the general account and the Real Estate Account and to
avoid conflicts of interest.
INDEMNIFICATION
The Account has agreed to indemnify TIAA and its affiliates, including its
officers and directors, against certain liabilities, including liabilities under
the Securities Act of 1933. The Account may make such indemnification out of its
assets.
ROLE OF THE INDEPENDENT FIDUCIARY
Because TIAA's ability to purchase and sell liquidity units raises certain
technical issues under ERISA, TIAA applied for and received a prohibited
transaction exemption from the U.S. Department of Labor (PTE 96-76). In
connection with the exemption, TIAA has appointed an independent fiduciary for
the Real Estate Account, with overall responsibility for reviewing Account
transactions to determine whether they are fair and in the Account's best
interest.
The Townsend Group, an institutional real estate consulting firm whose
principal offices are located in Cleveland, Ohio, serves as the Account's
independent fiduciary. The independent fiduciary's responsibilities include:
o reviewing and approving the Account's investment guidelines and monitoring
whether the Account's investments comply with those guidelines
o reviewing and approving valuation procedures
o approving adjustments to any property valuations that change the value of the
property or the Account as a whole above or below certain prescribed levels,
or that are made within three months of the annual independent appraisal
o reviewing and approving how we value accumulation and annuity units
o approving the appointment of all independent appraisers
o reviewing the purchase and sale of units by TIAA to ensure that we use the
correct unit values
o requiring appraisals besides those normally conducted, if the independent
fiduciary believes that any of the properties have changed materially, or
that an additional appraisal is necessary to assure the Account has correctly
valued a property
The independent fiduciary also must monitor TIAA's ownership in the Account
and supervise any winding down of the Account's operations. Its responsibilities
include:
o calculating the percentage of total accumulation units that TIAA's ownership
shouldn't exceed (the trigger point) and creating a method for changing the
trigger point
o approving any adjustment of TIAA's interest in the Account and requiring an
adjustment if TIAA's investment reaches the trigger point
o participating in any program to reduce TIAA's ownership in the Account or to
facilitate winding down the Account, including selecting properties for sale,
providing sales guidelines, and approving those sales that, in the
independent fiduciary's opinion, are desirable
A special subcommittee of the Investment Committee of TIAA's Board of
Trustees appointed The Townsend Group as the independent fiduciary starting
March 1, 2000, for a three-year term. This subcommittee may renew the
independent fiduciary appointment, remove the independent fiduciary, or appoint
its successor. The independent fiduciary can be removed for cause by the vote of
a majority of subcommittee members and will not be reappointed unless more than
60 percent of the subcommittee members approve. It can resign after at least 180
days' written notice.
TIAA pays the independent fiduciary directly. The investment management
charge paid to TIAA includes TIAA's costs for retaining the independent
fiduciary. The independent fiduciary will receive less than 5 percent of its
annual income (including payment for its services to the Account) from TIAA.
When you decide as a participant or plan fiduciary to invest in the Account,
after TIAA has provided you with full and fair disclosure including the
disclosure in this prospectus, you are also acknowledging that you approve and
accept The Townsend Group or any successor to serve as the Account's independent
fiduciary.
TIAA Real Estate Account PROSPECTUS | 7 |
DESCRIPTION OF PROPERTIES
THE PROPERTIES -- IN GENERAL
As of December 31, 2001, the Account had 65 properties in its real estate
portfolio. The following charts break down the Account's real estate assets by
region and property type.
EAST MIDWEST SOUTH WEST TOTAL
- --------------------------------------------------------------------------------
OFFICE 35.6% 6.3% 3.8% 7.1% 52.8%
INDUSTRIAL 4.7% 2.3% 6.3% 9.6% 22.9%
RESIDENTIAL 6.4% 1.3% 8.9% 6.3% 22.9%
RETAIL 0.6% 0.5% 0.3% 0 1.4%
TOTAL 47.3% 10.4% 19.3% 23.0% 100.0%
In the table below you will find general information about each of the Account's
portfolio properties as of December 31, 2001.
ANNUAL AVG.
BASE RENT
YEAR YEAR RENTABLE AREA PERCENT PER LEASED
PROPERTY LOCATION BUILT PURCHASED (SQ. FT.) LEASED SQ. FT.(1) MARKET VALUE(2)
- ----------------------------------------------------------------------------------------------------------------------------------
OFFICE PROPERTIES
780 Third Avenue New York, NY 1984 1999 487,501 98% $46.18 $177,500,000
1801 K Street Washington, DC 1971(3) 2000 564,359 99% $32.31 $150,339,845
Ten & Twenty Westport Rd Wilton, CT 2001 2001 538,840 100% $25.34 $140,105,661
Morris Corporate Center III Parsippany, NJ 1990 2000 525,154 92% $22.21 $106,214,595
88 Kearny Street San Francisco, CA 1986 1999 228,470 89% $36.80 $ 82,116,702
Sawgrass Portfolio Sunrise, FL 1997-2000 1997,
1999-2000 344,009 100% $15.12 $ 50,800,000
Parkview Plaza(4) Oakbrook, IL 1990 1997 266,020 100% $19.11 $ 50,500,000
1015 15th Street Washington, DC 1978(3) 2001 189,681 100% $30.91 $ 48,736,575
Maitland Promenade One Maitland, FL 1999 2000 227,814 95% $21.18 $ 39,000,000
Columbia Centre III Rosemont, IL 1989 1997 238,696 89% $20.29 $ 37,500,000
One Monument Place Fairfax, VA 1990 1999 219,837 100% $22.26 $ 35,400,000
Biltmore Commerce Center Phoenix, AZ 1985 1999 262,875 38% $ 9.30 $ 32,295,058
10 Waterview Boulevard Parsippany, NJ 1984 1999 209,553 98% $22.70 $ 30,400,000
Fairgate at Ballston(4) Arlington, VA 1988 1997 143,457 99% $26.63 $ 30,300,000
Tysons Executive Plaza II(5)
(held in joint venture) McLean, VA 1988 2000 252,552 100% $24.25 $ 28,538,029(5)
Columbus Office Portfolio -- -- 259,626 100% $12.76 $ 28,400,000
Metro South Building Dublin, OH 1997 1999 90,726 -- $11.64 --
Vision Service Plan Building Eaton, OH 1997 1999 50,000 -- $11.88 --
One Metro Place Dublin, OH 1998 2001 118,900 -- $13.99 --
Needham Corporate Center Needham, MA 1987 2001 138,684 97% $27.68 $ 28,294,526
Longview Executive Park(4) Hunt Valley, MD 1988 1997 258,999 100% $11.84 $ 28,200,800
9 Hutton Centre Santa Ana, CA 1990 2001 148,265 91% $19.68 $ 20,448,764
BISYS Fund Services Building Eaton, OH 1995 1999 155,964 100% $12.32 $ 20,400,000
Five Centerpointe(4) Lake Oswego, OR 1988 1997 113,971 98% $22.65 $ 18,001,499
Batterymarch Park II Quincy, MA 1986 2001 104,718 96% $25.51 $ 17,990,854
371 Hoes Lane Piscataway, NJ 1986 1997 139,670 83% $12.35 $ 14,700,000
Southbank Building Phoenix, AZ 1995 1996 122,535 100% $ 8.75 $ 13,565,218
Northmark Business Center(4) Blue Ash, OH 1985 1997 108,561 95% $12.53 $ 12,200,000
--------- --------------
SUBTOTAL--OFFICE PROPERTIES 6,249,811 $1,241,948,126
- ----------------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL PROPERTIES
Ontario Portfolio 2,698,717 100% $ 3.40 $108,000,000
Timberland Building Ontario, CA 1998 1998 414,435 -- -- --
5200 Airport Drive Ontario, CA 1997 1998 404,500 -- -- --
1200 S. Etiwanda Ave. Ontario, CA 1998 1998 223,170 -- -- --
Park Mira Loma West Mira Loma, CA 1998 1998 557,500 -- -- --
Wineville Center Buildings Mira Loma, CA 1999 2000 1,099,112 -- -- --
Dallas Industrial Portfolio Dallas and Coppell, 1997- 2000;
(formerly Parkwest Center) TX 2000 2001 2,609,031 94% $ 2.72 $ 97,245,850
| 8 | TIAA Real Estate Account PROSPECTUS
INDUSTRIAL PROPERTIES (CONTINUED)
ANNUAL AVG.
BASE RENT
YEAR YEAR RENTABLE AREA PERCENT PER LEASED
PROPERTY LOCATION BUILT PURCHASED (SQ. FT.) LEASED SQ. FT.(1) MARKET VALUE(2)
- ----------------------------------------------------------------------------------------------------------------------------------
IDI Kentucky Portfolio 1,437,022 100% $ 2.80 $ 53,600,000
(formerly, Parkwest Int'l)
Building C Hebron, KY 1998 1998 520,000 -- -- --
Building D Hebron, KY 1998 1998 184,800 -- -- --
Building E Hebron, KY 2000 2000 207,222 -- -- --
Building J Hebron, KY 2000 2000 525,000 -- -- --
Chicago Industrial Portfolio
(consolidation of Rockrun,
Glen Pointe and Woodcreek Chicago and Joliet, 1997- 1998;
Business Parks) IL 2000 2000 866,064 100% $ 4.18 $ 42,591,186
Atlanta Industrial Portfolio Lawrenceville, GA 1996-99 2000 1,145,693 84% $ 2.79 $ 40,459,044
Northpointe Commerce Center Fullerton, CA 1990-94 2000 612,023 100% $ 5.90 $ 37,456,149
Cabot Industrial Portfolio
(under development and held
in joint venture) Rancho Cucamonga, CA 2001(6)2000; 2001 641,475 100% $ 2.42 $ 34,363,752(6)
South River Road Industrial Cranbury, NJ 1999 2001 626,071 100%(7) $ 2.30 $ 32,688,565
Konica Photo Imaging
Headquarters Mahwah, NJ 1999 1999 168,000 100% $ 9.43 $ 17,700,000
Eastgate Distribution Center San Diego, CA 1996 1997 200,000 100% $ 5.21 $ 14,500,000
Landmark at Salt Lake City
Building #4 Salt Lake City, UT 2000 2000 328,508 100% $ 3.98 $ 13,600,000
Arapahoe Park East Boulder, CO 1979-82 1996 129,425 100% $10.18 $ 13,100,000
UPS Distribution Facility Fernley, NV 1998 1998 256,000 100% $ 3.54 $ 11,100,000
FedEx Distribution Facility Crofton, MD 1998 1998 111,191 100% $ 6.39 $ 7,600,000
Westinghouse Facility Coral Springs, FL 1997 1997 75,630 100% $ 7.29 $ 5,300,000
Interstate Crossing Eagan, MN 1995 1996 131,380 100% $ 4.01 $ 6,504,740
Butterfield Industrial Park El Paso, TX 1980-81 1995 183,510 100% $ 2.96 $ 4,700,000
River Road Distribution Center Fridley, MN 1995 1995 100,456 100% $ 3.49 $ 4,131,571
---------- ------------
SUBTOTAL--INDUSTRIAL PROPERTIES 12,320,196 $544,640,857
- ----------------------------------------------------------------------------------------------------------------------------------
RETAIL PROPERTIES
Rolling Meadows Rolling Meadows, IL 1957(3) 1997 130,909 99% $ 9.07 $ 12,390,000
Lynnwood Collection Raleigh, NC 1988 1996 86,362 96% $ 7.53 $ 7,900,000
Millbrook Collection Raleigh, NC 1988 1996 102,221 84% $ 6.04 $ 7,200,000
Plantation Grove Ocoee, FL 1995 1995 73,655 100% $10.01 $ 7,700,000
---------- ------------
SUBTOTAL--RETAIL PROPERTIES 393,147 $ 35,190,000
---------- ------------
SUBTOTAL--COMMERCIAL PROPERTIES 18,968,054 $1,821,778,983
- ----------------------------------------------------------------------------------------------------------------------------------
RESIDENTIAL PROPERTIES(8)
Ashford Meadows Apartments Herndon, VA 1998 2000 NA 91% NA $ 64,195,500
The Colorado New York, NY 1987 1999 NA 93% NA $ 60,500,000
Larkspur Courts Apartments Larkspur, CA 1991 1999 NA 96% NA $ 53,200,000
South Florida Apartment Boca Raton and
Portfolio Plantation, FL 1986 2001 NA 97% NA $ 46,700,000
Doral Pointe Apartments Miami, FL 1990 2001 NA 97% NA $ 45,341,796
Lodge at Willow Creek Douglas County, CO 1997 1997 NA 88% NA $ 32,000,000
Golfview Apartments Lake Mary, FL 1998 1998 NA 87% NA $ 27,050,000
The Legends at Chase Oaks Plano, TX 1997 1998 NA 96% NA $ 26,000,000
Lincoln Woods Lafayette Hill, PA 1991 1997 NA 92% NA $ 24,800,000
Kenwood Mews Apartments Burbank, CA 1991 2001 NA 97% NA $ 22,686,216
Monte Vista Littleton, CO 1995 1996 NA 98% NA $ 21,800,000
Westcreek Apartments Westlake Village, CA 1988 1997 NA 91% NA $ 17,900,000
Carolina Apartments Margate, FL 1993 2001 NA 94% NA $ 17,600,000
Indian Creek Apartments Farmington Hills, MI 1988 1998 NA 96% NA $ 16,800,000
Royal St. George W. Palm Beach, FL 1995 1996 NA 98% NA $ 16,400,000
Quiet Waters Apartments Deerfield Beach, FL 1995 2001 NA 96% NA $ 16,100,000
Bent Tree Apartments Columbus, OH 1987 1998 NA 85% NA $ 14,500,000
The Greens at Metrowest Orlando, FL 1990 1995 NA 91% NA $ 14,100,000
---------- ------------
SUBTOTAL--RESIDENTIAL PROPERTIES NA $ 537,673,512
---------- ------------
TOTAL--ALL PROPERTIES 18,968,055 $2,359,452,495
- ----------------------------------------------------------------------------------------------------------------------------------
(1) BASED ON TOTAL CONTRACTUAL RENT ON LEASES EXISTING AT DECEMBER 31, 2001. FOR
THOSE PROPERTIES PURCHASED IN 2001, THE NUMBER WAS DERIVED BY ANNUALIZING
THE RENTS CHARGED BY THE ACCOUNT SINCE ACQUIRING THE PROPERTY.
(2) MARKET VALUE REFLECTS THE VALUE DETERMINED IN ACCORDANCE WITH THE PROCEDURES
DESCRIBED IN THE ACCOUNT'S PROSPECTUS.
(3) UNDERGONE EXTENSIVE RENOVATIONS.
(4) PURCHASED THROUGH LIGHT STREET PARTNERS, L.P. (NOW 100% OWNED BY THE
ACCOUNT).
(5) PROPERTY HELD IN 50%/50% JOINT VENTURE WITH TENNESSEE CONSOLIDATED
RETIREMENT SYSTEM. MARKET VALUE SHOWN REFLECTS THE VALUE OF THE ACCOUNT'S
INTEREST IN THE PROPERTY.
(6) THE PROPERTY IS HELD IN A 80%/20% JOINT VENTURE WITH CABOT INDUSTRIAL TRUST,
AND CONSISTS OF ONE COMPLETED BUILDING AND ONE UNDER DEVELOPMENT. THE
EXISTING BUILDING IS AT MARKET VALUE AND THE PROPERTY UNDER DEVELOPMENT IS
CURRENTLY VALUED AT COST. IT IS ANTICIPATED THAT THE BUILDING UNDER
DEVELOPMENT WILL BE READY FOR OCCUPANCY IN 2002.
(7) ONE TENANT REPRESENTING 17% OF THE SPACE FILED FOR BANKRUPTCY PROTECTION AND
HAS VACATED ITS SPACE.
(8) FOR THE AVERAGE UNIT SIZE AND ANNUAL AVERAGE RENT PER UNIT FOR EACH
RESIDENTIAL PROPERTY, SEE "RESIDENTIAL PROPERTIES" BELOW.
TIAA Real Estate Account PROSPECTUS | 9 |
COMMERCIAL (NON-RESIDENTIAL) PROPERTIES
IN GENERAL. At December 31, 2001, the Account held 47 commercial
(non-residential) properties in its portfolio. None of these properties is
subject to a mortgage, and although the terms vary under each lease, certain
expenses, such as real estate taxes and other operating expenses, are paid or
reimbursed by the tenants.
At December 31, 2001, the Account's office property portfolio consisted of 25
office properties located in metropolitan areas throughout the United States
(including one property held in a 50%/50% joint venture). The office properties
together are approximately 92 percent leased with 549 leases.
At December 31, 2001, the Account's industrial property portfolio consisted
of 18 properties (including one which is held in an 80%/20% joint venture and is
currently under development) used primarily for warehousing, distribution, or
light manufacturing activities. The Account's industrial properties together are
99 percent leased with 107 leases.
At December 31, 2001, the Account's retail property portfolio consisted of
four neighborhood shopping centers, each of which is anchored by a supermarket
tenant. These retail properties together are approximately 95 percent leased
with 57 leases.
MAJOR TENANTS: The following table lists the Account's major commercial
tenants based on the total space they occupy in the Account's properties.
PERCENTAGE OF
TOTAL RENTABLE
AREA OF ACCOUNT'S
OCCUPIED NON-RESIDENTIAL PROPERTY
MAJOR TENANT SQUARE FEET PROPERTIES TYPE
- --------------------------------------------------------------------------------
WalMart 1,099,112 5.8% Industrial
The GAP 1,045,000 5.5% Industrial
Standard Motor Products 671,172 3.5% Industrial
Meiko-America 557,500 2.9% Industrial
UPS 422,400 2.2% Industrial
Timberland 414,435 2.2% Industrial
New Breed Transfer Company 404,500 2.1% Industrial
Cooper Tire 401,226 2.1% Industrial
Petco 258,000 1.4% Industrial
Mack Truck 248,014 1.3% Industrial
American Building Supply 240,249 1.3% Industrial
Van Kampen 223,170 1.2% Office
PHH 199,563 0.9% Office
Northern Telecom 149,426 0.8% Office
- --------------------------------------------------------------------------------
LEASE EXPIRATIONS. The following charts provide lease expiration information
for the Account's commercial properties, categorized by property type. While
many of the leases contain renewal options with varying terms, these charts
assume that none of the tenants exercise their renewal options.
RENTABLE PERCENT OF
AREA TOTAL RENTABLE
SUBJECT TO AREA OF ACCOUNT'S
YEAR OF NUMBER OF EXPIRING NON-RESIDENTIAL
LEASE LEASES LEASES PROPERTIES REPRESENTED
EXPIRATION EXPIRING (SQ. FT.) BY EXPIRING LEASES
- --------------------------------------------------------------------------------
OFFICE PROPERTIES
2002 80 666,061 3.5%
2003 83 735,077 3.9%
2004 83 678,352 3.6%
2005 68 665,077 3.5%
2006 78 1,061,375 5.6%
2007 and
thereafter 157 2,041,275 10.6%
- --------------------------------------------------------------------------------
TOTAL 549 5,847,217 30.7%
- --------------------------------------------------------------------------------
INDUSTRIAL PROPERTIES
2002 5 170,958 .9%
2003 12 1,315,518 6.9%
2004 17 1,420,276 7.5%
2005 27 2,723,866 14.4%
2006 15 668,629 3.5%
2007 and
thereafter 31 5,570,698 29.4%
- --------------------------------------------------------------------------------
TOTAL 107 11,869,945 62.6%
- --------------------------------------------------------------------------------
RETAIL PROPERTIES
2002 7 12,621 0.1%
2003 10 18,425 0.1%
2004 9 14,848 0.1%
2005 14 43,332 0.2%
2006 9 28,637 0.2%
2007 and
thereafter 8 228,344 1.2%
- --------------------------------------------------------------------------------
TOTAL 57 346,207 1.9%
- --------------------------------------------------------------------------------
| 10 | TIAA Real Estate Account PROSPECTUS
RESIDENTIAL PROPERTIES
The Account's residential property portfolio currently consists of 17 first
class or luxury multi-family garden apartment complexes and one high rise
apartment building for a total of 18 properties. None of the properties in the
portfolio is subject to a mortgage. The complexes generally contain one- to
three-bedroom apartment units, with a range of amenities, such as patios or
balconies, washers and dryers, and central air conditioning. Many of these
apartment communities have use of on-site fitness facilities, including some
with swimming pools. Rents on each of the properties tend to be comparable with
competitive communities and are not subject to rent regulation. The Account is
responsible for the expenses of operating the properties.
In the table below you will find more detailed information regarding the
apartment complexes in the Account's portfolio as of December 31, 2001.
NUMBER AVERAGE UNIT SIZE AVG. RENT PER PERCENT
PROPERTY LOCATION OF UNITS (SQUARE FEET) UNIT/PER MONTH LEASED
- -------------------------------------------------------------------------------------------------------------------------------
Ashford Meadows Apartments Herndon, VA 440 1050 $1,315 91%
The Colorado New York, NY 256 632 $2,434 93%
Larkspur Courts Apartments Larkspur, CA 248 1001 $2,247 96%
South Florida Apartment Boca Raton and
Portfolio Plantation, FL 500 888 $ 980 97%
Lodge at Willow Creek Douglas County, CO 316 1001 $1,055 88%
Golfview Apartments Lake Mary, FL 276 1139 $1,116 87%
The Legends at Chase Oaks Plano, TX 346 972 $1,037 96%
Lincoln Woods Lafayette Hill, PA 216 773 $1,206 92%
Monte Vista Littleton, CO 219 888 $1,049 98%
Indian Creek Apartments Farmington Hills, MI 196 1139 $ 999 96%
Westcreek Apartments Westlake Village, CA 126 948 $1,490 91%
Royal St. George West Palm Beach, FL 224 870 $ 884 98%
Bent Tree Apartments Columbus, OH 256 928 $ 745 85%
The Greens at Metrowest Orlando, FL 200 920 $ 857 91%
Carolina Apartments Margate, FL 208 1026 $ 961 94%
Quiet Waters Apartments Deerfield Beach, FL 200 1048 $1,019 96%
Doral Pointe Miami, FL 440 1130 $1,101 97%
Kenwood Mews Burbank, CA 141 942 $1,283 97%
RECENT PROPERTY PURCHASES AND SALES
THE FOLLOWING DESCRIBES RECENT PROPERTY SALES BY THE ACCOUNT. WHEN REVIEWING
THIS INFORMATION, IT IS IMPORTANT TO KEEP IN MIND THAT ANY CHANGES IN THE
VALUATION OF THE PROPERTY SINCE IT WAS PURCHASED HAVE BEEN REFLECTED IN THE
ACCOUNT'S DAILY UNIT VALUE OVER THE PERIOD THE ACCOUNT HELD THE PROPERTY.
On January 31, 2002, the Account sold one office building (the Southbank
Building) located in Phoenix, Arizona for approximately $13 million. The Account
had purchased the building in February, 1996 for an original purchase price of
approximately $10.1 million.
FOR A DISCUSSION OF THE ACCOUNT'S REAL ESTATE HOLDINGS AND RECENT
ACQUISITIONS IN THE CONTEXT OF THE ACCOUNT'S PERFORMANCE AS A WHOLE, SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" BELOW. REAL ESTATE INVESTMENTS MADE BY THE ACCOUNT AFTER THE DATE OF
THIS PROSPECTUS WILL BE DESCRIBED IN SUPPLEMENTS TO THE PROSPECTUS, AS
APPROPRIATE.
TIAA Real Estate Account PROSPECTUS | 11 |
SELECTED FINANCIAL DATA
The following selected financial data should be considered together with the
Account's financial statements and related notes, which are presented later in
this prospectus.
JULY 3, 1995
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED DECEMBER 31, TO
-------------------------------------------------------------------------------------------- DECEMBER 31,
2001 2000 1999 1998 1997 1996 1995
-------------- -------------- -------------- --------------- ------------- ------------ ------------
INVESTMENT INCOME:
Real estate income, net:
Rental income $ 256,755,315 $ 195,537,993 $ 132,316,878 $ 81,009,203 $ 44,342,342 $ 10,951,183 $ 165,762
-------------- -------------- -------------- --------------- ------------- ------------ ------------
Real estate property
level expenses and
taxes:
Operating expenses 52,456,479 40,056,716 27,334,060 17,339,706 9,024,240 2,116,334 29,173
Real estate taxes 29,670,456 22,851,890 15,892,736 9,103,637 4,472,311 1,254,163 14,659
-------------- -------------- -------------- --------------- ------------- ------------ ------------
Total real estate
property level
expenses and taxes 82,126,935 62,908,606 43,226,796 26,443,343 13,496,551 3,370,497 43,832
-------------- -------------- -------------- --------------- ------------- ------------ ------------
Real estate income,
net 174,628,380 132,629,387 89,090,082 54,565,860 30,845,791 7,580,686 121,930
Income from real estate
joint venture 2,251,593 756,133 -- -- -- -- --
Dividends and interest 33,687,343 31,334,291 24,932,733 23,943,728 16,486,279 6,027,486 2,828,900
-------------- -------------- -------------- --------------- ------------- ------------ ------------
Total investment income 210,567,316 164,719,811 114,022,815 78,509,588 47,332,070 13,608,172 2,950,830
Expenses 17,191,929 13,424,566 9,278,410 6,274,594 3,526,545 1,155,796 310,433
-------------- -------------- -------------- --------------- ------------- ------------ ------------
Investment income, net 193,375,387 151,295,245 104,744,405 72,234,994 43,805,525 12,452,376 2,640,397
Net realized and
unrealized gain on
investments (23,344,613) 54,147,449 9,834,743 7,864,659 18,147,053 3,330,539 35,603
-------------- -------------- -------------- --------------- ------------- ------------ ------------
Net increase in net
assets resulting from
operations before
minority interest 170,030,774 205,442,694 114,579,148 80,099,653 61,952,578 15,782,915 2,676,000
Minority interest in
net increase in net
assets resulting from
operations (811,789) -- 1,364,619 (3,487,991) (1,881,178) -- --
Net increase in net
assets resulting from
participant transactions 657,326,121 486,196,949 383,171,774 333,936,510 356,052,262 233,653,793 117,582,345
-------------- -------------- -------------- --------------- ------------- ------------ ------------
Net increase in net
assets $ 826,545,106 $ 691,639,643 $ 499,115,541 $ 410,548,172 $ 416,123,662 $249,436,708 $120,258,345
============== ============== ============== =============== ============= ============ ============
DECEMBER 31,
----------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997 1996 1995
-------------- -------------- -------------- --------------- ------------- ------------ ------------
Total assets $3,270,384,450 $2,423,100,402 $1,719,457,715 $ 1,229,603,431 $ 815,760,825 $426,372,007 $143,177,421
Total liabilities and
minority interest 56,717,273 35,978,331 23,975,287 33,236,544 29,942,110 56,676,954 22,919,076
-------------- -------------- -------------- --------------- ------------- ------------ ------------
Total net assets $3,213,667,177 $2,387,122,071 $1,695,482,428 $ 1,196,366,887 $ 785,818,715 $369,695,053 $120,258,345
============== ============== ============== =============== ============= ============ ============
Accumulation units
outstanding 18,456,445 14,604,673 11,487,360 8,833,911 6,313,015 3,295,786 1,172,498
============== ============== ============== =============== ============= ============ ============
Accumulation unit value $ 168.16 $ 158.21 $ 142.97 $ 132.17 $ 122.30 $ 111.11 $ 102.57
============== ============== ============== =============== ============= ============ ============
QUARTERLY SELECTED FINANCIAL INFORMATION
The following is selected financial information for the Account for each full
quarter within the past two calendar years:
2001
------
FOR THE THREE MONTHS ENDED
--------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ------------------------------------------------------------------------------------------------------
Investment income, net $ 45,264,635 $ 47,931,306 $ 50,435,135 $ 49,744,311
Net realized gain (loss)
on investments 978,396 514,453 759,534 (3,522,087)
Net unrealized gain on investments (4,436,522) 11,550,552 (8,059,992) (21,128,947)
Minority interest in
net increase in net assets
resulting from operations -- (448,023) (213,578) (150,188)
------------ ------------ ------------ ------------
Net increase in net assets
resulting from operations $ 41,806,509 $ 59,548,288 $ 42,921,099 $ 24,943,089
============ ============ ============ ============
Total return 1.67% 2.21% 1.46% 0.82%
============ ============ ============ ============
2000
-----
FOR THE THREE MONTHS ENDED
------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -------------------------------------------------------------------------------------------------
Investment income, net $ 31,774,860 $36,145,064 $ 40,552,504 $42,822,817
Net realized gain (loss)
on investments (147,448) 58,263 (241,717) 8,606,836
Net unrealized gain on investments 5,603,540 14,044,336 15,013,318 11,210,321
Minority interest in
net increase in net assets
resulting from operations -- -- -- --
------------ ----------- ------------ -----------
Net increase in net assets
resulting from operations $ 37,230,952 $50,247,663 $ 55,324,105 $62,639,974
============ =========== ============ ===========
Total return 2.15% 2.67% 2.67% 2.77%
============ =========== ============ ===========
| 12 | TIAA Real Estate Account PROSPECTUS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF ACCOUNT'S FINANCIAL CONDITION AND
OPERATING RESULTS
The Account continued its positive growth in 2001, with approximately $3.2
billion in net assets as of year-end 2001. As of December 31, 2001, the Account
owned a total of 65 real estate properties, including 25 office properties (one
held in joint venture), 18 industrial properties (including one development
project joint venture), 18 apartment complexes and four neighborhood shopping
centers. At December 31, 2001, these properties represented 73.1% of the
Account's total investment portfolio.
The Account closed 21 real estate transactions in 2001. It purchased 15
properties (seven office properties, including one development project, three
industrial properties, and five apartment properties) made one fund investment,
and sold five properties (one office, one retail, one apartment, and two
industrial properties). The Account continues to pursue suitable properties, and
is currently in various stages of negotiations with a number of prospective
sellers. The Account currently has outstanding commitments to purchase two
office buildings, three retail properties and six warehouses in the total amount
of approximately $417.5 million.
As of December 31, 2001, the Account also held investments in commercial
paper, representing 17.0% of the portfolio, real estate investment trusts
(REITs), representing 4.2% of the portfolio, and other real estate related
investments, including commercial mortgage backed securities (CMBS), a mortgage
and one fund investment, representing 5.7% of the portfolio.
The tragic events of September 11th did not directly affect the Account's
real estate holdings in New York City, which are holdings located in the midtown
and upper east side areas of Manhattan. While these events had a sobering effect
on the overall economy, it is not currently possible to quantify any long-term
impact on the real estate market.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO
YEAR ENDED DECEMBER 31, 2000
The Account's total net return was 6.29% for the year ended December 31, 2001
and 10.66% for 2000. The 2001 performance of each of the Account's asset types,
i.e., real estate, REITs and commercial paper, declined as compared to 2000,
with the decline in the value of the Account's real estate having the largest
impact. The Account's net investment income, after deducting all expenses, was
$193,375,387 for the year ended December 31, 2001 and $151,295,245 for 2000, a
28% increase. This increase was the result of a 35% increase in net assets and
an increase in the Account's real estate holdings from December 31, 2000 to
December 31, 2001. The Account had net realized and unrealized losses on
investments of $23,344,613 for the year ended December 31, 2001, compared with
the net realized and unrealized gains on its investments of $54,147,449 for
2000. This difference was primarily due to the decrease of $26,611,066 in the
aggregate market value of the Account's real estate holdings during 2001, as
compared to 2000, during which the Account's holdings experienced a $22,257,781
market value increase. The Account's net realized losses in 2001 were primarily
due to the sale of certain properties identified as sales candidates because
they no longer met the Account's investment objectives or were located in
markets which were experiencing declining economic conditions. The unrealized
losses in 2001 can be attributed to the decline in market value of some of the
Account's real estate properties. The Account's marketable securities had modest
realized and unrealized gains in 2001 totaling $5,231,736, as compared to the
substantial net gains of $22,145,715 in 2000.
The Account's real estate holdings generated approximately 83% of the
Account's total investment income (before deducting Account level expenses)
during 2001 compared with 81% during 2000. The remaining portion of the
Account's total investment income was generated by investments in marketable
securities.
Gross real estate rental income was $256,755,315 for the year ended December
31, 2001 and $195,537,993 for the same period in 2000. This increase was
primarily due to the increase in the number of properties owned by the Account,
from 60 properties at the end of 2000 to 65 properties at the end of 2001.
Interest income on the Account's short-term investments for 2001 and 2000
totaled $24,490,376 and $24,294,579, respectively. Dividend income on the
Account's REIT investments totaled $9,196,967 and $7,039,712, respectively, for
the same periods.
Total property level expenses for the year ended December 31, 2001 were
$82,126,935 of which $52,456,479 was attributable to operating expenses and
$29,670,456 was attributable to real estate taxes. Total property level expenses
for the year ended December 31, 2000 were $62,908,606, of which $40,056,716
represented operating expenses and $22,851,890 was attributable to real estate
taxes. The increase in property level expenses during 2001 reflected the
increased number of properties in the Account.
The Account incurred expenses for the years ended December 31, 2001 and 2000
of $5,896,729 and $6,924,202, respectively, for investment advisory services,
$8,470,496 and $4,392,882, respectively, for administrative and distribution
services, and $2,824,704 and $2,107,482, respectively, for mortality and expense
risk charges and liquidity guarantee charges. Such expenses generally increased
as a result of the larger net asset base in the Account. The expenses for
investment advisory services in 2001, however, decreased because they included
an expense adjustment credit in the first quarter of 2001 to reflect a change in
the way certain investment expenses are allocated to the Account.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO
YEAR ENDED DECEMBER 31, 1999
The Account's total net return was 10.66% for the year ended December 31,
2000 and 8.17% for 1999. The Account's net investment income, after deducting
all expenses, was $151,295,245 for the year ended December 31, 2000 and
$104,744,405 for 1999, a 44% increase. This increase was the result of a 41%
increase in net assets and a 45% increase in the market value of the Account's
real estate holdings from December 31, 1999 to December 31, 2000. The Account
had net realized and unrealized gains on investments of $54,147,449 for the year
ended December 31, 2000 compared with $9,834,743 for 1999. This difference was
due in part to the increase in realized and unrealized gains on the Account's
real estate properties from $23,232,711 in 1999 to $32,001,734 for 2000, and,
significantly, to the Account's gain of $22,145,715 on its marketable securities
in 2000, compared with its loss of $13,397,968 on its marketable securities in
1999.
The Account's real estate holdings generated approximately 81% of the
Account's total investment income (before deducting Account level expenses)
during 2000 compared with 78% during 1999. The remaining portion of the
Account's total investment income was generated by investments in marketable
securities.
Gross real estate rental income was $195,537,993 for the year ended December
31, 2000 and $132,316,878 for the same period in 1999. This increase was
primarily due to the increase in the number of properties owned by the Account
- -- from 54 properties at the end of 1999 to 60 properties at the end of 2000.
(The total number of properties in 2000 reflects the consolidation of certain
groups of properties into single portfolios.) Interest and dividend income on
the Account's marketable securities investments increased from $24,932,733 for
1999 to $31,334,291 in 2000.
TIAA Real Estate Account PROSPECTUS | 13 |
Total property level expenses for the year ended December 31, 2000 were
$62,908,606 of which $40,056,716 was attributable to operating expenses and
$22,851,890 was attributable to real estate taxes. Total property level expenses
for the year ended December 31, 1999 were $43,226,796, of which $27,334,060
represented operating expenses and $15,892,736 was attributable to real estate
taxes. The increase in property level expenses during 2000 reflected the
increased number of properties in the Account.
The Account incurred expenses for the years ended December 31, 2000 and 1999
of $6,924,202 and $4,246,911, respectively, for investment advisory services,
$4,392,882 and $3,442,282, respectively, for administrative and distribution
services, and $2,107,482 and $1,589,217, respectively, for mortality and expense
risk charges and liquidity guarantee charges. These expenses increased
significantly as a result of the increased costs of managing a growing account,
including the costs of acquiring and managing additional properties, and the
increased staffing costs associated with administering a larger account.
LIQUIDITY AND CAPITAL RESOURCES
During 2001, the Account received $254,149,962 in premiums and $486,614,583 in
net participant transfers from the TIAA Traditional account and the CREF
accounts, while in 2000 the Account received $161,668,073 in premiums and
$379,610,411 in net participant transfers from other TIAA and CREF accounts. The
unprecedented volume of net participants' transfers into the Account in 2001 can
be attributed to the substantial decline in the equity markets. Real estate
properties costing $538,400,000 and $625,800,000 were purchased during 2001 and
2000, respectively. In 2001, the Account also received $94,800,000 in proceeds
from the sale of properties. By year end 2001, the Account's liquid assets
(i.e., its cash, REITs, short- and intermediate-term investments, and government
securities) had a value of $853,769,802, while at the end of 2000 those assets
were valued at $464,544,434.
We plan to use much of the Account's liquid assets as of December 31, 2001,
exclusive of the REITs, to purchase additional suitable real estate properties.
The remaining liquid assets, exclusive of the REITs, will continue to be
available to meet expense needs and redemption requests (e.g., cash withdrawals
or transfers).
In the unlikely event that the Account's liquid assets and its cash flow from
operating activities and participant transactions are not sufficient to meet its
cash needs, including redemption requests, TIAA's general account will purchase
liquidity units in accordance with TIAA's liquidity guarantee to the Account.
The Account spent approximately $21.9 million in 2001 for capital (long-term)
expenses, including ongoing tenant improvements and leasing commissions at the
commercial properties relating to the renewal of existing tenants or re-leasing
of space to new tenants during the normal course of business. In 2002, it is
estimated that the Account will expend approximately $29.8 million in capital
expenses. These expenditures will be for the costs routinely incurred by the
Account for painting, re-carpeting and minor replacements to re-lease apartments
as they become vacant and the costs associated with the renewal of existing
tenants or releasing of space to new tenants in the commercial properties.
EFFECTS OF INFLATION -- 2002
To the extent that inflation may increase property operating expenses in the
future, we anticipate that increases will generally be billed to tenants either
through contractual lease provisions in office, industrial, and retail
properties or through rent increases in apartment complexes. However, depending
on how long any vacant space in a property remains unleased, the Account may not
be able to recover the full amount of such increases in operating expenses.
VALUING THE ACCOUNT'S ASSETS
We value the Account's assets as of the close of each valuation day by taking
the sum of:
o the value of the Account's cash, cash equivalents, and short-term and other
debt instruments
o the value of the Account's other securities investments and other assets
o the value of the individual real properties and other real estate-related
investments owned by the Account
o an estimate of the net operating income accrued by the Account from its
properties and other real estate-related investments
and then reducing it by the Account's liabilities, including the daily
investment management fee and certain other expenses attributable to operating
the Account. See "Expense Deductions," page 15.
VALUING REAL ESTATE AND RELATED INVESTMENTS
VALUING REAL PROPERTY: Individual real properties will be valued initially at
their purchase prices. (Prices include all expenses related to purchase, such as
acquisition fees, legal fees and expenses, and other closing costs.) We could
use a different value in appropriate circumstances.
After this initial valuation, an independent appraiser, approved by the
independent fiduciary, will value properties at least once a year. The
independent fiduciary can require additional appraisals if it believes that a
property has changed materially or otherwise to assure that the Account is
valued correctly.
Quarterly, we will conduct an internal review of each of the Account's
properties. We'll adjust a valuation if we believe that the value of the
property has changed since the previous valuation. We'll continue to use the
revised value to calculate the Account's net asset value until the next review
or appraisal. However, we can adjust the value of a property in the interim to
reflect what we believe are actual changes in property value.
The Account's net asset value will include the current value of any note
receivable (an amount that someone else owes the Account) from selling a real
estate-related investment. We'll estimate the value of the note by applying a
discount rate appropriate to then-current market conditions.
Development properties initially will be valued at the Account's cost, and
the value will be adjusted as additional development costs are incurred. Once a
property receives a certificate of occupancy, or within one year from the
purchase date, whichever is earlier, the property will be appraised by an
independent appraiser, approved by the independent fiduciary. We may also have
the properties independently appraised earlier if circumstances warrant.
Because of the nature of real estate assets, the Account's net asset value
won't necessarily reflect the true or realizable value of its real estate assets
(i.e., what the Account would get if it sold them).
VALUING REAL PROPERTY ENCUMBERED BY DEBT: In general, when we value an
Account property subject to a mortgage, the Account's net asset value will
include the value of the Account's interest in the property (with the property
valued as described above), less the face amount of the outstanding balance of
the debt. We can adjust the property valuation if we determine that the existing
debt could have a material affect on how much the Account would receive if it
were to sell the property, looking at such factors as whether the debt is
prepayable, the remaining term on the debt, and then-current interest rates.
VALUING CONVENTIONAL MORTGAGES: Individual mortgage loans made by the Account
will be valued initially at their face amount. Thereafter, quarterly, we'll
value the Account's fixed interest mortgage loans by discounting payments of
principal and interest to their present value (using a rate at which commercial
lenders would make similar mortgage loans). We'll also use this method for
foreign mortgages with conventional terms. We can adjust the mortgage value more
frequently if circumstances require it.
| 14 | TIAA Real Estate Account PROSPECTUS
Floating variable rate mortgages will generally be valued at their face amount,
although we may adjust these values as market conditions dictate.
VALUING PARTICIPATING MORTGAGES: Individual mortgages will initially be
valued at their face amount. Thereafter, quarterly, we'll estimate the values of
the participating mortgages by making various assumptions about occupancy rates,
rental rates, expense levels, and other things. We'll use these assumptions to
project the cash flow and anticipated sale proceeds from each investment over
the term of the loan, or sometimes over a shorter period. To calculate sale
proceeds, we'll assume that the real property underlying each investment will be
sold at the end of the period used in the valuation at a price based on market
assumptions for the time of the projected sale. We'll then discount the
estimated cash flows and sale proceeds to their present value (using rates
appropriate to then-current market conditions).
NET OPERATING INCOME: The Account usually receives operating income from its
investments intermittently, not daily. In fairness to participants, we estimate
the Account's net operating income rather than applying it when we actually
receive it, and assume that the Account has earned (accrued) a proportionate
amount of that estimated amount daily. You bear the risk that, until we adjust
the estimates when we receive actual income reports, the Account could be under-
or over-valued.
Every year, we prepare a month-by-month estimate of the revenues and expenses
(estimated net operating income) for each of the Account's properties. Each day,
we add the appropriate fraction of the estimated net operating income for the
month to the Account's net asset value.
Every month, the Account receives a report of the actual operating results
for the prior month for each property (actual net operating income). We then
recognize the actual net operating income on the accounting records of the
Account and adjust the outstanding daily accrued receivable accordingly. As the
Account actually receives cash from a property, we'll adjust the daily accrued
receivable and other accounts appropriately.
ADJUSTMENTS: We can adjust the value of an investment if we believe events or
market conditions (such as a borrower's or tenant's default) have affected how
much the Account could get if it sold the investment. We may not always be aware
of each event that might require a valuation adjustment, and because our
evaluation is based on subjective factors, we may not in all cases make
adjustments where changing conditions could affect the value of an investment.
The independent fiduciary will need to approve adjustments to any valuation
of one or more properties that
o is made within three months of the annual independent appraisal or
o results in an increase or decrease of:
o more than 6 percent of the value of any of the Account's properties since the
last independent annual appraisal
o more than 2 percent in the value of the Account since the prior month or
o more than 4 percent in the value of the Account within any quarter.
RIGHT TO CHANGE VALUATION METHODS: If we decide that a different valuation
method would reflect the value of a real estate-related investment more
accurately, we may use that method if the independent fiduciary consents.
Changes in TIAA's valuation methods could change the Account's net asset value
and change the values at which participants purchase or redeem Account
interests.
VALUING OTHER INVESTMENTS
DEBT SECURITIES AND MONEY MARKET INSTRUMENTS: We value fixed income
securities (including money market instruments) for which market quotations are
readily available at the most recent bid price or the equivalent quoted yield
for those securities (or those of comparable maturity, quality, and type). We
obtain values for money market instruments with maturities of one year or less
either from one or more of the major market makers for those securities or from
one or more financial information services. We use an independent pricing
service to value securities with maturities longer than one year except when we
believe prices do not accurately reflect the fair value of these securities.
EQUITY SECURITIES: We value equity securities (including REITs) listed or
traded on the New York Stock Exchange or the American Stock Exchange at their
last sale price on the valuation day. If no sale is reported that day, we use
the mean of the closing bid and asked prices. Equity securities listed or traded
on any other exchange are valued in a comparable manner on the principal
exchange where traded.
We value equity securities traded on the NASDAQ Stock Market's National
Market at their last sale price on the valuation day. If no sale is reported
that day, we use the mean of the closing bid and asked prices. Other U.S.
over-the-counter equity securities are valued at the mean of the closing bid and
asked prices.
FOREIGN SECURITIES: To value investments traded on a foreign exchange or in
foreign markets, we use their closing values under the generally accepted
valuation method in the country where traded, as of the valuation date. We
convert this to U.S. dollars at the exchange rate in effect on the valuation
day.
INVESTMENTS LACKING CURRENT MARKET QUOTATIONS: We value securities or other
assets for which current market quotations are not readily available at fair
value as determined in good faith under the direction of the Investment
Committee of TIAA's Board of Trustees and in accordance with the
responsibilities of TIAA's Board as a whole. In evaluating fair value for the
Account's interest in commingled investment vehicles, the Account will generally
look to the value periodically assigned to interests by the issuer. When
possible, the Account will seek to have input in formulating the issuer's
valuation methodology.
EXPENSE DEDUCTIONS
Deductions are made each valuation day from the net assets of the Account for
various services required to manage investments, administer the Account and the
contracts, and to cover certain risks borne by TIAA. Services are performed at
cost by TIAA and TIAA-CREF Individual & Institutional Services, Inc.
("Services"), a subsidiary of TIAA. Because services are provided at cost, we
expect that expense deductions will be relatively low. TIAA guarantees that in
the aggregate, the expense charges will never be more than 2.50% of average net
assets per year.
The current annual expense deductions are:
PERCENT OF
TYPE OF EXPENSE NET ASSETS SERVICES
DEDUCTION ANNUALLY PERFORMED
- --------------------------------------------------------------------------------
Investment 0.245% For TIAA's investment advice,
Management portfolio accounting, custodial
services, and similar services,
including independent fiduciary and
appraisal fees
Administration 0.245% For Services' administrative
services, such as allocating premiums
and paying annuity income
Distribution 0.040% For Services' expenses related to
distributing the annuity contracts
Mortality and 0.070% For TIAA's bearing certain mortality
Expense Risk and expense risks
Liquidity Guarantee 0.030% For TIAA's liquidity guarantee
- --------------------------------------------------------------------------------
TOTAL ANNUAL 0.630% FOR TOTAL SERVICES TO THE ACCOUNT
EXPENSE DEDUCTION
- --------------------------------------------------------------------------------
TIAA Real Estate Account PROSPECTUS | 15 |
After the end of every quarter, we reconcile how much we deducted as
discussed above with the expenses the Account actually incurred. If there is a
difference, we add it to or deduct it from the Account in equal daily
installments over the remaining days in the quarter. Since our at-cost
deductions are based on projections of Account assets and overall expenses, the
size of any adjusting payments will be directly affected by how different our
projections are from the Account's actual assets or expenses. While our
projections of Account asset size (and resulting expense fees) are based on our
best estimates, the size of the Account's assets can be affected by many
factors, including premium growth, participant transfers into or out of the
Account, and any changes in the value of portfolio holdings. Historically, the
adjusting payments have generally been small and have resulted in both upward
and downward adjustments to the Account's expense deductions for the following
quarter.
TIAA's board can revise the deduction rates from time to time to keep
deductions as close as possible to actual expenses.
Currently there are no deductions from premiums or withdrawals, but we might
change this in the future. Property expenses, brokers' commissions, transfer
taxes, and other portfolio expenses are charged directly to the Account.
THE CONTRACTS
TIAA offers the Real Estate Account as a variable option for the annuity
contracts described below. Some employer plans may not offer the Real Estate
Account as an option for RA, GRA, GSRA, or Keogh contracts. The Account is not
available in California.
RA (RETIREMENT ANNUITY) AND GRA (GROUP RETIREMENT ANNUITY)
RA and GRA contracts are used mainly for employee retirement plans.
RA contracts are issued directly to you. GRA contracts, which are group
contracts, are issued through an agreement between your employer and TIAA.
Depending on the terms of your plan, RA and GRA premiums can be paid by your
employer, you, or both. If you're paying some of or the entire periodic premium,
your contributions can be in either pre-tax dollars by salary reduction or
after-tax dollars by payroll deduction. You can also transfer funds from another
investment choice under your employer's plan to your contract. For RAs only, you
can make contributions directly to TIAA. Ask your employer for more information
about these contracts.
SRA (SUPPLEMENTAL RETIREMENT ANNUITY) AND
GSRA (GROUP SUPPLEMENTAL RETIREMENT ANNUITY)
These are for voluntary tax-deferred annuity (TDA) plans and 401(k) plans. SRA
contracts are issued directly to you. GSRA contracts, which are group contracts,
are issued through an agreement between your employer and TIAA. Your employer
pays premiums in pre-tax dollars through salary reduction. Although you can't
pay premiums directly, you can transfer amounts from other TDA plans.
CLASSIC IRA
Classic IRAs are individual contracts issued directly to you. You and your
spouse can each open a Classic IRA with an annual contribution of up to $3,000
or by rolling over funds from another IRA or retirement plan, if you meet our
eligibility requirements. If you are age 50 or older, you may contribute up to
$3,500. The combined limit for your contributions to a Classic IRA and a Roth
IRA for a single year is $3,000, or $3,500 if you are age 50 or older, excluding
rollovers. We can't issue you a joint contract.
ROTH IRA
Roth IRAs are also individual contracts issued directly to you. You or your
spouse can each open a Roth IRA with an annual contribution up to $3,000 or with
a rollover from another IRA or a Classic IRA issued by TIAA if you meet our
eligibility requirements. If you are age 50 or older you may contribute up to
$3,500. The combined limit for your contributions to a Classic IRA and a Roth
IRA for a single year is $3,000, or $3,500 if you are age 50 or older, excluding
rollovers. We can't issue you a joint contract.
Classic and Roth IRAs may together be referred to as "IRAs" in this
prospectus.
GA (GROUP ANNUITY) AND INSTITUTIONALLY-OWNED GSRA
These are used exclusively for employee retirement plans and are issued directly
to your employer or your plan's trustee. Your employer pays premiums directly to
TIAA (you can't pay the premiums directly to TIAA) and your employer or the
plan's trustee may control the allocation of contributions and transfers to and
from these contracts. If a GA or GSRA contract is issued pursuant to your plan,
the rules relating to transferring and withdrawing your money, receiving any
annuity income or death benefits, and the timing of payments may be different,
and are determined by your plan. Ask your employer or plan administrator for
more information.
KEOGHS
TIAA also offers contracts for Keogh plans. If you are a self-employed
individual who owns an unincorporated business, you can use our Keogh contracts
for a Keogh plan, and cover common law employees, subject to our eligibility
requirements.
IRA AND KEOGH ELIGIBILITY
You or your spouse can set up a TIAA Classic or Roth IRA or a Keogh if you're a
current or retired employee or trustee of an eligible institution, or if you own
a TIAA or CREF annuity or a TIAA individual insurance contract. To be considered
a retired employee for this purpose, an individual must be at least 55 years old
and have completed at least three years of service at an eligible institution.
In the case of partnerships, at least half the partners must be eligible
individuals and the partnership itself must be primarily engaged in education or
research. Eligibility may be restricted by certain income limits on opening Roth
IRA contracts.
STARTING OUT
We'll issue you a TIAA contract when we receive your completed application or
enrollment form. 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 generally invest the money in the CREF Money Market
Account until we receive your form. (Some employer plans may require that we
send such premiums back to the employer.) We'll transfer the appropriate amount
from the CREF Money Market Account and credit it to the Real Estate Account as
of end of the business day we receive your completed form.
If the allocation instructions on your application or enrollment form are
incomplete, violate plan restrictions, or total more than 100 percent, we'll
invest your premiums in the CREF Money Market Account. If your allocation
instructions total less than 100 percent, we'll credit the percentage that is
not allocated to a specific account to the CREF Money Market Account. The bal
ance with be invested as you instructed. After we receive a complete and correct
application, we'll follow your allocation instructions for future premiums.
However, any amounts that we credited to the CREF Money Market Account before we
received correct instructions will be transferred to
| 16 | TIAA Real Estate Account PROSPECTUS
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 may in the future. Your employer's retirement
plan may limit your premium amounts, while the Internal Revenue Code limits the
total annual premiums you may invest in plans qualified for favorable tax
treatment. If you pay premiums directly to an RA or IRA, the premiums and any
earnings are not subject to your employer's plan.
In most cases (subject to any restriction we may impose, as described in this
prospectus), TIAA will accept premiums to a contract at any time during your
accumulation period. Once your first premium has been paid, your TIAA contract
can't lapse or be forfeited for nonpayment of premiums. TIAA can stop accepting
premiums to contracts at any time.
CHOOSING AMONG THE TIAA AND CREF ACCOUNTS
You can allocate all or part of your premiums to the Real Estate Account, unless
your employer's plan precludes that choice. You can also allocate premiums to
TIAA's traditional annuity or any of the CREF variable investment accounts, if
the account is available under your employer's plan.
You can change your allocation choices for future premiums by
o writing to our home office
o using the TIAA-CREF Web Center's account access feature at www.tiaa-cref.org
or
o calling our Automated Telephone Service (24 hours a day) at 800-842-2252
THE RIGHT TO CANCEL YOUR CONTRACT
You can cancel your contract up to 30 days after you first receive it, unless we
have begun making annuity payments from it. If you already had a TIAA contract
prior to investing in the Real Estate Account, you have no 30-day right to
cancel the contract. To cancel, mail or deliver the contract with a signed
Notice of Cancellation (available by contacting TIAA) to our home office. We'll
cancel the contract, then send the entire current accumulation to whomever sent
the premiums. You bear the investment risk during this period (although some
states require us to send back your entire premium without accounting for
investment results).
DETERMINING THE VALUE OF YOUR INTEREST IN THE ACCOUNT--
ACCUMULATION UNITS
When you pay premiums or make transfers to the Real Estate Account, you buy
accumulation units. When you take a cash withdrawal, transfer from the Account,
or apply funds to begin annuity income, the number of your accumulation units
decrease. We calculate how many accumulation units to credit by dividing the
amount you applied to the Account by its accumulation unit value at the end of
the business day when we received your premium or transfer. To determine how
many accumulation units to subtract for cash withdrawals and transfers, we use
the accumulation unit value for the end of the business day when we receive your
transaction request and all required information and documents (unless you ask
for a later date).
The accumulation unit value reflects the Account's investment experience
(i.e., the real estate net operating income accrued, as well as dividends,
interest and other income accrued), realized and unrealized capital gains and
losses, as well as Account expense charges.
CALCULATING ACCUMULATION UNIT VALUES: We calculate the Account's accumulation
unit value at the end of each valuation day. To do that, we multiply the
previous day's value by the net investment factor for the Account. The net
investment factor is calculated as A divided by B, where A and B are defined as:
A. The value of the Account's net assets at the end of the current valuation
period, less premiums received during the current valuation period.
B. The value of the Account's net assets at the end of the previous valuation
period, plus the net effect of transactions made at the start of the
current valuation period.
HOW TO TRANSFER AND WITHDRAW
YOUR MONEY
Generally TIAA allows you to move your money to or from the Real Estate Account
in the following ways:
o from the Real Estate Account to a CREF investment account or TIAA's
traditional annuity
o to the Real Estate Account from a CREF investment account or TIAA's
traditional annuity (transfers from TIAA's traditional annuity under RA and
GRA contracts are subject to restrictions)
o from the Real Estate Account to other companies
o to the Real Estate Account from other companies/plans
o by withdrawing cash
o by setting up a program of automatic withdrawals or transfers
These transactions generally must be for at least $1,000 at a time (or your
entire Account accumulation, if less). These options may be limited by the terms
of your employer's plan or by current tax law. Transfers and cash withdrawals
are currently free. TIAA can place restrictions on transfers or charge fees for
transfers and withdrawals in the future.
Transfers and cash withdrawals are effective at the end of the business day
we receive your request and all required documentation. You can also choose to
have transfers and withdrawals take effect at the close of any future business
day or the last calendar day of the current or any future month, even if it's
not a business day. If you request a transfer at any time other than during a
business day, it will be effective at the close of the next business day.
To request a transfer or to withdraw cash:
o write to TIAA's home office at 730 Third Avenue, New York, NY 10017-3206
o call us at 800 842-2252 or
o for internal transfers, using the TIAA-CREF Web Center's account access
feature at www.tiaa-cref.org
You may be required to complete and return certain forms to effect these
transactions. We can suspend or terminate your ability to transact by telephone,
over the Internet, or by fax at any time, for any reason.
Before you transfer or withdraw cash, make sure you understand the possible
federal and other income tax consequences. See "Taxes," page 21.
TRANSFERS TO AND FROM OTHER TIAA-CREF ACCOUNTS
Once every calendar quarter you can transfer some or all of your accumulation in
the Real Estate Account to TIAA's traditional annuity, to one of the CREF
accounts or to mutual funds offered under the terms of your plan. Transfers to
certain CREF accounts may be restricted by your employer's plan.
You can also transfer some or all of your accumulation in TIAA's traditional
annuity, in your CREF accounts or in the mutual funds offered under the terms of
your plan to the Real Estate Account, if your employer's plan offers the
Account. Transfers from TIAA's traditional annuity to the Real Estate Account
under RA and GRA contracts are subject to restrictions under the terms of those
contracts.
Because excessive transfer activity can hurt Account performance and other
participants, we may further limit how often you transfer or otherwise modify
the transfer privilege.
TIAA Real Estate Account PROSPECTUS | 17 |
TRANSFERS TO OTHER COMPANIES
Generally you may transfer funds from the Real Estate Account to a company other
than TIAA or CREF, subject to certain tax restrictions. This right may be
limited by your employer's plan. If your employer participates in our special
transfer services program, we can make automatic monthly transfers from your RA
or GRA contract to another company, and the $1,000 minimum will not apply to
these transfers.
TRANSFERS FROM OTHER COMPANIES/PLANS
Subject to your employer's plan, you can usually transfer or rollover money from
another 403(b) or 401(a)/403(a) and governmental 457(b) retirement plan to your
TIAA contract. You may also rollover before-tax amounts in a Classic IRA to
403(b) plans, 401(a)/403(a) plans or eligible governmental 457(b) plans,
provided such employer plans agree to accept the rollover. Similarly, you may be
able to rollover funds from 401(a), 403(a), 403(b) and governmental 457(b) plans
to a TIAA Classic IRA. Funds in a private 457(b) plan can be transferred to
another private 457(b) plan only. Accumulations in private 457(b) plans may not
be rolled over to a qualified plan (e.g., a 401(a) plan), a 403(b) plan, a
governmental 457(b) plan or an IRA.
WITHDRAWING CASH
You may withdraw cash from your SRA, GSRA, IRA, or Keogh Real Estate Account
accumulation at any time during the accumulation period, provided federal tax
law permits it (see below). Cash withdrawals from your RA or GRA accumulation
may be limited by the terms of your employer's plan and federal tax law.
Normally, you can't withdraw money from a contract if you've already begun
receiving lifetime annuity income.
Current federal tax law restricts your ability to make cash withdrawals from
your accumulation under most voluntary salary reduction agreements. Withdrawals
are generally available only if you reach age 59 1/2, leave your job, become
disabled, or die, or if your employer terminates its retirement plan. If your
employer's plan permits, you may also be able to withdraw money if you encounter
hardship, as defined by the IRS, but hardship withdrawals can be from
contributions only, not investment earnings. You may be subject to a 10 percent
penalty tax if you make a withdrawal before you reach age 59 1/2, unless an
exception applies to your situation.
Under current federal tax law, you are not permitted to withdraw from 457(b)
plans earlier than the calendar year in which you reach age 70 1/2 or leave your
job or are faced with an unforeseeable emergency (as defined by law). There are
generally no early withdrawal tax penalties if you withdraw under any of these
circumstances (i.e., no 10% tax on distributions prior to age 59 1/2).
Special rules and restrictions apply to Classic and Roth IRAs.
SYSTEMATIC WITHDRAWALS AND TRANSFERS
If your employer's plan allows, you can set up a program to make cash
withdrawals or transfers automatically by specifying that we withdraw or
transfer from your Real Estate Account accumulation any fixed number of
accumulation units, dollar amount, or percentage of accumulation until you tell
us to stop or until your accumulation is exhausted. Currently, the program must
be set up so that at least $100 is automatically withdrawn or transferred at a
time.
POSSIBLE RESTRICTIONS ON PREMIUMS AND TRANSFERS TO THE ACCOUNT
From time to time we may stop accepting premiums for and/or transfers into the
Account. We might do so if, for example, we can't find enough appropriate real
estate-related investment opportunities at a particular time. Whenever
reasonably possible, we will notify you before we decide to restrict premiums
and/or transfers. However, because we may need to respond quickly to changing
market conditions, we reserve the right to stop accepting premiums and/or
transfers at any time without prior notice.
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.
MARKET TIMING POLICY
There are participants who may try to profit from transferring money back and
forth among the CREF accounts, the Real Estate Account, and mutual funds
available under the terms of your plan, in an effort to "time" the market. As
money is shifted in and out of these accounts, we incur transaction costs,
including, among other things, expenses for buying and selling securities. These
costs are borne by all participants, including long-term investors who do not
generate the costs. To discourage this market-timing activity, participants who
make more than three transfers out of any CREF account (other than the CREF
Money Market Account) in a calendar month will be advised that if this transfer
frequency continues, we will suspend their ability to make telephone, fax and
Internet transfers. We have the right to modify our policy at any time without
advance notice.
RECEIVING ANNUITY INCOME
THE ANNUITY PERIOD IN GENERAL
You can receive an income stream from all or part of your Real Estate Account
accumulation. Unless you opt for a lifetime annuity, generally you must be at
least age 59 1/2 to begin receiving annuity income payments from your annuity
contract free of a 10 percent early distribution penalty tax. Your employer's
plan may also restrict when you can begin income payments. Under the minimum
distribution rules of the Internal Revenue Code, you generally must begin
receiving some payments from your contract shortly after you reach the later of
age 70 1/2 or you retire. Also, you can't begin a one-life annuity after you
reach age 90, nor may you begin a two-life annuity after either you or your
annuity partner reach age 90.
Your income payments may be paid out from the Real Estate Account through a
variety of income options. You can pick a different income option for different
portions of your accumulation, but once you've started payments you usually
can't change your income option or annuity partner for that payment stream.
Usually income payments are monthly. You can choose quarterly, semi-annual,
and annual payments as well. (TIAA has the right to not make payments at any
interval that would cause the initial payment to be less than $100.) We'll send
your payments by mail to your home address or, on your request, by mail or
electronic funds transfer to your bank.
Your initial income payments are based on the value of your accumulation on
the last valuation day before the annuity starting date. Your payments change
after the initial payment based on the Account's investment experience and the
income change method you choose.
There are two income change methods for annuity payments: annual and monthly.
Under the annual income change method, payments from the Account change each May
1, based on the net investment results during the prior year (April 1 through
March 31). Under the monthly income change method, payments from the Account
change every month, based on the net investment results during the previous
month. For the formulas used to cal-
| 18 | TIAA Real Estate Account PROSPECTUS
culate the amount of annuity payments, see page 20. The total value of your
annuity payments may be more or less than your total premiums.
ANNUITY STARTING DATE
Generally, you pick an annuity starting date when you first apply for a TIAA
contract but you can change this date at any time prior to the day before that
annuity starting date. Ordinarily, annuity payments begin on your annuity
starting date, provided we have received all documentation necessary for the
income option you've picked. If something's missing, we'll defer your annuity
starting date until we receive it. Your first annuity check may be delayed while
we process your choice of income options and calculate the amount of your
initial payment. Any premiums received within 70 days after payments begin may
be used to provide additional annuity income. Premiums received after 70 days
will remain in your accumulating annuity contract until you give us further
instructions. Ordinarily, your first annuity payment can be made on any business
day between the first and twentieth of any month.
INCOME OPTIONS
Both the number of annuity units you purchase and the amount of your income
payments will depend on which income option you pick. Your employer's plan, tax
law and ERISA may limit which income options you can use to receive income from
an RA or GRA, GSRA or Keogh. Ordinarily you'll choose your income options
shortly before you want payments to begin, but you can make or change your
choice any time before your annuity starting date.
All Real Estate Account income options provide variable payments, and the
amount of income you receive depends in part on the investment experience of the
Account. The current options are:
o One-Life Annuity with or without Guaranteed Period: Pays income as long as
you live. If you opt for a guaranteed period (10, 15 or 20 years) and you die
before it's over, income payments will continue to your beneficiary until the
end of the period. If you don't opt for a guaranteed period, all payments end
at your death-so that it's possible for you to receive only one payment if
you die less than a month after payments start.
o Annuity for a Fixed Period: Pays income for any period you choose from 5 to
30 years.
o Two-Life Annuities: Pays income to you as long as you live, then continues at
either the same or a reduced level for the life of your annuity partner.
There are three types of two-life annuity options, all available with or
without a guaranteed period -- Full Benefit to Survivor, Two-Thirds Benefit
to Survivor, and a Half-Benefit to Annuity Partner. Under the Two-Thirds
Benefit to Survivor option, payments to you will be reduced upon the death of
your annuity partner.
o Minimum Distribution Option ("MDO") Annuity: Generally available only if you
must begin annuity payments under the Internal Revenue Code minimum
distribution requirements. (Some employer plans allow you to elect this
option earlier -- contact TIAA for more information.) The option pays an
amount designed to fulfill the distribution requirements under federal tax
law. You must apply your entire accumulation under a contract if you want to
use the MDO annuity. It is possible that income under the MDO annuity will
cease during your lifetime. Prior to age 90, you can apply any remaining part
of an accumulation applied to the MDO annuity to any other income option for
which you're eligible. Using an MDO won't affect your right to take a cash
withdrawal of any accumulation not yet distributed.
For any of the income options described above, current federal tax law says
that your guaranteed period can't exceed the joint life expectancy of you and
your beneficiary or annuity partner.
Other income options may become available in the future, subject to the terms
of your retirement plan and relevant federal and state laws. For more
information about any annuity option, please contact us.
RECEIVING LUMP SUM PAYMENTS (RETIREMENT TRANSITION BENEFIT): If your
employer's plan allows, you may be able to receive a single sum payment of up to
10 percent of the value of any part of an RA or GRA accumulation being converted
to annuity income on the annuity starting date. Of course, if your employer's
plan allows cash withdrawals, you can take a larger amount (up to 100 percent)
of your Real Estate Account accumulation as a cash payment. The retirement
transition benefit will be subject to current federal income tax requirements
and possible early distribution penalties. See "Taxes," page 21.
If you haven't picked an income option when the annuity starting date arrives
for your RA, GRA, SRA or GSRA contract, TIAA usually will assume you want the
ONE-LIFE ANNUITY WITH 10-YEAR GUARANTEED PERIOD if you're unmarried, paid from
TIAA's traditional annuity. If you're married, we may assume for you A SURVIVOR
ANNUITY WITH HALF-BENEFIT TO ANNUITY PARTNER WITH A 10-YEAR GUARANTEED PERIOD,
with your spouse as your annuity partner, paid from TIAA's traditional annuity.
If you haven't picked an income option when the annuity starting date arrives
for your IRA, we may assume you want the MINIMUM DISTRIBUTION OPTION annuity.
TRANSFERS DURING THE ANNUITY PERIOD
After you begin receiving annuity income, you can transfer all or part of the
future annuity income payable once each calendar quarter (i) from the Real
Estate Account into a "comparable annuity" payable from a CREF account or TIAA's
traditional annuity, or (ii) from a CREF account into a comparable annuity
payable from the Real Estate Account. Comparable annuities are those which are
payable under the same income option, and have the same first and second
annuitant, and remaining guaranteed period.
We'll process your transfer on the business day we receive your request. You
can also choose to have a transfer take effect at the close of any future
business day, or the last calendar day of the current or any future month, even
if it's not a business day. Transfers under the annual income payment method
will affect your annuity payments beginning on the May 1 following the March 31
which is on or after the effective date of the transfer. Transfers under the
monthly income payment method and all transfers into TIAA's traditional annuity
will affect your annuity payments beginning with the first payment due after the
monthly payment valuation day that is on or after the transfer date. You can
switch between the annual and monthly income change methods, and the switch will
go into effect on the following March 31.
ANNUITY PAYMENTS
The amount of annuity payments we pay you or your beneficiary (annuitant) will
depend upon the number and value of the annuity units payable. The number of
annuity units is first determined on the day before the annuity starting date.
The amount of the annuity payments will change according to the income change
method chosen.
Under the annual income change method, the value of an annuity unit for
payments is redetermined on March 31 of each year -- the payment valuation day.
Annuity payments change beginning May 1. The change reflects the net investment
experience of the Real Estate Account. The net investment experience for the
twelve months following each March 31 revaluation will be reflected in the
following year's value.
TIAA Real Estate Account PROSPECTUS | 19 |
Under the monthly income change method, the value of an annuity unit for
payments is determined on the payment valuation day, which is the 20th day of
the month preceding the payment due date or, if the 20th is not a business day,
the preceding business day. The monthly changes in the value of an annuity unit
reflect the net investment experience of the Real Estate Account.
The formulas for calculating the number and value of annuity units payable
are described below.
CALCULATING THE NUMBER OF ANNUITY UNITS PAYABLE: When a participant or a
beneficiary converts the value of all or a portion of his or her accumulation
into an income-paying contract, the number of annuity units payable from the
Real Estate Account under an income change method is determined by dividing the
value of the Account accumulation to be applied to provide the annuity payments
by the product of the annuity unit value for that income change method and an
annuity factor. The annuity factor as of the annuity starting date is the value
of an annuity in the amount of $1.00 per month beginning on the first day such
annuity units are payable, and continuing for as long as such annuity units are
payable.
The annuity factor will reflect interest assumed at the effective annual rate
of 4 percent, and the mortality assumptions for the person(s) on whose life
(lives) the annuity payments will be based. Mortality assumptions will be based
on the then-current settlement mortality schedules for this Account. Annuitants
bear no mortality risk under their contracts-actual mortality experience will
not reduce annuity payments after they have started. TIAA may change the
mortality assumptions used to determine the number of annuity units payable for
any future accumulations converted to provide annuity payments.
The number of annuity units payable under an income change method under your
contract will be reduced by the number of annuity units you transfer out of that
income change method under your contract. The number of annuity units payable
will be increased by any internal transfers you make to that income change
method under your contract.
VALUE OF ANNUITY UNITS: The Real Estate Account's annuity unit value is
calculated separately for each income change method for each business day and
for the last calendar day of each month. The annuity unit value for each income
change method is determined by updating the annuity unit value from the previous
valuation day to reflect the net investment performance of the Account for the
current valuation period relative to the 4 percent assumed investment return. In
general, your payments will increase if the performance of the Account is
greater than 4 percent and decrease if the value is less than 4 percent. The
value is further adjusted to take into account any changes expected to occur in
the future at revaluation either once a year or once a month, assuming the
Account will earn the 4 percent assumed investment return in the future.
The initial value of the annuity unit for a new annuitant is the value
determined as of the day before annuity payments start.
For participants under the annual income change method, the value of the
annuity unit for payments remains level until the following May 1. For those who
have already begun receiving annuity income as of March 31, the value of the
annuity unit for payments due on and after the next succeeding May 1 is equal to
the annuity unit value determined as of such March 31.
For participants under the monthly income change method, the value of the
annuity unit for payments changes on the payment valuation day of each month for
the payment due on the first of the following month.
TIAA reserves the right, subject to approval by the Board of Trustees, to
modify the manner in which the number and/or value of annuity units is
calculated in the future.
DEATH BENEFITS
AVAILABILITY; CHOOSING BENEFICIARIES
TIAA may pay death benefits if you or your annuity partner die during the
accumulation or annuity period. When you purchase your annuity contract, you
name one or more beneficiaries to receive the death benefit if you die. You can
change your beneficiaries anytime before you die, and, unless you instruct
otherwise, your annuity partner can do the same after your death.
YOUR SPOUSE'S RIGHTS
Your choice of beneficiary for death benefits may, in some cases, be subject to
the consent of your spouse. Similarly, if you are married at the time of your
death, federal law may require a portion of the death benefit be paid to your
spouse even if you have named someone else as beneficiary. If you die without
having named any beneficiary, any portion of your death benefit not payable to
your spouse will go to your estate.
AMOUNT OF DEATH BENEFIT
If you die during the accumulation period, the death benefit is the amount of
your accumulation. If you and your annuity partner die during the annuity period
while payments are still due under a fixed-period annuity or for the remainder
of a guaranteed period, the death benefit is the value of the remaining
guaranteed payments.
METHODS OF PAYMENT OF DEATH BENEFITS
Generally, you can choose for your beneficiary the method we'll use to pay the
death benefit, but few participants do this. If you choose a payment method, you
can also block your beneficiaries from changing it. Most people leave the choice
to their beneficiaries. We can block any choice if its initial payment is less
than $25. Beginning in late 2001 or 2002, if death occurs while your contract is
in the accumulation stage, in most cases we'll pay the death benefit using the
TIAA-CREF Savings & Investment Plan. We won't do this if you preselected another
option or if the beneficiary elects another option. Some beneficiaries aren't
eligible for the TIAA-CREF Savings & Investment Plan. If your beneficiary isn't
eligible and doesn't specifically tell us to start paying death benefits within
a year of your death, we can start making payments to them over five years using
the fixed-period annuity method of payment.
PAYMENTS DURING THE ACCUMULATION PERIOD: Currently, the available methods of
payment for death benefits from funds in the accumulation period are:
o SINGLE-SUM PAYMENT, in which the entire death benefit is paid to your
beneficiary at once;
o ONE-LIFE ANNUITY WITH OR WITHOUT GUARANTEED PERIOD, in which the death
benefit is paid monthly for the life of the beneficiary or through the
guaranteed period;
o ANNUITY FOR A FIXED PERIOD OF 2 TO 30 YEARS;
o ACCUMULATION-UNIT DEPOSIT OPTION, which pays a lump sum at the end of a fixed
period, ordinarily two to five years, during which period the accumulation
units deposited participate in the Account's investment experience (generally
the death benefit value must be at least $5,000); and
o MINIMUM DISTRIBUTION OPTION, which automatically pays income according to the
Internal Revenue Code's minimum distribution requirements. It operates in
much the same way as the MDO annuity income option. It's possible, under this
method, that your beneficiary won't receive income for life.
| 20 | TIAA Real Estate Account PROSPECTUS
Death benefits are usually paid monthly (unless you chose a single-sum method
of payment), but your beneficiary can switch them to quarterly, semi-annual, or
annual payments.
PAYMENTS DURING THE ANNUITY PERIOD: If you and your annuity partner die
during the annuity period, your beneficiary can choose to receive any remaining
guaranteed periodic payments due under your contract. Alternatively, your
beneficiary can choose to receive the commuted value of those payments in a
single sum unless you have indicated otherwise. The amount of the commuted value
will be different than the total of the periodic payments that would otherwise
be paid.
Ordinarily, death benefits are subject to federal estate tax. Generally, if
taken as a lump sum, death benefits would be taxed like complete withdrawals. If
taken as annuity benefits, death benefits would be taxed like annuity payments.
For more information on death benefits, see the discussion under "Taxes" below,
or for further detail, contact TIAA.
TAXES
This section offers general information concerning federal taxes. It doesn't
cover every situation. Tax treatment varies depending on the circumstances, and
state and local taxes may also be involved. For complete information on your
personal tax situation, check with a qualified tax advisor.
HOW THE REAL ESTATE ACCOUNT IS TREATED FOR TAX PURPOSES
The Account is not a separate taxpayer for purposes of the Internal Revenue
Code-its earnings are taxed as part of TIAA's operations. Although TIAA is not
expected to owe any federal income taxes on the Account's earnings, if TIAA does
incur taxes attributable to the Account, it may make a corresponding charge
against the Account.
TAXES IN GENERAL
During the accumulation period, Real Estate Account premiums paid in before-tax
dollars, employer contributions and earnings attributable to these amounts are
not taxed until they're withdrawn. Annuity payments, single-sum withdrawals,
systematic withdrawals, and death benefits are usually taxed as ordinary income.
Premiums paid in after-tax dollars aren't taxable when withdrawn, but earnings
attributable to these amounts are taxable. Death benefits are usually also
subject to federal estate and state estate or inheritance taxation. Generally,
transfers between qualified retirement plans are not taxed.
Generally, contributions you can make under an employer's plan are limited by
federal tax law. Employee voluntary salary reduction contributions to 403(b) and
401(k) plans are limited to $11,000 per year ($12,000 per year if you are age 50
or older). Certain long-term employees may be able to defer up to $14,000 per
year in a 403(b) plan ($15,000 per year if you are age 50 or older).
Contributions to Classic and Roth IRAs, other than rollover contributions,
cannot generally exceed $3,000 per year ($3,500 per year for taxpayers age 50 or
older).
The maximum contribution limit to a 457(b) non-qualified deferred
compensation plan for employees of state and local governments for 2001 is
$11,000 ($12,000 if you are age 50 or older). Special catch up rules may permit
a higher contribution in one or more of the last three years prior to an
individual's normal retirement age under the plan.
EARLY DISTRIBUTIONS
If you want to withdraw funds or begin receiving income from any 401(a), 403(a),
or 403(b) retirement plan or an IRA before you reach age 59 1/2, you may have to
pay a 10 percent early distribution tax on the taxable amount. Distributions
from a Roth IRA generally are not taxed, except that, once aggregate
distributions exceed contributions to the Roth IRA, income tax and a 10% penalty
tax may apply to distributions made (1) before age 59 1/2 (subject to certain
exceptions) or (2) during the five taxable years starting with the year in which
the first contribution is made to any Roth IRA. A 10 percent penalty tax may
apply to amounts attributable to a conversion from an IRA if they are
distributed during the five taxable years beginning with the year in which the
conversion was made. You won't have to pay this tax in certain circumstances.
Early distributions from 457(b) plans are not subject to a 10% penalty tax
unless, in the case of a governmental 457(b) plan, the distribution includes
amounts rolled over to the plan from an IRA, 401(a)/403(a), or 403(b) plan.
Consult your tax advisor for more information.
MINIMUM DISTRIBUTION REQUIREMENTS
In most cases, payments must begin by April 1 of the year after the year you
reach age 70 1/2, or if later, by retirement. For Classic IRAs, and with respect
to 5 percent or more owners of the business covered by a Keogh plan, payments
must begin by April 1 of the year after you reach age 70 1/2. Under the terms of
certain retirement plans, the plan administrator may direct us to make the
minimum distributions required by law even if you do not elect to receive them.
In addition, if you don't begin distributions on time, you may be subject to a
50 percent excise tax on the amount you should have received but did not. Roth
IRAs are generally not subject to these rules and do not require that any
distributions be made prior to your death.
WITHHOLDING ON DISTRIBUTIONS
If we send an "eligible rollover" distribution directly to you, federal law
requires us to withhold 20 percent from the taxable portion. If we roll over
such a distribution directly to an IRA or employer plan, we do not withhold any
federal income tax. The 20 percent withholding also does not apply to certain
"non-eligible" distributions such as payments from IRAs, hardships withdrawals,
lifetime annuity payments, substantially equal periodic payments over your life
expectancy or over 10 or more years, or minimum distribution payments.
For the taxable portion of non-eligible rollover distributions, we will
usually withhold federal income taxes unless you tell us not to and you are
eligible to avoid withholding. However, if you tell us not to withhold but we
don't have your taxpayer identification number on file, we still are required to
deduct taxes. These rules also apply to distributions from governmental 457(b)
plans. In general, all amounts received under a private 457(b) plan are taxable
and are subject to federal income tax withholding as wages. Nonresident aliens
who pay U.S. taxes are subject to different withholding rules.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is always the
possibility that the tax treatment of your contract could change by legislation
or otherwise. Consult a tax adviser with respect to legislative developments and
their effect on your contract.
We have the right to modify the contract in response to legislative changes
that could otherwise diminish the favorable tax treatment that annuity contract
owners currently receive. We make no guarantee regarding the tax status of any
contract and do not intend the above discussion as tax advice.
General Matters
MAKING CHOICES AND CHANGES
You may have to make certain choices or changes (e.g., changing your income
option, making a cash withdrawal) by written notice satisfactory to us and
received at our home office or at some other location that we have specifically
designated for that purpose. When we receive a notice of a
TIAA Real Estate Account PROSPECTUS | 21 |
change in beneficiary or other person named to receive payments, we'll execute
the change as of the date it was signed, even if the signer has died in the
meantime. We execute all other changes as of the date received.
TELEPHONE AND INTERNET TRANSACTIONS
You can use our Automated Telephone Service (ATS) or the TIAA-CREF Web Center's
account access feature to check your account balances, transfer to TIAA's
traditional annuity or CREF, and/or allocate future premiums among the Real
Estate Account, TIAA's traditional annuity, and CREF. You will be asked to enter
your Personal Identification Number (PIN) and social security number for both
systems. (You can establish a PIN by calling us.) Both will lead you through the
transaction process and will use reasonable procedures to confirm that
instructions given are genuine. If we use such procedures, we are not
responsible for incorrect or fraudulent transactions. All transactions made over
the ATS and Internet are electronically recorded.
To use the ATS, you need a touch-tone phone. The toll free number for the ATS
is 800 842-2252. To use the Internet, go to the account access feature of the
TIAA-CREF Web Center at http://www.tiaa-cref.org.
We can suspend or terminate your ability to transact by telephone, over the
Internet, or by fax at any time, for any reason.
VOTING RIGHTS
You don't have the right to vote on the management and operation of the Account
directly; however, you may send ballots to advise the TIAA Board of Overseers
about voting for nominees for the TIAA Board of Trustees.
ELECTRONIC PROSPECTUS
If you received this prospectus electronically and would like a paper copy,
please call 800 842-2733, extension 5509, and we will send it to you. Under
certain circumstances where we are legally required to deliver a prospectus to
you, we cannot send you a prospectus electronically unless you've consented.
HOUSEHOLDING
To lower costs and eliminate duplicate documents sent to your home, we may begin
mailing only one copy of the Account's prospectus, prospectus supplements or any
other required documents to your household, even if more than one participant
lives there. If you would prefer to continue receiving your own copy of any of
these documents, you may call us toll-free at 800 842-2733, extension 5509, or
write us.
MISCELLANEOUS POLICIES
IF YOU'RE MARRIED: If you're married, you may be required by law or your
employer's plan to get advance written consent from your spouse before we make
certain transactions for you. If you're married at your annuity starting date,
you may also be required by law or your employer's plan to choose an income
option that provides survivor annuity income to your spouse, unless he or she
waives that right in writing. There are limited exceptions to the waiver
requirement.
TEXAS OPTIONAL RETIREMENT PROGRAM RESTRICTIONS: If you're in the Texas
Optional Retirement Program, you or your beneficiary can redeem some or all of
your accumulation only if you retire, die, or leave your job in the state's
public institutions of higher education.
ASSIGNING YOUR CONTRACT: Generally, neither you nor your beneficiaries can
assign your ownership of a TIAA retirement contract to anyone else.
OVERPAYMENT OF PREMIUMS: If your employer mistakenly sends more premiums on
your behalf than you're entitled to under your employer's retirement plan or the
Internal Revenue Code, we'll refund them to your employer as long as we're
requested to do so (in writing) before you start receiving annuity income. Any
time there's a question about premium refunds, TIAA will rely on information
from your employer. If you've with drawn or transferred the amounts involved
from your accumulation, we won't refund them.
ERRORS OR OMISSIONS: We reserve the right to correct any errors or omissions
on any form, report, or statement that we send you.
PAYMENT TO AN ESTATE, GUARDIAN, TRUSTEE, ETC.: We reserve the right to pay in
one sum the commuted value of any benefits due an estate, corporation,
partnership, trustee, or other entity not a natural person. Neither TIAA nor the
Account will be responsible for the conduct of any executor, trustee, guardian,
or other third party to whom payment is made.
BENEFITS BASED ON INCORRECT INFORMATION: If the amounts of benefits provided
under a contract were based on information that is incorrect, benefits will be
recalculated on the basis of the correct data. If the Account has overpaid or
underpaid, appropriate adjustments will be made.
PROOF OF SURVIVAL: We reserve the right to require satisfactory proof that
anyone named to receive benefits under a contract is living on the date payment
is due. If we have not received this proof after we request it in writing, the
Account will have the right to make reduced payments or to withhold payments
entirely until such proof is received.
DISTRIBUTOR
The annuity contracts are offered continuously by TIAA-CREF Individual &
Institutional Services, Inc. (Services), which is registered with the SEC as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc. (NASD). Teachers Personal Investors Services, Inc. (TPIS), which is also
registered with the SEC and is a member of the NASD, may participate in the
distribution of the contracts on a limited basis. Services and TPIS are direct
or indirect subsidiaries of TIAA. As already noted, distribution costs are
covered by a deduction from the assets of the Account; no commissions are paid
for distributing the contracts. Anyone distributing the contracts must be a
registered representative of Services or TPIS, whose main offices are both at
730 Third Avenue, New York, NY 10017-3206.
STATE REGULATION
TIAA, the Real Estate Account, and the contracts are subject to regulation by
the New York Insurance Department (NYID) as well as by the insurance regulatory
authorities of certain other states and jurisdictions.
TIAA and the Real Estate Account must file with the NYID both quarterly and
annual statements. The Account's books and assets are subject to review and
examination by the NYID at all times, and a full examination into the affairs of
the Account is made at least every five years. In addition, a full examination
of the Real Estate Account operations is usually conducted periodically by some
other states.
LEGAL MATTERS
All matters involving state law and relating to the contracts, including TIAA's
right to issue the contracts, have been passed upon by Charles H. Stamm,
Executive Vice President and General Counsel of TIAA. Sutherland Asbill &
Brennan LLP, Washington, D.C., have passed upon legal matters relating to the
federal securities laws.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated financial
statements and schedule at December 31, 2001 and 2000, and for each of the three
years in the period ended December 31, 2001 as set forth in their reports.
Friedman, Alpren & Green LLP, independent auditors, have audited our (i)
combined statement of revenues and certain expenses of
| 22 | TIAA Real Estate Account PROSPECTUS
Windsor at Boca Arbor Club, Windsor at Carolina, Windsor at Lakepointe, and
Windsor at Quiet Waters (South Florida Apartment Portfolio, Carolina Apartments,
and Quiet Water Apartments) for the year ended March 31, 2001, (ii) statement of
revenues and certain expenses of Ten & Twenty Westport Road for the year ended
December 31, 2000, and (iii) statement of revenues and certain expenses of 1015
15th Street, N.W. for the year ended December 31, 2000. We've included these
financial statements and schedule in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's and Friedman, Alpren &
Green LLP's respective reports, given on the authority of such firms as experts
in accounting and auditing.
ADDITIONAL INFORMATION
INFORMATION AVAILABLE AT THE SEC
The Account has filed with the SEC a registration statement under the Securities
Act of 1933 which contains this prospectus and additional information related to
the offering described in this prospectus. The Account also files annual,
quarterly, and current reports, along with other information, with the SEC, as
required by the Securities Exchange Act of 1934. You may read and copy the full
registration statement, and any reports and information filed with the SEC for
the Account, at the SEC's public reference room at 450 Fifth Street, N.W., Room
1024, Washington, DC 20549. This information can also be obtained through the
SEC's website on the Internet (http://www.sec.gov).
OTHER REPORTS TO PARTICIPANTS
TIAA will mail to each participant in the Real Estate Account periodic reports
providing information relating to their accumulations in the Account, including
premiums paid, number and value of accumulations, and withdrawals or transfers
during the period, as well as such other information as may be required by
applicable law or regulations.
Further information may be obtained from TIAA at 730 Third Avenue, New York,
NY 10017-3206.
FINANCIAL STATEMENTS
The consolidated financial statements of the TIAA Real Estate Account, financial
statements of certain properties purchased by the Account and condensed
unaudited financial statements of TIAA follow. The full audited financial
statements of TIAA, which are incorporated into this prospectus by reference,
are available upon request by calling 800 842-2733 extension 5509.
The financial statements of TIAA should be distinguished from the
consolidated financial statements of the Real Estate Account and should be
considered only as bearing on the ability of TIAA to meet its obligations under
the contracts. They should not be considered as bearing upon the assets held in
the Real Estate Account.
INDEX TO FINANCIAL STATEMENTS
TIAA REAL ESTATE ACCOUNT Page
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Management Responsibility 24
Report of the Audit Committee 24
Consolidated Statements of Assets and Liabilities 25
Consolidated Statements of Operations 26
Consolidated Statements of Changes in Net Assets 27
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28
Report of Independent Auditors 30
Consolidated Statement of Investments 30
PROFORMA CONDENSED FINANCIAL STATEMENTS:
Proforma Condensed Statement of Assets and Liabilities 33
Proforma Condensed Statement of Operations 33
Notes to Proforma Condensed Financial Statements 34
WINDSOR AT BOCA ARBOR CLUB, WINDSOR AT CAROLINA,
WINDSOR AT LAKEPOINTE, AND WINDSOR AT QUIET WATERS
(SOUTH FLORIDA APARTMENT PORTFOLIO, CAROLINA
APARTMENTS, AND QUIET WATER APARTMENTS):
Independent Auditors' Report 35
Combined Statement of Revenues and Certain Expenses 35
Notes to Statement of Revenues and Certain Expenses 35
TEN & TWENTY WESTPORT ROAD:
Independent Auditors' Report 36
Statement of Revenues and Certain Expenses 36
Notes to Statement of Revenues and Certain Expenses 36
1015 15TH STREET, N.W.:
Independent Auditors' Report 37
Statement of Revenues and Certain Expenses 37
Notes to Statement of Revenues and Certain Expenses 37
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
Condensed Unaudited Statutory-Basis Financial Statements 38
Supplemental Information to Condensed
Unaudited Statutory-Basis Financial Statements 39
TIAA Real Estate Account PROSPECTUS | 23 |
REPORT OF MANAGEMENT RESPONSIBILITY
To the Participants of the TIAA Real Estate Account:
The accompanying financial statements of the TIAA Real Estate Account
("Account") of Teachers Insurance and Annuity Association of America ("TIAA")
are the responsibility of TIAA's management. They have been prepared in
accordance with accounting principles generally accepted in the United States
and have been presented fairly and objectively in accordance with such
principles.
TIAA has established and maintains a strong system of internal controls
designed to provide reasonable assurance that assets are properly safeguarded
and transactions are properly executed in accordance with management's
authorization, and to carry out the ongoing responsibilities of management for
reliable financial statements. In addition, TIAA's internal audit personnel
provide a continuing review of the internal controls and operations of TIAA,
including its separate account operations.
The accompanying financial statements have been audited by the independent
auditing firm of Ernst & Young LLP. To maintain auditor independence and avoid
even the appearance of conflict of interest, it continues to be the Account's
policy that any non-audit services be obtained from a firm other than the
external financial audit firm. For the periods covered by these financial
statements, the Account did not engage Ernst & Young LLP for any management
advisory or consulting services. The independent auditors' report, which follows
the notes to financial statements, expresses an independent opinion on the
fairness of presentation of these financial statements.
The Audit Committee of the TIAA Board of Trustees, consisting entirely of
trustees who are not officers of TIAA, meets regularly with management,
representatives of Ernst & Young LLP and internal audit personnel to review
matters relating to financial reporting, internal controls and auditing.
/s/ John H. Biggs
Chairman, President and
Chief Executive Officer
/s/ Richard L. Gibbs
Executive Vice President and
Principal Accounting Officer
REPORT OF THE AUDIT COMMITTEE
To the Participants of the TIAA Real Estate Account:
The TIAA Audit Committee oversees the financial reporting process of the TIAA
Real Estate Account ("Account") on behalf of TIAA's Board of Trustees. The Audit
Committee is a standing committee of the Board and operates in accordance with a
formal written charter (copies are available upon request) which describes the
Audit Committee's responsibilities. All members of the Audit Committee
("Committee") are independent, as defined under the listing standards of the New
York Stock Exchange.
Management has the primary responsibility for the Account's financial
statements, development and maintenance of a strong system of internal controls,
and compliance with applicable laws and regulations. In fulfilling its oversight
responsibilities, the Committee reviewed and approved the audit plans of the
internal auditing group and the independent auditing firm in connection with
their respective audits. The Committee also meets regularly with the internal
and independent auditors, both with and without management present, to discuss
the results of their examinations, their evaluation of external controls, and
the overall quality of financial reporting. As required by its charter, the
Committee will evaluate rotation of the external financial audit firm whenever
circumstances warrant, but in no event later than between their fifth and tenth
years of service.
The Committee reviewed and discussed the accompanying audited financial
statements with management, including a discussion of the quality and
appropriateness of the accounting principles and financial reporting practices
followed, the reasonableness of significant judgments, and the clarity of
disclosures in the financial statements. The Committee has also discussed the
audited financial statements with Ernst & Young LLP, the independent auditing
firm responsible for expressing an opinion on the conformity of these audited
financial statements with generally accepted accounting principles.
The discussion with Ernst & Young LLP focused on their judgments concerning
the quality and appropriateness of the accounting principles and financial
reporting practices followed by the Account, the clarity of the financial
statements and related disclosures, and other significant matters, such as any
significant changes in accounting policies, management judgments and estimates,
and the nature of any uncertainties or unusual transactions. In addition, the
Committee discussed with Ernst & Young LLP the auditors' independence from
management and the Account, and has received a written disclosure regarding such
independence, as required by the Independence Standards Board.
Based on the review and discussions referred to above, the Committee has
approved the release of the accompanying audited financial statements for
publication and filing with appropriate regulatory authorities.
Willard T. Carleton, Audit Committee Chair
Frederick R. Ford, Audit Committee Member
Leonard S. Simon, Audit Committee Member
Rosalie J. Wolf, Audit Committee Member
February 20, 2002
| 24 | TIAA Real Estate Account PROSPECTUS
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 2001 DECEMBER 31, 2000
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Investments, at value:
Real estate properties (cost: $2,276,414,478 and $1,818,143,290) $2,330,914,466 $1,899,254,344
Mortgages (cost: $7,265,887 and $-) 7,265,887 --
Other real estate related investments (cost: $30,925,755 and $24,674,574) 34,430,886 26,035,867
Marketable securities:
Real estate related (cost: $301,967,699 and $134,898,725) 305,250,475 135,854,484
Other (cost: $548,265,288 and $328,060,804) 548,243,870 327,974,084
Cash 275,457 715,866
Other 44,003,409 33,265,757
-------------- --------------
TOTAL ASSETS 3,270,384,450 2,423,100,402
-------------- --------------
LIABILITIES
Accrued real estate property level expenses and taxes 39,595,315 24,396,036
Security deposits held 8,767,676 6,817,972
Other 618,289 1,736,106
-------------- --------------
TOTAL LIABILITIES 48,981,280 32,950,114
-------------- --------------
MINORITY INTEREST IN SUBSIDIARIES 7,735,993 3,028,217
-------------- --------------
NET ASSETS
Accumulation Fund 3,103,639,556 2,310,540,978
Annuity Fund 110,027,621 76,581,093
-------------- --------------
TOTAL NET ASSETS $3,213,667,177 $2,387,122,071
============== ==============
NUMBER OF ACCUMULATION UNITS OUTSTANDING--Notes 5 and 6 18,456,445 14,604,673
============== ==============
NET ASSET VALUE, PER ACCUMULATION UNIT--Note 5 $ 168.16 $ 158.21
============== ==============
- --------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
TIAA Real Estate Account PROSPECTUS | 25 |
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME Real estate income, net:
Rental income $256,755,315 $195,537,993 $132,316,878
------------ ------------ ------------
Real estate property level expenses and taxes:
Operating expenses 52,456,479 40,056,716 27,334,060
Real estate taxes 29,670,456 22,851,890 15,892,736
------------ ------------ ------------
Total real estate property level expenses and taxes 82,126,935 62,908,606 43,226,796
------------ ------------ ------------
Real estate income, net 174,628,380 132,629,387 89,090,082
Income from real estate joint venture 2,251,593 756,133 --
Interest 24,490,376 24,294,579 17,117,917
Dividends 9,196,967 7,039,712 7,814,816
------------ ------------ ------------
TOTAL INCOME 210,567,316 164,719,811 114,022,815
------------ ------------ ------------
Expenses -- Note 2:
Investment advisory charges 5,896,729 6,924,202 4,246,911
Administrative and distribution charges 8,470,496 4,392,882 3,442,282
Mortality and expense risk charges 1,987,604 1,414,888 1,027,707
Liquidity guarantee charges 837,100 692,594 561,510
------------ ------------ ------------
TOTAL EXPENSES 17,191,929 13,424,566 9,278,410
------------ ------------ ------------
INVESTMENT INCOME, NET 193,375,387 151,295,245 104,744,405
------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Real estate properties (4,109,121) 8,382,660 8,788,795
Marketable securities 2,839,417 (106,726) (3,022,098)
------------ ------------ ------------
Net realized gain (loss) on investments (1,269,704) 8,275,934 5,766,697
------------ ------------ ------------
Net change in unrealized appreciation (depreciation) on:
Real estate properties (26,611,066) 22,257,781 14,443,916
Real estate joint venture 2,143,838 1,361,293 --
Marketable securities 2,392,319 22,252,441 (10,375,870)
------------ ------------ ------------
Net change in unrealized appreciation (depreciation) on investments (22,074,909) 45,871,515 4,068,046
------------ ------------ ------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (23,344,613) 54,147,449 9,834,743
------------ ------------ ------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS BEFORE MINORITY INTEREST 170,030,774 205,442,694 114,579,148
Minority interest in net increase in net assets resulting from
operations (811,789) -- 1,364,619
------------ ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $169,218,985 $205,442,694 $115,943,767
============ ============ ============
- --------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
| 26 | TIAA Real Estate Account PROSPECTUS
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31,
------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Investment income, net $ 193,375,387 $ 151,295,245 $ 104,744,405
Net realized gain (loss) on investments (1,269,704) 8,275,934 5,766,697
Net change in unrealized appreciation (depreciation) on investments (22,074,909) 45,871,515 4,068,046
Minority interest in net increase in net assets resulting
from operations (811,789) -- 1,364,619
------------- ------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 169,218,985 205,442,694 115,943,767
------------- ------------- -------------
FROM PARTICIPANT TRANSACTIONS
Premiums 254,149,962 161,668,073 126,200,561
Net transfers from (to) TIAA (6,241,427) 36,271,547 24,155,178
Net transfers from CREF Accounts 492,856,010 343,338,864 269,199,426
Annuity and other periodic payments (13,710,081) (9,924,802) (6,330,436)
Withdrawals and death benefits (69,728,343) (45,156,733) (30,052,955)
------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING
FROM PARTICIPANT TRANSACTIONS 657,326,121 486,196,949 383,171,774
------------- ------------- -------------
NET INCREASE IN NET ASSETS 826,545,106 691,639,643 499,115,541
NET ASSETS
Beginning of year 2,387,122,071 1,695,482,428 1,196,366,887
-------------- -------------- --------------
End of year $3,213,667,177 $2,387,122,071 $1,695,482,428
============== ============== ==============
- --------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations $ 169,218,985 $ 205,442,694 $ 115,943,767
Adjustments to reconcile net increase in net assets resulting
from operations to net cash used in operating activities:
Increase in investments (836,986,805) (702,336,424) (475,537,558)
Increase in other assets (10,737,652) (1,207,996) (14,271,470)
Increase in accrued real estate property level expenses
and taxes 15,199,279 5,970,708 6,992,799
Increase in security deposits held 1,949,704 1,268,013 3,659,536
Increase (decrease) in other liabilities (1,117,817) 1,736,106 --
Increase (decrease) in minority interest 4,707,776 3,028,217 (19,913,592)
------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (657,766,530) (486,098,682) (383,126,518)
------------- ------------- -------------
CASH FLOWS FROM PARTICIPANT TRANSACTIONS
Premiums 254,149,962 161,668,073 126,200,561
Net transfers from (to) TIAA (6,241,427) 36,271,547 24,155,178
Net transfers from CREF Accounts 492,856,010 343,338,864 269,199,426
Annuity and other periodic payments (13,710,081) (9,924,802) (6,330,436)
Withdrawals and death benefits (69,728,343) (45,156,733) (30,052,955)
------------- ------------- -------------
NET CASH PROVIDED BY PARTICIPANT TRANSACTIONS 657,326,121 486,196,949 383,171,774
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH (440,409) 98,267 45,256
CASH
Beginning of year 715,866 617,599 572,343
------------- ------------- -------------
End of year $ 275,457 $ 715,866 $ 617,599
============= ============= =============
- --------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
TIAA Real Estate Account PROSPECTUS | 27 |
TIAA REAL ESTATE ACCOUNT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
The TIAA Real Estate Account ("Account") is a segregated investment account
of Teachers Insurance and Annuity Association of America ("TIAA") and was
established by resolution of TIAA's Board of Trustees on February 22, 1995,
under the insurance laws of the State of New York, for the purpose of funding
variable annuity contracts issued by TIAA. The Account holds various properties
in wholly-owned and majority-owned subsidiaries which are consolidated for
financial statement purposes. The investment objective of the Account is a
favorable long-term rate of return primarily through rental income and capital
appreciation from real estate investments owned by the Account. The Account also
invests in publicly-traded securities and other instruments to maintain adequate
liquidity for operating expenses, capital expenditures and to make benefit
payments. The financial statements were prepared in accordance with accounting
principles generally accepted in the United States which may require the use of
estimates made by management. Actual results may vary from those estimates. The
following is a summary of the significant accounting policies consistently
followed by the Account.
BASIS OF PRESENTATION: The accompanying consolidated financial statements
include the Account and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
VALUATION OF REAL ESTATE PROPERTIES: Investments in real estate properties
are stated at fair value, as determined in accordance with procedures approved
by the Investment Committee of the Board of Trustees and in accordance with the
responsibilities of the Board as a whole; accordingly, the Account does not
record depreciation. Fair value for real estate properties is defined as the
most probable price for which a property will sell in a competitive market under
all conditions requisite to a fair sale. Determination of fair value involves
subjective judgement because the actual market value of real estate can be
determined only by negotiation between the parties in a sales transaction. Real
estate properties owned by the Account are initially valued at their respective
purchase prices (including acquisition costs). Subsequently, independent
appraisers value each real estate property at least once a year. The independent
fiduciary, The Townsend Group, must approve all independent appraisers used by
the Account. The independent fiduciary can also require additional appraisals if
it believes that a property's value has changed materially or otherwise to
assure that the Account is valued correctly. TIAA's appraisal staff performs a
valuation review of each real estate property on a quarterly basis and updates
the property value if it believes that the value of the property has changed
since the previous valuation review or appraisal. The independent fiduciary
reviews and approves any such valuation adjustments which exceed certain
prescribed limits. TIAA continues to use the revised value to calculate the
Account's net asset value until the next valuation review or appraisal.
VALUATION OF REAL ESTATE JOINT VENTURES: Real estate joint ventures are
stated at the Account's equity in the net assets of the underlying entity, which
values its real estate holdings at fair value.
VALUATION OF MORTGAGES: Mortgages are initially valued at their face amount.
Fixed rate mortgages are, thereafter, valued quarterly by discounting payments
of principal and interest to their present value using a rate at which
commercial lenders would make similar mortgage loans. Floating variable rate
mortgages are generally valued at their face amount, although the value may be
adjusted as market conditions dictate.
VALUATION OF MARKETABLE SECURITIES: Equity securities listed or traded on any
United States national securities exchange are valued at the last sale price as
of the close of the principal securities exchange on which such securities are
traded or, if there is no sale, at the mean of the last bid and asked prices on
such exchange. Short-term money market instruments are stated at market value.
Portfolio securities, including limited partnership interests, for which market
quotations are not readily available are valued at fair value as determined in
good faith under the direction of the Investment Committee of the Board of
Trustees and in accordance with the responsibilities of the Board as a whole.
ACCOUNTING FOR INVESTMENTS: Real estate transactions are accounted for as of
the date on which the purchase or sale transactions for the real estate
properties close (settlement date). Rent from real estate properties consists of
all amounts earned under tenant operating leases, including base rent,
recoveries of real estate taxes and other expenses and charges for miscellaneous
services provided to tenants. Rental income is recognized in accordance with the
billing terms of the lease agreements. The Account bears the direct expenses of
the real estate properties owned. These expenses include, but are not limited
to, fees to local property management companies, property taxes, utilities,
maintenance, repairs, insurance and other operating and administrative costs. An
estimate of the net operating income earned from each real estate property is
accrued by the Account on a daily basis and such estimates are adjusted as soon
as actual operating results are determined. Realized gains and losses on real
estate transactions are accounted for under the specific identification method.
Securities transactions are accounted for as of the date the securities are
purchased or sold (trade date). Interest income is recorded as earned and
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, the
Account is taxed as a segregated asset account of TIAA. The Account should incur
no material federal income tax attributable to the net investment experience of
the Account.
NOTE 2--MANAGEMENT AGREEMENTS
Investment advisory services for the Account are provided by TIAA employees,
under the direction of TIAA's Board of Trustees and its Investment Committee,
pursuant to investment management procedures adopted by TIAA for the Account.
TIAA's investment management decisions for the Account are also subject to
review by the Account's independent fiduciary. TIAA also provides all portfolio
accounting and related services for the Account.
Distribution and administrative services for the Account are provided by
TIAA-CREF Individual & Institutional Services, Inc. ("Services") pursuant to a
Distribution and Administrative Services Agreement with the Account. Services, a
wholly-owned subsidiary of TIAA, is a registered broker-dealer and member of the
National Association of Securities Dealers, Inc.
TIAA also provides a liquidity guarantee to the Account, for a fee, to ensure
that sufficient funds are available to meet participant transfer and cash
withdrawal requests in the event that the Account's cash flows and liquid
investments are insufficient to fund such requests. TIAA also receives a fee for
assuming certain mortality and expense risks.
The services provided by TIAA and Services are provided at cost. TIAA and
Services receive payments from the Account on a daily basis according to
formulas established each year with the objective of keeping the payments as
close as possible to the Account's actual expenses. Any differences between
actual expenses and the amounts paid are adjusted quarterly.
NOTE 3--REAL ESTATE PROPERTIES
Had the Account's real estate properties which were purchased during the year
ended December 31, 2001 been acquired at the beginning of the period (January 1,
2001), rental income and real estate property level expenses and taxes for the
year ended December 31, 2001 would have increased by approximately $36,395,000
and $12,691,000, respectively. In addition, interest income for the year ended
December 31, 2001 would have
| 28 | TIAA Real Estate Account PROSPECTUS
decreased by approximately $18,520,000. Accordingly, the total proforma effect
on the Account's net investment income for the year ended December 31, 2001
would have been an increase of approximately $5,184,000, if the real estate
properties acquired during the year ended December 31, 2001 had been acquired at
the beginning of the year.
NOTE 4--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,
- --------------------------------------------------------------
2002 $ 192,814,000
2003 180,210,000
2004 159,868,000
2005 137,375,000
2006 104,650,000
Thereafter 313,328,000
--------------
TOTAL $1,088,245,000
- --------------------------------------------------------------
Certain leases provide for additional rental amounts based upon the recovery
of actual operating expenses in excess of specified base amounts.
- --------------------------------------------------------------------------------
NOTE 5--CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Selected condensed consolidated financial information for an Accumulation Unit
of the Account is presented below.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
PER ACCUMULATION UNIT DATA:
Rental income $ 14.862 $ 14.530 $ 12.168 $ 10.425 $ 7.288
Real estate property level expenses and taxes 4.754 4.674 3.975 3.403 2.218
-------- -------- -------- -------- --------
Real estate income, net 10.108 9.856 8.193 7.022 5.070
Income from real estate joint venture 0.130 0.056 -- -- --
Dividends and interest 1.950 2.329 2.292 3.082 2.709
-------- -------- -------- -------- --------
Total income 12.188 12.241 10.485 10.104 7.779
Expense charges (1) 0.995 0.998 0.853 0.808 0.580
-------- -------- -------- -------- --------
Investment income, net 11.193 11.243 9.632 9.296 7.199
Net realized and unrealized
gain (loss) on investments (1.239) 3.995 1.164 .579 3.987
-------- -------- -------- -------- --------
Net increase in Accumulation Unit Value 9.954 15.238 10.796 9.875 11.186
Accumulation Unit Value:
Beginning of year 158.206 142.968 132.172 122.297 111.111
-------- -------- -------- -------- --------
End of year $168.160 $158.206 $142.968 $132.172 $122.297
======== ======== ======== ======== ========
Total return 6.29% 10.66% 8.17% 8.07% 10.07%
Ratios to Average Net Assets:
Expenses (1) 0.61% 0.67% 0.63% 0.64% 0.58%
Investment income, net 6.81% 7.50% 7.13% 7.34% 7.25%
Portfolio turnover rate:
Real estate properties 4.61% 3.87% 4.46% 0% 0%
Securities 40.62% 32.86% 27.68% 24.54% 7.67%
Thousands of Accumulation Units
outstanding at end of year 18,456 14,605 11,487 8,834 6,313
- ----------------------------------------------------------------------------------------------------------
(1) EXPENSE CHARGES PER ACCUMULATION UNIT AND THE RATIO OF EXPENSES TO AVERAGE
NET ASSETS INCLUDE THE PORTION OF EXPENSES RELATED TO THE MINORITY INTERESTS
AND EXCLUDE REAL ESTATE PROPERTY LEVEL EXPENSES AND TAXES. IF THE REAL
ESTATE PROPERTY LEVEL EXPENSES AND TAXES WERE INCLUDED, THE EXPENSE CHARGE
PER ACCUMULATION UNIT FOR THE YEAR ENDED DECEMBER 31, 2001 WOULD BE $5.749
($5.672, $4.828, $4.211 AND $2.798 FOR THE YEARS ENDED DECEMBER 31, 2000,
1999, 1998 AND 1997, RESPECTIVELY), AND THE RATIO OF EXPENSES TO AVERAGE NET
ASSETS FOR THE YEAR ENDED DECEMBER 31, 2001 WOULD BE 3.50% (3.79%, 3.58%,
3.32% AND 2.82% FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, 1998 AND 1997,
RESPECTIVELY).
NOTE 6--ACCUMULATION UNITS
Changes in the number of Accumulation Units outstanding were as follows:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
2001 2000 1999
- -------------------------------------------------------------------------
ACCUMULATION UNITS:
Credited for premiums 1,542,511 1,074,708 918,728
Credited for transfers, net
disbursements and amounts
applied to the Annuity Fund 2,309,261 2,042,605 1,734,721
Outstanding:
Beginning of year 14,604,673 11,487,360 8,833,911
---------- ---------- ----------
End of year 18,456,445 14,604,673 11,487,360
========== ========== ==========
- -------------------------------------------------------------------------
TIAA Real Estate Account PROSPECTUS | 29 |
REPORT OF INDEPENDENT AUDITORS
To the Participants of the TIAA Real Estate Account and the
Board of Trustees of Teachers Insurance and Annuity Association of America:
We have audited the accompanying consolidated statements of assets and
liabilities, including the consolidated statement of investments as of December
31, 2001, of the TIAA Real Estate Account ("Account") of Teachers Insurance and
Annuity Association of America ("TIAA") as of December 31, 2001 and 2000, and
the related consolidated statements of operations, changes in net assets and
cash flows for each of the three years in the period ended December 31, 2001.
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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 2001, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Account at
December 31, 2001 and 2000, and the consolidated results of its operations and
the changes in its net assets and its cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
February 1, 2002
TIAA REAL ESTATE ACCOUNT
CONSOLIDATED STATEMENT OF INVESTMENTS
DECEMBER 31, 2001
REAL ESTATE PROPERTIES--72.25%
LOCATION/DESCRIPTION VALUE
- --------------------------------------------------------------------------------
ARIZONA:
Biltmore Commerce Center -- Office building $ 32,295,058
Southbank Building -- Office building 13,565,218
CALIFORNIA:
9 Hutton Centre -- Office building 20,448,764
88 Kearny Street -- Office building 82,116,702
Cabot Industrial Portfolio -- Industrial building 34,363,752
Eastgate Distribution Center -- Industrial building 14,500,000
Kenwood Mews -- Apartments 22,686,216
Larkspur Courts -- Apartments 53,200,000
Northpoint Commerce Center -- Industrial building 37,456,149
Ontario Industrial Properties -- Industrial building 108,000,000
Westcreek -- Apartments 17,900,000
COLORADO:
Arapahoe Park East-- Industrial building 13,100,000
The Lodge at Willow Creek-- Apartments 32,000,000
Monte Vista -- Apartments 21,800,000
CONNECTICUT:
Ten & Twenty Westport Roa d-- Office building 140,105,661
FLORIDA:
Carolina Apartments -- Apartments 17,600,000
Doral Pointe --Apartments 45,341,796
Golfview -- Apartments 27,050,000
The Greens at Metrowest -- Apartments 14,100,000
Maitland Promenade One -- Office building 39,000,000
Plantation Grove -- Shopping center 7,700,000
Quiet Waters -- Apartments 16,100,000
Royal St. George -- Apartments 16,400,000
Sawgrass Portfolio -- Office building 50,800,000
South Florida Apartment Portfolio -- Apartments 46,700,000
Westinghouse Facility -- Industrial building 5,300,000
GEORGIA:
Atlanta Industrial Portfolio -- Industrial building 40,459,044
LOCATION/DESCRIPTION VALUE
- --------------------------------------------------------------------------------
ILLINOIS:
Chicago Industrial Portfolio -- Industrial building $ 42,591,186
Columbia Center III -- Office building 37,500,000
Parkview Plaza -- Office building 50,500,000
Rolling Meadows -- Shopping center 12,390,000
KENTUCKY:
IDI Kentucky Portfolio -- Industrial building 53,600,000
MARYLAND:
FedEx Distribution Facility -- Industrial building 7,600,000
Longview Executive Park -- Office building 28,200,800
MASSACHUSETTS:
Batterymarch Park II -- Office building 17,990,854
Needham Corporate Center -- Office building 28,294,526
MICHIGAN:
Indian Creek -- Apartments 16,800,000
MINNESOTA:
Interstate Crossing -- Industrial building 6,504,740
River Road Distribution Center -- Industrial building 4,131,571
NEVADA:
UPS Distribution Facility -- Industrial building 11,100,000
NEW JERSEY:
10 Waterview Boulevard -- Office building 30,400,000
371 Hoes Lane -- Office building 14,700,000
Konica Photo Imaging Headquarters -- Industrial building 17,700,000
Morris Corporate Center III -- Office building 106,214,595
South River Road Industrial -- Industrial building 32,688,565
NEW YORK:
780 Third Avenue -- Office building 177,500,000
The Colorado -- Apartments 60,500,000
NORTH CAROLINA:
The Lynnwood Collection -- Shopping center 7,900,000
The Millbrook Collection -- Shopping center 7,200,000
| 30 | TIAA Real Estate Account PROSPECTUS
LOCATION/DESCRIPTION VALUE
- --------------------------------------------------------------------------------
OHIO:
Bent Tree -- Apartments $ 14,500,000
Bisys Fund Services Building -- Office building 20,400,000
Columbus Portfolio -- Office building 28,400,000
Northmark Business Center III -- Office building 12,200,000
OREGON:
Five Centerpointe -- Office building 18,001,499
PENNSYLVANIA:
Lincoln Woods -- Apartments 24,800,000
TEXAS:
Butterfield Industrial Park -- Industrial building 4,700,000(1)
Dallas Industrial Portfolio -- Industrial building 97,245,850
The Legends at Chase Oaks -- Apartments 26,000,000
UTAH:
Landmark at Salt Lake City -- Industrial building 13,600,000
VIRGINIA:
Ashford Meadows -- Apartments 64,195,500
Fairgate at Ballston -- Office building 30,300,000
Monument Place -- Office building 35,400,000
WASHINGTON DC:
1015 15th Street -- Office building 48,736,575
1801 K Street N W -- Office building 150,339,845
--------------
TOTAL REAL ESTATE PROPERTIES
(Cost $2,276,414,478) 2,330,914,466
- -----------------------------------------------------------------------------
(1) LEASEHOLD INTEREST ONLY.
MORTGAGES--0.23%
- --------------------------------------------------------------------------------
The Georgetown Company -- a 90% participation
in a construction loan with a total commitment
of $13 million, bearing interest payable
monthly at LIBOR plus 200 basis points,
currently 3.90%, due April 1, 2003 with an
option to extend to April 1, 2004 7,265,887
---------
TOTAL MORTGAGES
(Cost $7,265,887) 7,265,887
- --------------------------------------------------------------------------------
OTHER REAL ESTATE RELATED INVESTMENTS--1.07%
REAL ESTATE JOINT VENTURE--0.89%
- --------------------------------------------------------------------------------
Teachers REA IV, LLC, which owns Tyson's Executive Plaza II
(50% Account Interest) 28,538,029
-----------
TOTAL REAL ESTATE JOINT VENTURE
(Cost $25,032,898) 28,538,029
- --------------------------------------------------------------------------------
LIMITED PARTNERSHIP--0.18%
- --------------------------------------------------------------------------------
MONY/Transwestern Mezzanine Realty Partners L.P. 5,892,857
-----------
TOTAL LIMITED PARTNERSHIP
(Cost $5,892,857) 5,892,857
- --------------------------------------------------------------------------------
TOTAL OTHER REAL ESTATE RELATED INVESTMENTS
(Cost $30,925,755) 34,430,886
- --------------------------------------------------------------------------------
MARKETABLE SECURITIES--26.45%
REAL ESTATE RELATED--9.46%
- --------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS--4.20%
SHARES ISSUER VALUE
- --------------------------------------------------------------------------------
50,600 Alexandria Real Estate Equities, Inc. 2,079,660
205,000 AMB Property Corporation 5,330,000
170,000 Apartment Investment & Management Co 7,774,100
260,325 Archstone-Smith Trust 6,846,548
100,400 Avalonbay Communities, Inc. 4,749,924
296,800 Boston Properties, Inc $ 11,278,400
230,400 Brandywine Realty Trust 4,854,528
130,000 Carramerica Realty Series B Pfd 3,186,300
84,400 Centerpoint Properties Corp. 4,203,120
83,300 Chateau Communities, Inc 2,490,670
266,900 Cousins Properties, Inc 6,501,684
271,300 Duke Realty Corp. 6,600,729
499,033 Equity Office Properties Trust. 15,010,913
213,400 Equity Residential Properties Trust Co. 6,126,714
114,700 Hilton Hotels Corp 1,252,524
40,000 Hospitality Properties Trust 1,180,000
222,800 Host Marriott Corp (New). 2,005,200
125,250 Kimco Realty Corp. 4,094,422
51,650 Macerich Company 1,373,890
82,100 Manufactured Home Communities, Inc. 2,562,341
240,500 Mission West Properties Inc. 3,059,160
331,600 Prologis Trust 7,132,716
130,600 Public Storage, Inc. 4,362,040
232,400 Reckson Associates Realty Corp 5,428,864
260,900 Simon Property Group, Inc. 7,652,197
8,600 SL Green Realty Corp. 264,106
153,000 Starwood Hotels & Resorts Worldwide 4,567,050
95,000 Sun Communities, Inc 3,538,750
------------
TOTAL REAL ESTATE INVESTMENT TRUSTS
(Cost $130,502,519) 135,506,550
- --------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE BACKED SECURITIES--5.26%
- --------------------------------------------------------------------------------
PRINCIPAL ISSUER, CURRENT RATE AND MATURITY DATE VALUE
- --------------------------------------------------------------------------------
$11,000,000 Ball 2001-116A B
2.490% 09/17/05 10,936,706
20,000,000 COMM 2.35
2.350% 11/15/13 19,996,660
20,000,000 CSFB 2001-TFLA
2.350% 11/13/13 19,996,620
10,000,000 GGPMP 3.20
3.200% 02/15/14 9,981,970
20,000,000 GGPMP 2.60
2.600% 02/15/14 19,961,680
10,000,000 GSMS 2001-Rock A2FL
2.500% 05/03/11 9,641,070
10,000,000 JPMCC 2001-FL1A B
2.320% 06/13/13 9,955,960
10,000,000 MSDW Capital
2.500% 02/03/11 9,826,920
10,000,000 MSDWC 2001 - XLF A1
2.610% 10/07/13 9,999,990
8,000,000 MSDWC 2001 - FRMA C
2.470% 07/12/16 7,756,312
7,500,000 MSDWC 2001 - SGMA B
2.450% 07/11/11 7,434,885
10,000,000 Opryland Hotel Trust
2.600% 04/01/04 9,953,540
7,484,348 Strategic Hotel Cap
2.330% 04/17/06 7,240,276
7,484,348 Strategic Hotel Cap
3.090% 04/17/06 7,197,226
5,000,000 Trize 2001 - TZHA A3FL
2.270% 03/15/13 4,898,260
5,000,000 USC Oakbrook Trust
2.340% 11/01/05 4,965,850
-----------
TOTAL COLLATERALIZED MORTGAGE BACKED SECURITIES
(Cost $171,465,180) 169,743,925
- --------------------------------------------------------------------------------
TOTAL REAL ESTATE RELATED
(Cost $301,967,699) 305,250,475
- --------------------------------------------------------------------------------
TIAA Real Estate Account PROSPECTUS | 31 |
OTHER--16.99%
COMMERCIAL PAPER--16.99%
- --------------------------------------------------------------------------------
PRINCIPAL ISSUER, CURRENT RATE AND MATURITY DATE VALUE
- --------------------------------------------------------------------------------
$15,950,000 Abbot Laboratories
1.780% 01/03/02 $ 15,947,607
25,000,000 Abbot Laboratories
1.740% 01/10/02 24,987,360
25,000,000 American Honda Finance Corp
1.770% 01/17/02 24,978,632
25,000,000 Beta Finance Inc
2.05% 01/25/02 24,968,578
18,065,000 BMW US Capital Corp
1.83% 01/03/02 18,062,290
5,400,000 Ciesco LP
1.85% 01/04/02 5,398,920
9,300,000 Ciesco LP
1.82% 02/07/02 9,282,231
8,150,000 Coca-Cola Enterprises Inc
1.80% 01/03/02 8,148,778
4,750,000 Coca-Cola Enterprises Inc
2.02% 02/15/02 4,739,075
15,000,000 Corporate Asset Funding Corp, Inc
2.07% 01/04/02 14,997,000
23,000,000 Delaware Funding Corp
1.88% 01/22/02 22,974,560
26,700,000 Edison Asset Securitization LLC
1.82% 01/11/02 26,685,152
20,000,000 Equilon Enterprises LLC
1.76% 01/14/02 19,985,844
12,400,000 Federal Home Loan Mortgage Corp
1.81% 01/02/02 12,398,781
25,000,000 Gannett Inc
1.83% 01/24/02 24,969,832
25,000,000 Goldman Sachs Group LP
1.75% 01/14/02 24,982,305
25,000,000 Govco Incorporated
1.80% 02/25/02 24,930,000
PRINCIPAL ISSUER, CURRENT RATE AND MATURITY DATE VALUE
- -------------------------------------------------------------------------------
$24,700,000 International Business Machine Corp
1.88% 01/07/02 $ 24,691,355
25,000,000 Kitty Hawk Funding Corp
1.77% 01/15/02 24,981,145
25,000,000 Park Avenue Receivables Corp
1.83% 01/11/02 24,986,098
21,700,000 Parker Hannifin Corp
2.00% 01/02/02 21,697,830
11,500,000 Pfizer Inc
1.75% 01/31/02 11,482,076
26,475,000 Pitney Bowes Inc
1.90% 01/11/02 26,460,277
7,500,000 Preferred Receivables Funding Corp
1.78% 01/09/02 7,496,588
25,000,000 Receivables Capital Corp
1.90% 01/23/02 24,971,090
25,000,000 Salomon Smith Barney Holdings Inc
1.90% 01/02/02 24,997,500
8,400,000 SBC Communications Inc
2.00% 01/10/02 8,395,753
25,000,000 United Parcel Service of America Inc
1.78% 02/01/02 24,959,778
14,700,000 Verizon Global Funding
1.85% 01/17/02 14,687,435
------------
TOTAL COMMERCIAL PAPER
(Amortized cost $548,265,288) 548,243,870
------------
TOTAL OTHER
(Cost $548,265,288) 548,243,870
------------
TOTAL MARKETABLE SECURITIES
(Cost $850,232,987) 853,494,345
--------------
TOTAL INVESTMENTS--100.00%
(Cost $3,164,839,107) $3,226,105,584
==============
- --------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
| 32 | TIAA Real Estate Account PROSPECTUS
TIAA REAL ESTATE ACCOUNT
PROFORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
DECEMBER 31, 2001
HISTORICAL PROFORMA ADJUSTMENTS PROFORMA
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments, at value:
Real estate properties, mortgages and other real
estate related investments $2,372,611,239 $ --(a) $2,372,611,239
Marketable securities 853,494,345 --(a) 853,494,345
Cash 275,457 -- 275,457
Other 44,003,409 -- 44,003,409
------------- ------------- -------------
TOTAL ASSETS 3,270,384,450 -- 3,270,384,450
------------- ------------- -------------
LIABILITIES
Accrued real estate property level expenses and taxes 39,595,315 -- 39,595,315
Security deposits held 8,767,676 -- 8,767,676
Other 618,289 -- 618,289
------------- ------------- -------------
TOTAL LIABILITIES 48,981,280 -- 48,981,280
------------- ------------- -------------
MINORITY INTEREST 7,735,993 -- 7,735,993
------------- ------------- -------------
NET ASSETS
Accumulation Fund 3,103,639,556 -- 3,103,639,556
Annuity Fund 110,027,621 -- 110,027,621
-------------- ------------- --------------
TOTAL NET ASSETS $3,213,667,177 -- $3,213,667,177
============== ============= ==============
- ---------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO PROFORMA CONDENSED FINANCIAL STATEMENTS.
TIAA REAL ESTATE ACCOUNT
PROFORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 2001
HISTORICAL PROFORMA ADJUSTMENTS PROFORMA
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Real estate income, net:
Rental income $256,755,315 $36,395,450 (b) $293,150,765
Real estate property level expenses and taxes:
Operating expenses 52,456,479 9,596,370 (b) 62,052,849
Real estate taxes 29,670,456 3,094,813 (b) 32,765,269
------------- ------------- -------------
Total real estate property level expenses and taxes 82,126,935 12,691,183 94,818,118
------------- ------------- -------------
Real estate income, net 174,628,380 23,704,267 198,332,647
Income from real estate joint venture 2,251,593 -- 2,251,593
Interest and dividends 33,687,343 (18,520,243)(c) 15,167,100
------------- ------------- -------------
TOTAL INCOME 210,567,316 5,184,024 215,751,340
EXPENSES 17,191,929 1,577,266 (d) 18,769,195
------------- ------------- -------------
INVESTMENT INCOME--NET 193,375,387 3,606,758 196,982,145
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (23,344,613) -- (23,344,613)
------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS BEFORE MINORITY INTEREST 170,030,774 3,606,758 173,637,532
Minority interest in net increase in net assets
resulting from operations (811,789) -- (811,789)
------------- ------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $169,218,985 $ 3,606,758 $172,825,743
============= ============= =============
- ---------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO PROFORMA CONDENSED FINANCIAL STATEMENTS.
TIAA Real Estate Account PROSPECTUS | 33 |
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,
2001 through the date of this prospectus. Various assumptions have been made in
order to prepare these proforma condensed financial statements. The proforma
condensed statement of assets and liabilities has been prepared assuming real
estate properties purchased during the period January 1, 2002 through the date
of this prospectus were purchased as of December 31, 2001. The proforma
condensed statement of operations has been prepared assuming all real estate
properties purchased during the period January 1, 2001 through the date of this
prospectus were purchased as of January 1, 2001.
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) No adjustments required as there were no properties purchased during the
period January 1, 2002 through the date of this prospectus.
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, 2001 through
the date of this prospectus, assuming such properties were owned for the
period January 1, 2001 through December 31, 2001.
(c) To record the decrease in interest and dividend income from having less cash
to invest in marketable securities, assuming the real estate properties
purchased during the period January 1, 2001 through the date of this
prospectus had been purchased as of January 1, 2001.
(d) To record additional investment advisory charges which would have been
incurred during 2001, assuming the real estate properties purchased during
the period January 1, 2001 through the date of this prospectus had been
purchased as of January 1, 2001.
| 34 | TIAA Real Estate Account PROSPECTUS
INDEPENDENT AUDITORS' REPORT
To the Management of Teachers Insurance and Annuity Association
We have audited the accompanying combined statement of revenues and certain
expenses of Windsor At Boca Arbor Club, Windsor At Carolina, Windsor At
Lakepointe and Windsor At Quiet Waters, as described in Note 1 (the
"Properties"), for the year ended March 31, 2001. This financial statement is
the responsibility of the property owner's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 Rule 3-14 of Securities and Exchange
Commission Regulation S-X, and, as described in Note 1, 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 revenues and certain expenses of the Properties for
the year ended March 31, 2001, in conformity with generally accepted accounting
principles.
/s/ Friedman Alpren & Green LLP
July 27, 2001
WINDSOR AT BOCA ARBOR CLUB, WINDSOR AT CAROLINA,
WINDSOR AT LAKEPOINTE AND WINDSOR AT QUIET WATERS
COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
(IN THOUSANDS)
YEAR ENDED MARCH 31, 2001 (AUDITED) AND
THREE MONTHS ENDED JUNE 30, 2001 (UNAUDITED)
YEAR ENDED THREE MONTHS ENDED
MARCH 31, 2001 JUNE 30, 2001
(AUDITED) (UNAUDITED)
- --------------------------------------------------------------------------------
REVENUES
Apartment rental income $ 9,869 $ 2,529
Other rental income 410 177
------- -------
10,279 2,706
------- -------
CERTAIN EXPENSES
Business office 646 131
Marketing 561 111
Repairs and maintenance 1,411 275
Club and pool 30 7
Utilities 436 97
Real estate taxes 1,289 324
Insurance 113 29
Management fees 417 109
Other operating expenses 43 9
------- -------
4,946 1,092
------- -------
Excess of revenues over
certain expenses $ 5,333 $1,614
======= =======
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS COMBINED FINANCIAL
STATEMENT.
WINDSOR AT BOCA ARBOR CLUB, WINDSOR AT CAROLINA,
WINDSOR AT LAKEPOINTE AND WINDSOR AT QUIET WATERS
NOTES TO COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
1 -- ORGANIZATION AND BASIS OF PRESENTATION
The properties are limited partnerships which are each owned by a 1%
corporate general partner and a 99% limited partner (Windsor Realty Fund III,
LP).
RESIDENTIAL
PROPERTY NAME LOCATION APARTMENT UNITS
- --------------------------------------------------------------------------------
Windsor at Boca Arbor ClubBoca Raton, Florida 304
Windsor at Carolina Margate, Florida 208
Windsor at Lakepointe Plantation, Florida 246
Windsor at Quiet Waters Deerfield Beach, Florida 200
- --------------------------------------------------------------------------------
The accompanying financial statement is presented in conformity with Rule
3-14 of Securities and Exchange Commission Regulation S-X. Accordingly, the
financial statement is not representative of the actual operations for the
periods presented, as certain expenses, which may not be comparable to the
expenses expected to be incurred in the future operations of the acquired
property, have been excluded. Expenses excluded consist of interest,
depreciation and amortization, asset management fees, and certain other expenses
not directly related to the future operations of the Properties.
2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of the financial statement in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
3 -- TRANSACTIONS WITH RELATED PARTIES
GID Management Corp. ("GID"), an affiliate of the general partner, is
entitled to an annual fee of 4% of gross receipts for services in connection
with the management of the properties. Management fees of approximately $417,000
and $109,000 were incurred for the year ended March 31, 2001 and the three
months ended June 30, 2001, respectively.
GID is entitled to a reimbursement of payroll and fringe benefits paid on
behalf of the properties. Reimbursements paid to GID were approximately $830,000
and $188,000 for the year ended March 31, 2001 and the three months ended June
30, 2001, respectively.
TIAA Real Estate Account PROSPECTUS | 35 |
INDEPENDENT AUDITORS' REPORT
To the Management of Teachers Insurance and Annuity Association
We have audited the accompanying statement of revenues and certain expenses
of the property located at 10 and 20 Westport Road, Wilton, Connecticut (the
"Property"), as described in Note 1, for the year ended December 31, 2000. This
financial statement is the responsibility of the property owner's management.
Our responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the Untied States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of revenues and certain expenses was prepared for
the purpose of complying with Rule 3-14 of Securities and Exchange Commission
Regulation S-X and, as described in Note 1, is not intended to be a complete
presentation of the Property's revenues and expenses.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the revenues and certain expenses of the Property for the
year ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Friedman Alpren & Green LLP
December 7, 2001
10 AND 20 WESTPORT ROAD, WILTON CONNECTICUT
STATEMENT OF REVENUES AND CERTAIN EXPENSES (IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2000 (AUDITED) AND
NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED)
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 2000 SEPTEMBER 30, 2001
(AUDITED) (UNAUDITED)*
- --------------------------------------------------------------------------------
REVENUES
Base rents $4,664 $5,301
FASB Statement No. 13 accrual (68) 192
Escalation charges 2,068 1,974
Storage and tenant services 56 41
------ -------
6,720 7,508
------ -------
CERTAIN EXPENSES
Operating 1,243 1,342
Administrative 437 410
Real estate taxes 326 339
------ -------
2,006 2,091
------ -------
Excess of revenues over
certain expenses $4,714 $5,417
====== =======
- --------------------------------------------------------------------------------
* 20 WESTPORT ROAD BEGAN OPERATIONS ON JUNE 15, 2001 AND ITS OPERATIONS ARE
INCLUDED FOR THE PERIOD JUNE 15, 2001 TO SEPTEMBER 30, 2001.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS COMBINED FINANCIAL
STATEMENT.
10 AND 20 WESTPORT ROAD, WILTON, CONNECTICUT
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Property, located at 10 and 20 Westport Road, Wilton, Connecticut,
consists of two commercial buildings with a combined rentable area of
approximately 532,000 square feet of office space and 6,800 square feet of
storage space. As of December 1, 2001, 100% of the office space and
approximately 43% of the storage space has been leased. Construction of the
property at 20 Westport Road was completed in June 2001. The Property's
accounting records are maintained in accordance with generally accepted
accounting principles.
The accompanying financial statement is presented in conformity with Rule
3-14 of Securities and Exchange Commission Regulation S-X. Accordingly, the
financial statement is not representative of the actual operations for the
periods presented, as certain expenses, which may not be comparable to the
expenses expected to be incurred in the future operations of the acquired
property, have been excluded. Expenses excluded consist of interest,
depreciation and amortization, leasing expenses and certain professional fees
not directly related to the future operations of the Property.
2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of the financial statement in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Rental income is recognized from leases with scheduled rent increases on a
straight-line basis over the lease term. Escalation rents based on payments for
real estate taxes and operating expenses are estimated and accrued.
DEFERRED RECOVERABLE COSTS
Deferred recoverable costs are amortized over 3 to 10 years; the amortization
is included in operating expenses.
3 -- RELATED PARTY TRANSACTIONS
The Property is managed by Louis Dreyfus Properties LLC, an affiliate of the
owner. The management fee under the management agreement calls for reimbursement
to the manager of its actual costs and expenses, not to exceed 3% of the annual
gross revenues of the Property. These fees amounted to $204,703 for the year
ended December 31, 2000.
In addition, the Property reimburses the manager for its share of direct
management expenses for operating the management office located at 23 Richmond
Hill Avenue, Stamford, Connecticut, plus other direct management expenses
incurred. The management office manages various properties (including 10 and 20
Westport Road) and the allocation is based on rentable office and retail space
of the properties.
An analysis of the reimbursements is as follows:
Total allocable direct management expenses $635,315
========
Allocation to 10 Westport Road (32%) $203,301
========
4 -- OPERATING LEASES
Office and storage space in the Property at 10 Westport Road is rented to
tenants under various operating leases. Approximate minimum future rentals
required under these leases at December 31, 2000 are as follows:
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
2001 $ 3,735,000
2002 3,763,000
2003 3,763,000
2004 3,763,000
2005 4,585,000
Thereafter 18,525,000
-----------
$38,134,000
===========
- --------------------------------------------------------------------------------
| 36 | TIAA Real Estate Account PROSPECTUS
INDEPENDENT AUDITORS' REPORT
To the Management of Teachers Insurance and Annuity Association
We have audited the accompanying statement of revenues and certain expenses
of the property located at 1015 15th Street, NW, Washington, D.C., as described
in Note 1 (the "Property"), for the year ended December 31, 2000. This financial
statement is the responsibility of the property owner's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of revenues and certain expenses was prepared for
the purpose of complying with Rule 3-14 of Securities and Exchange Commission
Regulation S-X, and, as described in Note 1, is not intended to be a complete
presentation of the Property's revenues and expenses.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the revenues and certain expenses of the Property for the
year ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Friedman Alpren & Green LLP
December 19, 2001
1015 15TH STREET, NW, WASHINGTON, D.C.
STATEMENT OF REVENUES AND CERTAIN EXPENSES (IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2000 (AUDITED) AND
NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED)
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 2000 SEPTEMBER 30, 2001
(AUDITED) (UNAUDITED)
- --------------------------------------------------------------------------------
REVENUES
Base rents $4,714 $4,185
Escalation charges 102 139
Parking income 193 147
Storage and tenant services 80 66
Miscellaneous 75 70
------- -------
5,164 4,607
------- -------
CERTAIN EXPENSES
Operating 1,377 1,196
Administrative 55 63
Real estate taxes 522 406
Bad debts 2 --
Other 13 --
------- -------
1,969 1,665
------- -------
Excess of revenues over
certain expenses $3,195 $2,942
======= =======
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS COMBINED FINANCIAL
STATEMENT.
1015 15TH STREET, NW, WASHINGTON, D.C.
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
1 -- ORGANIZATION AND BASIS OF PRESENTATION
The Property is a 12-story office building located at 1015 15th Street, NW,
Washington, D.C. and is owned by 1015 15th Street NW Associates, LP (a limited
partnership). It has an aggregate net rentable area of approximately 190,000
square feet of office, retail and storage space and 42,000 square feet of garage
space (approximately 99% of which is leased at December 19, 2001). The
Property's accounting records are maintained in accordance with generally
accepted accounting principles.
The accompanying financial statement is presented in conformity with Rule
3-14 of the Securities and Exchange Commission Regulation S-X. Accordingly, the
financial statement is not representative of the actual operations for the
periods presented, as certain expenses, which may not be comparable to the
expenses expected to be incurred in the future operations of the acquired
property, have been excluded. Expenses excluded consist of interest,
depreciation and amortization, asset management fees, leasing expenses and
certain other expenses not directly related to the future operations of the
Property.
The statement of revenues and certain expenses for the nine months ended
September 31, 2001 is unaudited. However, in the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for
the fair presentation of this statement of revenues and certain expenses for the
interim period on the basis described above have been included. The results for
such interim period are not necessarily indicative of the results for an entire
year.
2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statement in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION
Rental income is recognized from leases with scheduled rent increases on a
straight-line basis over the lease term. Escalation rents based on payments for
real estate taxes and operating expenses are estimated and accrued.
3 -- OPERATING LEASES
Office and retail space in the Property is rented to tenants under various
operating leases. Approximate minimum future rentals required under these leases
at December 31, 2000 (including leases entered into from January 1, 2001 through
December 19, 2001) are as follows:
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
2001 $ 5,373,000
2002 5,774,000
2003 5,856,000
2004 5,586,000
2005 4,817,000
Thereafter 16,095,000
-----------
$43,501,000
===========
- --------------------------------------------------------------------------------
TIAA Real Estate Account PROSPECTUS | 37 |
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,
------------------------------
2001 2000
- --------------------------------------------------------------------------------
ASSETS
Bonds $ 87,013,371 $ 80,809,152
Mortgages 23,068,264 21,952,809
Real estate 4,927,282 5,296,235
Stocks 2,205,332 1,738,069
Other long-term investments 3,304,292 3,329,278
Cash and short-term investments 2,892,904 2,577,223
Investment income due and accrued 1,339,451 1,286,268
Separate account assets 4,228,544 3,408,570
Other assets 673,658 502,934
------------- -------------
TOTAL ASSETS $ 129,653,098 $ 120,900,538
============= =============
LIABILITIES, CAPITAL AND CONTINGENCY
RESERVES
Policy and contract reserves $ 107,363,466 $ 99,859,231
Dividends declared for the following year 2,364,877 2,197,454
Asset Valuation Reserve 2,619,461 2,870,533
Interest Maintenance Reserve 308,168 1,118,965
Separate account liabilities 4,228,544 3,408,570
Securities lending collateral 2,619,761 2,333,054
Other liabilities 1,497,738 1,015,326
------------- -------------
TOTAL LIABILITIES 121,002,015 112,803,133
------------- -------------
Capital (2,500 shares of $1,000 par value
common stock issued and outstanding)
and paid-in surplus 3,050 3,050
Contingency reserves:
For investment losses, annuity and
insurance mortality, and other risks 8,648,033 8,094,355
------------- -------------
TOTAL CAPITAL AND
CONTINGENCY RESERVES 8,651,083 8,097,405
------------- -------------
TOTAL LIABILITIES, CAPITAL
AND CONTINGENCY RESERVES $ 129,653,098 $ 120,900,538
============= =============
- --------------------------------------------------------------------------------
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
TIAA CONDENSED UNAUDITED STATEMENTS OF OPERATIONS
(in thousands)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000
- --------------------------------------------------------------------------------
INCOME
Insurance and annuity premiums, deposits,
and other considerations $ 3,878,895 $ 3,594,805
Transfers from CREF, net 1,402,316 572,211
Annuity dividend additions 3,059,734 2,728,562
Net investment income 8,819,579 8,556,537
------------- -------------
TOTAL INCOME $ 17,160,524 $ 15,452,115
============= =============
DISTRIBUTION OF INCOME
Policy and contract benefits $ 3,065,338 $ 2,976,305
Dividends to policyholders 4,766,809 4,315,895
Increase in policy and contract reserves 7,463,548 5,991,167
Operating expenses 412,789 356,975
Transfers to separate accounts, net 615,228 527,255
Other, net 20,499 (18,442)
Federal income tax expense (benefit) 26,784 24,048
Increase in contingency reserves from
operations 789,529 1,278,912
------------- -------------
TOTAL DISTRIBUTION OF INCOME $ 17,160,524 $ 15,452,115
============= =============
Net Income:
Increase in contingency reserves
from operations $ 789,529 $ 1,278,912
Net realized capital gains (losses)
less capital gains taxes, after transfers
to Interest Maintenance Reserve (204,291) (56,916)
------------- -------------
NET INCOME $ 585,238 $ 1,221,996
============= =============
CHANGES IN CAPITAL AND
CONTINGENCY RESERVES:
Net income $ 585,238 $ 1,221,996
Net unrealized capital gains (losses)
on investments (574,266) 123,349
Transfers to (from) the Asset Valuation
Reserve 251,073 (232,754)
Increase in non-admitted assets,
other than investments (59,749) (40,614)
Cumulative effect of change in
accounting principles 375,325 --
Other, net (23,943) --
------------- -------------
NET CHANGE IN CAPITAL AND
CONTINGENCY RESERVES 553,678 1,071,977
CAPITAL AND CONTINGENCY RESERVES
AT BEGINNING OF YEAR 8,097,405 7,025,428
------------- -------------
CAPITAL AND CONTINGENCY RESERVES
AT END OF YEAR $ 8,651,083 $ 8,097,405
============= =============
- --------------------------------------------------------------------------------
| 38 | TIAA Real Estate Account PROSPECTUS
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
SUPPLEMENTAL INFORMATION TO
CONDENSED UNAUDITED FINANCIAL STATEMENTS
VALUATION OF INVESTMENTS: Bonds and short-term investments (debt securities with
maturities of one year or less at the time of acquisition) not in default are
generally stated at amortized cost; medium to highest quality preferred stocks
at cost; common stocks at market value; and all other bond, short-term and
preferred stock investments at the lower of amortized cost or market value. For
loan-backed bonds and structured securities, amortized cost is determined using
actual and anticipated cash flows under the prospective method for interest-only
securities and under the retrospective method for all other securities.
Anticipated prepayments are based on life-to-date prepayment speeds, using
historical cash flows and internal estimates. Mortgages are stated at amortized
cost and directly-owned real estate at depreciated cost (net of encumbrances).
Investments in wholly-owned subsidiaries, real estate limited partnerships and
securities limited partnerships are stated at TIAA's equity in the net admitted
assets of the underlying entities. Policy loans are stated at outstanding
principal amounts. Separate account assets are generally stated at market value.
Seed money investments in the TIAA-CREF Mutual Funds, TIAA-CREF Institutional
Mutual Funds and TIAA-CREF Life Funds are stated at market value. All
investments are stated net of impairments which are considered to be other than
temporary, which are determined on an individual basis. Depreciation of real
estate investments is generally computed over a 40-year period on the
straight-line method.
ADDITIONAL INFORMATION:
2001 2000
- --------------------------------------------------------------------------------
As a percentage of total bond investments:
Below investment grade bonds 8.2% 6.9%
As a percentage of total mortgage investments:
Total mortgage investments in California 19.0% 19.0%
Total mortgage investments in office buildings 42.4% 40.9%
Total mortgage investments in shopping centers 25.4% 27.6%
As a percentage of total real estate investments:
Two states with highest real estate
investment California 14% California 14%
Florida 10% Florida 10%
TOTAL REAL ESTATE INVESTMENTS
IN OFFICE BUILDINGS 72.0% 67.1%
DERIVATIVE INSTRUMENTS: TIAA has filed a Derivatives Use Plan with the New
York State Insurance Department. This plan details TIAA's derivative policy
objectives, strategies and controls, and any restrictions placed on various
derivative types. The plan also specifies the procedures and systems that TIAA
has established to evaluate, monitor and report on the derivative portfolio in
terms of valuation, effectiveness and counterparty credit quality. TIAA uses
derivative instruments for hedging and asset replication purposes. TIAA enters
into derivative directly with counterparties of high credit quality (i.e., rated
AA or better at time of inception) and monitors counterparty credit quality on
an ongoing basis. At December 31, 2001 and 2000, TIAA had outstanding foreign
currency swap contracts with a total notional value of approximately
$1,421,613,000 and $1,020,545,000, respectively; foreign currency forward
contracts with a total notional value of approximately $234,686,000 and
$203,113,000, respectively; interest rate swap contracts with a total notional
value of approximately $565,855,000 and $409,036,000, respectively; swap options
outstanding with a total notional value of $0 and $219,100,000, respectively;
and interest rate cap contracts with a total notional value of approximately
$75,650,000 and $145,650,000, respectively.
TIAA Real Estate Account PROSPECTUS | 39 |
APPENDIX A--MANAGEMENT OF TIAA
The Real Estate Account has no officers or directors. The Trustees and principal
executive officers of TIAA, and their principal occupations during the last five
years, are as follows:
TRUSTEES
DAVID ALEXANDER, 69. President Emeritus, Pomona College. Formerly, Trustees'
Professor, Pomona College and American Secretary, Rhodes Scholarship Trust.
MARCUS ALEXIS, 70. Board of Trustees Professor of Economics and Professor of
Management and Strategy, J.L. Kellogg Graduate School of Management,
Northwestern University, and Visiting Professor of Economics, Stanford
University.
WILLARD T. CARLETON, 67. Donald R. Diamond Professor of Finance Emeritus,
College of Business and Public Administration, University of Arizona.
ROBERT C. CLARK, 58. Dean and Royall Professor of Law, Harvard Law School,
Harvard University.
ESTELLE A. FISHBEIN, 67. Vice President and General Counsel, The Johns
Hopkins University.
FREDERICK R. FORD, 66. Executive Vice President and Treasurer Emeritus,
Purdue University. Formerly, Executive Vice President and Treasurer, Purdue
University.
RUTH SIMMS HAMILTON, 64. Professor, Department of Sociology, and Director,
African Diaspora Research Project, Michigan State University.
ROCHELLE B. LAZARUS, 54. Chairman and Chief Executive Officer, Ogilvy &
Mather Worldwide. Formerly, President and Chief Operating Officer, Ogilvy &
Mather Worldwide.
ROBERT M. O'NEIL, 67. Professor of Law, University of Virginia and Director,
The Thomas Jefferson Center for the Protection of Free Expression.
LEONARD S. SIMON, 65. Vice Chairman, Charter One Financial Inc. Formerly,
Chairman, President and Chief Executive Officer, RCSB Financial, Inc. and
Chairman and Chief Executive Officer, The Rochester Community Savings Bank.
RONALD L. THOMPSON, 52. Chairman and Chief Executive Officer, Midwest
Stamping Co.
PAUL R. TREGURTHA, 66. Chairman and Chief Executive Officer, Mormac Marine
Group, Inc. and Moran Transportation Company, Inc.; Formerly, Chairman, Meridian
Aggregates, L.P.; Vice Chairman, The Interlake Steamship Company and Lakes
Shipping Company.
WILLIAM H. WALTRIP, 64. Chairman, Technology Solutions Company. Formerly,
Chairman and Chief Executive Officer, Bausch & Lomb Inc.
ROSALIE J. WOLF, 60. Managing Director, Laurel Management, LLC. Formerly,
Treasurer and Chief Investment Officer, The Rockefeller Foundation.
OFFICER-TRUSTEES
JOHN H. BIGGS, 65. Chairman, President and Chief Executive Officer, TIAA and
CREF.
MARTIN L. LEIBOWITZ, 65. Vice Chairman and Chief Investment Officer, TIAA and
CREF.
OTHER OFFICERS
RICHARD J. ADAMSKI, 59. Vice President and Treasurer, TIAA and CREF.
RICHARD L. GIBBS, 55. Executive Vice President, Finance and Planning, TIAA
and CREF.
E. LAVERNE JONES, 53. Vice President and Corporate Secretary, TIAA and CREF.
APPENDIX B--SPECIAL TERMS
ACCUMULATION: The total value of your accumulation units in the Real Estate
Account.
ACCUMULATION PERIOD: The period that begins with your first premium and
continues until the entire accumulation has been applied to purchase annuity
income, transferred from the Account, or paid to you or a beneficiary.
ACCUMULATION UNIT: A share of participation in the Real Estate Account for
someone in the accumulation period. The Account's accumulation unit value
changes daily.
ANNUITY UNIT: A measure used to calculate the amount of annuity payments due
a participant.
BENEFICIARY: Any person or institution named to receive benefits if you die
during the accumulation period or if you (and your annuity partner, if you have
one) die before the guaranteed period of your annuity ends.
BUSINESS DAY: Any day the New York Stock Exchange (NYSE) is open for trading.
A business day ends at 4 p.m. eastern time, or when trading closes on the NYSE,
if earlier.
CALENDAR DAY: Any day of the year. Calendar days end at the same time as
business days.
COMMUTED VALUE: The present value of annuity payments due under an income
option or method of payment not based on life contingencies. Present value is
adjusted for investment gains or losses since the annuity unit value was last
calculated.
ELIGIBLE INSTITUTION: A nonprofit institution, including any governmental
institution, organized in the United States.
ERISA: The Employee Retirement Income Security Act of 1974, as amended.
GENERAL ACCOUNT: All of TIAA's assets other than those allocated to the Real
Estate Account or to other existing or future TIAA separate accounts.
INCOME CHANGE METHOD: The method under which you choose to have your annuity
payments revalued. Under the annual income change method, your payments are
revalued once each year. Under the monthly income change method, your payments
are revalued every month.
SEPARATE ACCOUNT: An investment account legally separated from the general
assets of TIAA, whose income and investment gains and losses are credited to or
charged against its own assets, without regard to TIAA's other income, gains or
losses.
VALUATION DAY: Any day the NYSE is open for trading, as well as the last
calendar day of each month. Valuation days end as of the close of all U.S.
national exchanges where securities or other investments of the Account are
principally traded. Valuation days that aren't business days will end at 4 p.m.
eastern time.
VALUATION PERIOD: The time from the end of one valuation day to the end of
the next.
| 40 | TIAA Real Estate Account PROSPECTUS
[LOGO] 730 Third Avenue
New York NY 10017-3206
HOW TO REACH US
OUR ADDRESS
TIAA-CREF
730 THIRD AVENUE
NEW YORK, NEW YORK 10017-3206
Send all notices, forms, requests, or payments to this address.
INTERNET
www.tiaa-cref.org
24 HOURS A DAY/SEVEN DAYS A WEEK
Obtain general information about TIAA-CREF, view personal account information,
reallocate premiums, and transfer funds among TIAA and CREF investments options.
AUTOMATED TELEPHONE SERVICE
800 842-2252
24 HOURS A DAY/SEVEN DAYS A WEEK
Change your allocation, transfer accumulations, get your accumulation unit
values, get TIAA and CREF performance, and confirm last premium paid.
TELEPHONE COUNSELING CENTER
800 842-2776
8 A.M. TO 11 P.M. ET MONDAY-FRIDAY
Speak to a consultant about retirement savings and planning, quarterly and
annuity benefits reports, receiving annuity payments, annuity income options and
tax reports.
IRA ENROLLMENT HOTLINE
800 842-2888
Speak with a service representative about our IRA products. We can suspend or
terminate your ability to transact by Internet or telephone at any time, for any
reason.
[LOGO] Printed on recycled paper CREF/RE Pro-5/02
PART II
INFORMATION NOT REQUIRED IN A PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
-------------------------------------------
SEC Registration Fees $ 184,000
Costs of printing and engraving $ 500,000*
Legal fees $ 10,000*
Accounting fees $ 10,000*
-----------
TOTAL $ 704,000*
- ---------
* - Approximate
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Trustees, officers, and employees of TIAA may be indemnified against
liabilities and expenses incurred in such capacity pursuant to Article Six of
TIAA's bylaws (see Exhibit 3(B)). Article Six provides that, to the extent
permitted by law, TIAA will indemnify any person made or threatened to be made a
party to any action, suit or proceeding by reason of the fact that such person
is or was a trustee, officer, or employee of TIAA or, while a trustee, officer,
or employee of TIAA, served any other organization in any capacity at TIAA's
request. To the extent permitted by law, such indemnification could include
judgments, fines, amounts paid in settlement, and expenses, including attorney's
fees. TIAA has in effect an insurance policy that will indemnify its trustees,
officers, and employees for liabilities arising from certain forms of conduct.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to trustees, officers, or employees of TIAA,
pursuant to the foregoing provision or otherwise, TIAA has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in that Act and is therefore unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment of expenses incurred or paid by a trustee, officer, or employee
in the successful defense of any action, suit or proceeding) is asserted by a
trustee, officer, or employee in connection with the securities being
registered, TIAA will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in that Act and will be governed by the final adjudication of such
issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
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.(1) (as amended) and the Amendment thereto(4)
(3) (A) Charter of TIAA (as amended)(4)
(B) Bylaws of TIAA (as amended)(3)
(4) (A) Forms of RA, GRA, GSRA, SRA, IRA Real Estate Account
Contract Endorsements(2) and Keogh Contract(1)
(B) Forms of Income-Paying Contracts(2)
(5) Opinion and Consent of Charles H. Stamm, Esquire(5)
(10) (A) Independent Fiduciary Agreement by and among TIAA,
the Registrant, and The Townsend Group(1)
(B) Custodial Services Agreement by and between TIAA and
Morgan Guaranty Trust Company of New York with
respect to the Real Estate Account(2)
(23) (A) Opinion and Consent of Charles H. Stamm, Esquire
(filed as Exhibit 5)
(B) Consent of Sutherland Asbill & Brennan LLP(5)
(C) Consent of Ernst & Young LLP(5)
(D) Consent of Friedman, Alpren & Greene LLP(5)
- -----------
(1) - Previously filed and incorporated herein by reference to Post-Effective
Amendment No. 6 to the Account's previous Registration Statement on Form S-1,
filed April 26, 2000 (File No. 333-22809)
(2) - 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).
(3) - Previously filed and incorporated herein by reference to the Account's
Form 10-Q Quarterly Report for the period ended September 30, 1997, filed
November 13, 1997 (File No. 33-92990).
(4) - Previously filed and incorporated herein by reference to the Account's
previous Registration Statement on Form S-1 filed April 27, 2001(File No.
333-59778).
(5) - Filed herewith
(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.
CHAIRMAN'S LETTER
To the Policyholders of
Teachers Insurance and Annuity
Association of America:
We are pleased to provide you with the accompanying audited statutory-basis
financial statements of Teachers Insurance and Annuity Association of America
("TIAA") for the year ended December 31, 2001. We continue to manage TIAA in a
prudent manner with the goal of maximizing our long-term performance within
reasonable risk parameters for the long-term benefit of our policyholders. As
you review these statements, it is also important to note that TIAA continues to
maintain the highest possible financial strength ratings from each of the four
nationally recognized independent rating organizations.
The report of management responsibility, on the following page, demonstrates our
ongoing commitment to conduct TIAA's activities in a well-controlled management
environment. Additionally, the accompanying audit report indicates an
unqualified opinion regarding TIAA's statutory-basis financial statements from
the independent auditing firm of Ernst & Young LLP. These statements have been
prepared in accordance with statutory accounting practices, a comprehensive
basis of accounting comprised of accounting practices prescribed or permitted by
the New York State Insurance Department ("Department").
There is also a reference in the auditors' report to accounting principles
generally accepted in the United States ("GAAP"); this reference to GAAP is
required by the auditors' professional standards. GAAP is an overall accounting
methodology that, while similar in many respects to statutory accounting
practices, is a separate basis of accounting. Statutory accounting is generally
more conservative than GAAP, and these statutory-basis financial statements are
not intended to be in conformity with GAAP.
Statutory accounting is the only basis of accounting recognized by the
Department for regulatory purposes, and it is the only basis of accounting used
by the Department in measuring the financial condition and results of operations
of an insurance company. It is also the basis for determining insurance company
solvency under the New York Insurance Law. While we could prepare a separate set
of GAAP financial statements, there is no legal requirement for us to do so.
Additionally, TIAA does not believe at this time that it would be a worthwhile
expenditure to maintain another separate set of financial records, particularly
since it would provide little additional value for our policyholders.
Accordingly, we believe that it is prudent for us to continue to manage and
report on the operations of TIAA under the conservative statutory accounting
methodology that we have always utilized.
/s/ John H. Biggs
------------------------------
Chairman, President and
Chief Executive Officer
2
REPORT OF MANAGEMENT RESPONSIBILITY
To the Policyholders of
Teachers Insurance and Annuity
Association of America:
The accompanying statutory-basis financial statements of Teachers Insurance and
Annuity Association of America ("TIAA") are the responsibility of management.
They have been prepared on the basis of statutory accounting practices, a
comprehensive basis of accounting comprised of accounting practices prescribed
or permitted by the New York State Insurance Department. The financial
statements of TIAA have been presented fairly and objectively in accordance with
such statutory accounting practices.
TIAA has established and maintains a strong system of internal controls designed
to provide reasonable assurance that assets are properly safeguarded and
transactions are properly executed in accordance with management's
authorization, and to carry out the ongoing responsibilities of management for
reliable financial statements. In addition, TIAA's internal audit personnel
provide a continuing review of the internal controls and operations of TIAA, and
the internal auditor regularly reports to the Audit Committee of the TIAA Board
of Trustees.
The independent auditing firm of Ernst & Young LLP has audited the accompanying
statutory-basis financial statements of TIAA. To maintain auditor independence
and avoid even the appearance of conflict of interest, it continues to be TIAA's
policy that any non-audit services be obtained from a firm other than the
external financial audit firm. The independent auditors' report expresses an
independent opinion on the fairness of presentation of these statutory-basis
financial statements.
The Audit Committee of the TIAA Board of Trustees, comprised entirely of
independent, nonmanagement trustees, meets regularly with management,
representatives of Ernst & Young LLP and internal auditing personnel to review
matters relating to financial reporting, internal controls and auditing. In
addition to the annual audit of the TIAA financial statements, the New York
State Insurance Department and other state insurance departments regularly
examine the financial statements of TIAA as part of their periodic corporate
examinations.
/s/ John H. Biggs
------------------------------
Chairman, President and
Chief Executive Officer
/s/ Richard L. Gibbs
------------------------------
Executive Vice President and
Principal Accounting Officer
3
REPORT OF THE AUDIT COMMITTEE
To the Policyholders of
Teachers Insurance and Annuity
Association of America:
The Audit Committee oversees the financial reporting process of Teachers
Insurance and Annuity Association of America ("TIAA") on behalf of the Company's
Board of Trustees. The Audit Committee is a standing committee of the Board and
operates in accordance with a formal written charter (copies are available upon
request) which describes the Audit Committee's responsibilities. All members of
the Audit Committee ("Committee") are independent, as defined under the listing
standards of the New York Stock Exchange.
Management has the primary responsibility for TIAA's financial statements,
development and maintenance of a strong system of internal controls, and
compliance with applicable laws and regulations. In fulfilling its oversight
responsibilities, the Committee reviewed and approved the audit plans of the
internal auditing group and the independent auditing firm in connection with
their respective audits. The Committee also meets regularly with the internal
and independent auditors, both with and without management present, to discuss
the results of their examinations, their evaluation of internal controls, and
the overall quality of financial reporting. As required by its charter, the
Committee will evaluate rotation of the external financial audit firm whenever
circumstances warrant, but in no event will the evaluation be later than between
their fifth and tenth years of service.
The Committee reviewed and discussed the accompanying audited financial
statements with management, including a discussion of the quality and
appropriateness of the accounting principles and financial reporting practices
followed, the reasonableness of significant judgments, and the clarity of
disclosures in the financial statements. The Committee has also discussed the
audited financial statements with Ernst & Young LLP, the independent auditing
firm responsible for expressing an opinion on the conformity of these audited
financial statements with statutory accounting principles.
The discussion with Ernst & Young LLP focused on their judgments concerning the
quality and appropriateness of the accounting principles and financial reporting
practices followed by TIAA, the clarity of the financial statements and related
disclosures, and other significant matters, such as any significant changes in
accounting policies, management judgments and estimates, and the nature of any
uncertainties or unusual transactions. In addition, the Committee discussed with
Ernst & Young LLP the auditors' independence from management, and TIAA has
received a written disclosure regarding such independence, as required by the
Independence Standards Board.
Based on the review and discussions referred to above, the Committee has
approved the release of the accompanying audited financial statements for
publication and filing with appropriate regulatory authorities.
Willard T. Carleton, Audit Committee Chair
Frederick R. Ford, Audit Committee Member
Leonard S. Simon, Audit Committee Member
Rosalie J. Wolf, Audit Committee Member
4
[ERNST & YOUNG LOGO]
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees of
Teachers Insurance and Annuity
Association of America:
We have audited the accompanying statutory-basis balance sheets of Teachers
Insurance and Annuity Association of America ("TIAA") as of December 31, 2001
and 2000, and the related statutory-basis statements of operations, changes in
capital and contingency reserves, and cash flows for the three years ended
December 31, 2001. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 2 to the financial statements, TIAA presents its financial
statements in conformity with accounting practices prescribed or permitted by
the New York State Insurance Department, which practices differ from accounting
principles generally accepted in the United States. The variances between such
practices and accounting principles generally accepted in the United States are
described in Note 2. The effects on the financial statements of these variances
are not reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with accounting principles generally accepted in the United States,
the financial position of TIAA at December 31, 2001 and 2000, or the results of
its operations or its cash flows for the three years ended December 31, 2001.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of TIAA at December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years ended December 31, 2001 in conformity with accounting practices
prescribed or permitted by the New York State Insurance Department.
As discussed in Note 2 to the financial statements, in 2001 TIAA changed various
accounting policies to be in accordance with the revised National Association of
Insurance Commissioners' Accounting Practices and Procedures Manual, as adopted
by the New York State Insurance Department.
/s/ Ernst & Young LLP
February 27, 2002
5
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
STATUTORY-BASIS BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
DECEMBER 31,
-------------------------------
2001 2000
------------- -------------
ASSETS
Bonds .......................................................................... $ 87,013,371 $ 80,809,152
Mortgages ...................................................................... 23,068,264 21,952,809
Real estate .................................................................... 4,927,282 5,296,235
Stocks.......................................................................... 2,205,332 1,738,069
Other long-term investments..................................................... 3,304,292 3,329,278
Cash and short-term investments................................................. 2,892,904 2,577,223
Investment income due and accrued .............................................. 1,339,451 1,286,268
Separate account assets ........................................................ 4,228,544 3,408,570
Other assets ................................................................... 673,658 502,934
------------- -------------
TOTAL ASSETS $ 129,653,098 $ 120,900,538
============= =============
LIABILITIES, CAPITAL AND CONTINGENCY RESERVES
Policy and contract reserves ................................................... $ 107,363,466 $ 99,859,231
Dividends declared for the following year ...................................... 2,364,877 2,197,454
Asset Valuation Reserve ........................................................ 2,619,461 2,870,533
Interest Maintenance Reserve ................................................... 308,168 1,118,965
Separate account liabilities ................................................... 4,228,544 3,408,570
Securities lending collateral................................................... 2,619,761 2,333,054
Other liabilities .............................................................. 1,497,738 1,015,326
------------- -------------
TOTAL LIABILITIES 121,002,015 112,803,133
------------- -------------
Capital (2,500 shares of $1,000 par value common stock
issued and outstanding) and paid-in surplus................................. 3,050 3,050
Contingency reserves:
For investment losses, annuity and insurance mortality,
and other risks ............................................................ 8,648,033 8,094,355
TOTAL CAPITAL AND CONTINGENCY RESERVES 8,651,083 8,097,405
------------- -------------
TOTAL LIABILITIES, CAPITAL AND CONTINGENCY RESERVES $ 129,653,098 $ 120,900,538
============= =============
See notes to statutory-basis financial statements.
6
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
STATUTORY-BASIS STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------
2001 2000 1999
------------ ------------ ------------
INCOME
Insurance and annuity premiums, deposits, and
other considerations................................. $ 3,878,895 $ 3,594,805 $ 3,412,749
Transfers from CREF, net .............................. 1,402,316 572,211 752,512
Annuity dividend additions ............................ 3,059,734 2,728,562 2,553,655
Net investment income ................................. 8,819,579 8,556,537 7,923,564
------------ ------------ ------------
TOTAL INCOME $ 17,160,524 $ 15,452,115 $ 14,642,480
============ ============ ============
DISTRIBUTION OF INCOME
Policy and contract benefits .......................... $ 3,065,338 $ 2,976,305 $ 2,653,962
Dividends to policyholders............................. 4,766,809 4,315,895 4,026,907
Increase in policy and contract reserves .............. 7,463,548 5,991,167 6,100,240
Operating expenses .................................... 412,789 356,975 335,039
Transfers to separate accounts, net ................... 615,228 527,255 490,880
Other, net ............................................ 20,499 (18,442) (11,437)
Federal income tax expense (benefit)................... 26,784 24,048 (25,213)
Increase in contingency reserves from operations ...... 789,529 1,278,912 1,072,102
------------ ------------ ------------
TOTAL DISTRIBUTION OF INCOME $ 17,160,524 $ 15,452,115 $ 14,642,480
============ ============ ============
Net Income:
Increase in contingency reserves from operations..... $ 789,529 $ 1,278,912 $ 1,072,102
Net realized capital gains (losses) less capital gains
taxes, after transfers to Interest Maintenance Reserve (204,291) (56,916) (48,028)
------------ ------------ ------------
NET INCOME $ 585,238 $ 1,221,996 $ 1,024,074
============ ============ ============
See notes to statutory-basis financial statements.
7
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
STATUTORY-BASIS STATEMENTS OF CHANGES IN CAPITAL AND CONTINGENCY RESERVES
(AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
2001 2000 1999
----------- ----------- -----------
CHANGES IN CAPITAL AND CONTINGENCY RESERVES
Net income ..................................................................... $ 585,238 $ 1,221,996 $ 1,024,074
Net unrealized capital gains (losses) on investments ........................... (574,266) 123,349 (112,613)
Transfers to (from) the Asset Valuation Reserve................................. 251,073 (232,754) (183,656)
Increase in non-admitted assets,
other than investments.................................................... (59,749) (40,614) (25,586)
Cumulative effect of change in accounting principles............................ 375,325 -- --
Other, net ..................................................................... (23,943) -- --
----------- ----------- -----------
NET CHANGE IN CAPITAL AND CONTINGENCY RESERVES 553,678 1,071,977 702,219
CAPITAL AND CONTINGENCY RESERVES
AT BEGINNING OF YEAR 8,097,405 7,025,428 6,323,209
----------- ----------- -----------
CAPITAL AND CONTINENCY RESERVES
AT END OF YEAR $ 8,651,083 $ 8,097,405 $ 7,025,428
=========== =========== ===========
See notes to statutory-basis financial statements.
8
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
STATUTORY-BASIS STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
2001 2000 1999
----------- ----------- -----------
CASH PROVIDED
By operating activities:
Insurance and annuity premiums,
deposits and other considerations ............................ $ 3,881,155 $ 3,510,073 $ 3,408,713
Transfers from CREF, net ......................................... 1,402,316 572,211 752,512
Annuity dividend additions ....................................... 3,059,734 2,728,562 2,553,651
Investment income, net ........................................... 8,629,197 8,378,040 7,692,392
----------- ----------- -----------
TOTAL RECEIPTS 16,972,402 15,188,886 14,407,268
Policy and contract benefits ....................................... 3,065,118 2,879,903 2,655,772
Dividends........................................................... 4,599,385 4,158,047 3,910,764
Operating expenses ................................................. 414,953 353,859 325,039
Federal income tax expense (benefit) ............................... 4,819 2,168 (43,713)
Transfers to separate accounts, net ................................ 615,980 526,334 492,504
Other, net ......................................................... (245,545) (102,795) 183,783
----------- ----------- -----------
TOTAL DISBURSEMENTS 8,451,710 7,817,516 7,524,149
----------- ----------- -----------
CASH PROVIDED BY OPERATING ACTIVITIES 8,520,692 7,371,370 6,883,119
----------- ----------- -----------
By investing activities:
Sales and redemptions of bonds and stocks ........................ 16,183,365 10,427,498 10,428,890
Sales and repayments of mortgage principal ....................... 2,941,103 2,894,511 3,716,069
Sales of real estate ............................................. 1,217,075 708,838 1,500,916
Other, net ....................................................... 637,615 691,453 984,791
----------- ----------- -----------
CASH PROVIDED BY INVESTING ACTIVITIES 20,979,158 14,722,300 16,630,666
----------- ----------- -----------
TOTAL CASH PROVIDED 29,499,850 22,093,670 23,513,785
----------- ----------- -----------
DISBURSEMENTS FOR NEW INVESTMENTS
Investments acquired:
Bonds and stocks ................................................. 23,393,034 16,082,049 16,695,529
Mortgages ........................................................ 4,188,459 3,508,065 4,894,308
Real estate ...................................................... 874,974 978,864 590,720
Other, net ....................................................... 727,702 1,738,448 898,779
----------- ----------- -----------
TOTAL DISBURSEMENTS FOR NEW INVESTMENTS 29,184,169 22,307,426 23,079,336
----------- ----------- -----------
INCREASE (DECREASE) IN CASH
AND SHORT-TERM INVESTMENTS 315,681 (213,756) 434,449
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF YEAR 2,577,223 2,790,979 2,356,530
----------- ----------- -----------
CASH AND SHORT-TERM INVESTMENTS
AT END OF YEAR $ 2,892,904 $ 2,577,223 $ 2,790,979
=========== =========== ===========
See notes to statutory-basis financial statements.
9
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
DECEMBER 31, 2001
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. Its purpose is to aid and strengthen nonprofit educational
and research organizations, governmental entities and other nonprofit
institutions by providing retirement and insurance benefits for their employees
and their families, 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. By charter, TIAA operates without profit to the corporation or its sole
shareholder, the TIAA Board of Overseers. As a result, all contingency reserves
are held solely to provide benefits in accordance with TIAA's charter purpose.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
TIAA's statutory-basis financial statements have been prepared on the basis of
statutory accounting practices prescribed or permitted by the New York State
Insurance Department ("Department"), a comprehensive basis of accounting that
differs from accounting principles generally accepted in the United States
("GAAP"). (Refer to the section titled "Accounting Principles Generally Accepted
in the United States" within this note.) Accounting changes adopted to conform
to the provisions of the National Association of Insurance Commissioners'
("NAIC") ACCOUNTING PRACTICES AND PROCEDURES MANUAL, ("NAIC SAP") are reported
as changes in accounting principles. The cumulative effect of changes in
accounting principles is reported as an adjustment to contingency reserves in
the period of the changes in accounting principles. The cumulative effect is the
difference between the amount of capital and contingency reserves at the
beginning of the year and the amount of capital and contingency reserves that
would have been reported at that date if the new accounting principles had been
applied retroactively for all prior periods. As a result of these changes, TIAA
reported a change in accounting principles as an adjustment that increased
contingency reserves by approximately $375,325,000, as follows:
AS OF JANUARY 1, 2001
---------------------
Adjustment to the Interest Maintenance Reserve....... $ 895,068,000
Temporary and other than temporary impairments....... (276,685,000)
Adjustment to accumulated depreciation............... (217,377,000)
Long-term disability deficiency reserves ............ (22,313,000)
Adjustment to sundry receivables..................... (3,368,000)
--------------
Total Contingency Reserves Adjustment $ 375,325,000
==============
ADJUSTMENT TO INTEREST MAINTENANCE RESERVE: Prior to the changes in accounting
principles notes above (which are collectively referred to as Codification),
TIAA recorded prepayment premiums received from borrowers in connection with
early repayments on bond and mortgage loan investments as realized capital gains
that were credited to the Interest Maintenance Reserve ("IMR"). As a result of
changes required under Codification, prepayment premiums received during 2001
have been recorded as investment income. The Codification adjustment to the IMR
reflected in the table above represents the release to TIAA's contingency
reserves of the portion of the IMR balance at December 31, 2000 that represented
unamortized realized capital gains that were related to prepayment premiums
received prior to 2001.
10
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
TEMPORARY AND OTHER THAN TEMPORARY IMPAIRMENTS: Prior to 2001, TIAA evaluated
its real estate and mortgage investments on a case-by-case basis to identify
potential impairments consistent with policies established by an internal
monitoring committee. The committee performed an adequacy test of TIAA's
investment-related reserves by considering the mortgage and real estate-related
balances contained within the Asset Valuation Reserve ("AVR") when determining
the need to establish other, specific reserves for temporary impairments. When
impairments considered to be other than temporary were identified, the committee
had such amounts written off as permanent reductions in the carrying values of
the assets and treated such amounts as realized capital losses that were charged
against the AVR.
Codification established specific requirements for the establishment of
valuation allowances for temporary impairments in the value of mortgage and real
estate investments in addition to the investment-related reserves contained in
the AVR. Additionally, Codification introduced a "held for sale" category for
real estate investments that requires such investments to be carried at the
lower of fair value or depreciated cost (i.e., carrying value).
TIAA's internal monitoring committee has modified its policies for identifying
and determining impairments to comply with the new requirements under
Codification. TIAA identifies real estate assets to be evaluated for impairment
based on estimated fair values that are determined annually for the entire real
estate portfolio. If a real estate investment's carrying value exceeds its
estimated fair value, then the asset's estimated future cash flows are analyzed
to determine whether the asset is impaired in accordance with the standards
under Codification. Once an asset is determined to be impaired, the impairment
is determined by comparing the investment's carrying value to its appraised
value. A valuation allowance is established for a temporary impairment by
recording an unrealized capital loss that is charged against the AVR; for an
impairment that is considered to be other than temporary, a permanent write-down
of an asset's carrying value is recorded as a realized capital loss, which is
also charged against the AVR. TIAA also identifies "held for sale" real estate,
and records valuation allowances to reflect such real estate assets at the lower
of their estimated fair value or carrying value. The real estate-related
adjustments required to implement the new standards under Codification at
January 1, 2001 totaled approximately $198,300,000 and are reflected in the
above table.
TIAA identifies mortgages to be evaluated for impairment based on the expected
collectibility of principal and interest according to the contractual terms of
each mortgage loan. If collectibility is not considered to be probable, the
mortgage is considered to be impaired. Mortgage impairments are determined by
comparing the carrying value of the impaired loan to the estimated fair value of
the underlying collateral. The extent of the impairment amount and the estimated
future cash flows of the underlying real estate property will determine whether
the impairment is considered to be temporary or other than temporary. In
accordance with the requirements of Codification, TIAA sets up valuation
allowances to reflect temporary impairments on mortgages by recording an
unrealized capital loss that is charged against the AVR. These valuation
allowances are determined independently of the mortgage loan-related balance in
the AVR. For impairments considered to be other than temporary, a permanent
write-down of the mortgage loan's carrying value is recorded as a realized
capital loss that is charged against the AVR. The mortgage-related adjustments
required to implement the new standards under Codification at January 1, 2001
totaled approximately $78,400,000 and are reflected in the above table.
ACCUMULATED DEPRECIATION: Prior to Codification, TIAA utilized the sinking fund
method of depreciation for real estate investments acquired between January 1,
1980 and December 31, 1990. Codification requires that all real estate be
depreciated using the straight-line method. The adjustment to accumulated
depreciation reflected in the above table represents the cumulative impact of
converting the affected real estate assets to the straight-line method of
depreciation. This real estate-related adjustment totaled approximately
$206,800,000. In addition, depreciation periods for EDP equipment and software
were shortened to three years, resulting in an adjustment of approximately
$10,586,000.
RESERVE ADJUSTMENTS: Long-term disability deficiency reserve adjustments are
discussed in Note 13.
11
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
The Department has certain statutory accounting practices that differ from those
found in NAIC SAP. For example, the Department does not permit deferred federal
income taxes to be recognized.
Reconciliations of TIAA's net income and contingency reserves between NAIC SAP
and statutory accounting practices prescribed by the Department are shown below:
2001
---------------
Net Income, New York Basis.......................... $ 585,238,455
New York Prescribed Practices:
Additional Reserves for Term Conversions..... 315,046
---------------
Net Income, NAIC SAP................................ $ 585,553,501
===============
Contingency Reserves, New York Basis................ $ 8,648,033,153
New York Prescribed Practices:
Additional Reserves for Term Conversions...... 315,046
Deferred Tax Asset............................ 858,366,000
---------------
Contingency Reserves, NAIC SAP..................... $ 9,506.714,199
===============
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
followed by TIAA:
STATEMENTS OF OPERATIONS: TIAA's Statements of Operations now include net
realized capital gains and losses, less capital gains taxes and transfers to the
IMR, as a component of net income. Previously, this amount was included in the
Statement of Changes in Capital and Contingency Reserves, as permitted by the
Department.
VALUATION OF INVESTMENTS: Bonds and short-term investments (debt securities with
maturities of one year or less at the time of acquisition) not in default are
generally stated at amortized cost; medium to highest quality preferred stocks
at cost; common stocks at market value; and all other bond, short-term and
preferred stock investments at the lower of amortized cost or market value. For
loan-backed bonds and structured securities, amortized cost is determined using
actual and anticipated cash flows under the prospective method for interest-only
securities and under the retrospective method for all other securities.
Anticipated prepayments are based on life-to-date prepayment speeds, using
historical cash flows, and internal estimates. Mortgages are stated at amortized
cost and directly owned real estate at depreciated cost (net of encumbrances).
Investments in wholly-owned subsidiaries, real estate limited partnerships and
securities limited partnerships are stated at TIAA's equity in the net admitted
assets of the underlying entities. Policy loans are stated at outstanding
principal amounts. Separate account assets are generally stated at market value.
Seed money investments in the TIAA-CREF Mutual Funds, TIAA-CREF Institutional
Mutual Funds and TIAA-CREF Life Funds are stated at market value. All
investments are stated net of impairments which are considered to be other than
temporary, which are determined on an individual asset basis. Depreciation of
real estate investments is generally computed over a 40-year period on the
straight-line method.
ACCOUNTING FOR INVESTMENTS: Investment transactions are accounted for as of the
date the investments are purchased or sold (trade date). Realized capital gains
and losses on investment transactions are accounted for under the specific
identification method.
12
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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. 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. In
order to minimize this risk, TIAA monitors the credit quality of its
counterparties.
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.
DERIVATIVE INSTRUMENTS: TIAA has filed a Derivatives Use Plan with the
Department. This plan details TIAA's derivative policy objectives, strategies
and controls, and any restrictions placed on various derivative types. The plan
also specifies the procedures and systems that TIAA has established to evaluate,
monitor and report on the derivative portfolio in terms of valuation,
effectiveness and counterparty credit quality. TIAA uses derivative instruments
for hedging and asset replication purposes. TIAA enters into derivatives
directly with counterparties of high credit quality (i.e., rated AA or better at
time of inception) and monitors counterparty credit quality on an ongoing basis.
TIAA's counterparty credit risk is limited to the positive fair value of its
derivative positions, unless otherwise described below.
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 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 flows into a fixed
amount of U.S. dollar cash flows. A foreign exchange premium (discount) is
recorded at the time the contract is opened, and it is calculated based on
the difference between the forward exchange rate and the spot rate. TIAA
amortizes the foreign exchange premium (discount) into investment income
over the life of the forward contract, or at the settlement date if the
forward contract is less than a year.
INTEREST RATE SWAP CONTRACTS: TIAA enters into interest rate swap contracts
to hedge against the effect of interest rate fluctuations on certain
variable interest rate bonds. These contracts allow TIAA to lock in a fixed
interest rate and to transfer the risk of higher or lower interest rates.
TIAA also enters into interest rate swap contracts to exchange the cash
flows on certain fixed interest rate bonds into variable interest rate cash
flows in connection with certain interest sensitive products. Payments
received and payments made under interest rate swap contracts are reflected
in net investment income.
13
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
SWAP OPTIONS: TIAA writes (sells) swap options on selected bonds to hedge
against the effect of interest rate fluctuations as part of TIAA's asset
and liability management program. Swap options give the holder the right,
but not the obligation, to enter into an interest rate swap contract with
TIAA where TIAA would pay a fixed interest rate and would receive a
variable interest rate on a specified notional amount. When a swap option
is written, the premium received is recorded as a liability. Because the
swap options written by TIAA 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 has no
counterparty credit risk associated with swap options written unless the
option is exercised and an interest rate swap contract is subsequently
formed.
INTEREST RATE CAP CONTRACTS: TIAA purchases interest rate cap contracts to
hedge against the risk of a rising interest rate environment as part of
TIAA's asset and liability management program. Under the terms of the
interest rate cap contracts, the selling entity makes payments to TIAA on a
specified notional amount if an agreed-upon index exceeds a predetermined
strike rate. Such payments received under interest rate cap contracts are
recognized as investment income. When an interest rate cap contract is
purchased, the premium paid is recorded as an asset, and the premium is
amortized against investment income over the life of the cap.
CREDIT DEFAULT SWAP CONTRACTS: As part of a strategy to replicate
investment grade corporate bonds in conjunction with US Treasury
securities, TIAA writes (sells) credit default swaps to earn a premium by
issuing insurance to the buyer of default protection. The carrying value of
credit default swaps represents the premium received for selling the
default protection, which premium is amortized into investment income over
the life of the swap. Under the terms of the credit default swap contracts,
TIAA synthetically assumes the credit risk of a reference asset and has the
obligation to reimburse the default protection buyer for the loss in market
value if the reference asset defaults, declares bankruptcy or experiences
some other, specified negative credit event. TIAA has no counterparty
credit risk with the buyer.
NON-ADMITTED ASSETS: Certain investment balances and corresponding investment
income due and accrued are designated as non-admitted assets by the Department,
based on delinquencies, defaults, and other statutory criteria, and cannot be
included in life insurance company balance sheets filed with the Department.
Such investment-related non-admitted assets totaled approximately $492,167,000
and $465,614,000 at December 31, 2001 and 2000, respectively. Income on bonds in
default is not accrued and, therefore, is not included in the non-admitted
totals. Certain non-investment assets, such as furniture and fixtures and
various receivables, are also designated as non-admitted assets. Such
non-admitted assets approximated $324,145,000 at December 31, 2001 and
$262,186,000 at December 31, 2000. Changes in such non-admitted assets are
charged or credited directly to contingency reserves.
POLICY AND CONTRACT RESERVES: TIAA offers a range of group and individual
retirement annuities and group and individual life and other insurance products.
Policy and contract reserves for such products are determined in accordance with
standard valuation methods approved by the Department and are computed in
accordance with standard actuarial formulae. The reserves established utilize
assumptions for interest (at rates ranging from 1.5% to 6.8% and averaging
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.
14
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
ASSET VALUATION RESERVE: The AVR, which covers all invested asset classes, is an
explicit liability reserve required by the NAIC and is intended to provide for
potential future credit and equity losses. Reserve components of the AVR are
maintained for bonds, stocks, mortgages, real estate and other invested assets.
Realized and unrealized credit and equity capital gains and losses, net of
capital gains taxes, are credited to or charged against the related components
of the AVR. Formula calculations determine the required contribution amounts for
each component, and insurance companies may also make voluntary contributions to
any component; however, the resulting ending balance cannot exceed the computed
maximum reserve for that component. Any computed excess amounts are eliminated
through transfers to other components or adjustments down to the maximum reserve
amounts. Contributions and adjustments to the AVR are reported as transfers to
or from contingency reserves.
INTEREST MAINTENANCE RESERVE: The Interest Maintenance Reserve ("IMR") is a
liability reserve required by the NAIC which accumulates realized capital gains
and losses resulting from interest rate fluctuations. Such capital gains and
losses are amortized out of the IMR, under the grouped method of amortization,
as an adjustment to net investment income over the remaining lives of the assets
sold.
ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES: The Financial
Accounting Standards Board ("FASB") requires that financial statements that are
intended to be in conformity with GAAP follow all applicable authoritative
accounting pronouncements. As a result, TIAA cannot refer to financial
statements prepared in accordance with statutory accounting practices as having
been prepared in accordance with GAAP. The differences between accounting
principles generally accepted in the United States and statutory accounting
practices would have a material effect on TIAA's financial statements, and the
primary differences can be summarized as follows. Under GAAP:
o The formula-based AVR is eliminated as a liability reserve;
o The IMR is eliminated and realized gains and losses resulting from interest
rate fluctuations are reported as a component of net income rather than
being accumulated in and subsequently amortized out of the IMR;
o Dividends on insurance policies and annuity contracts are accrued as the
necessary earnings emerge from operations rather than being accrued in the
year when they are declared;
o The "non-admitted" asset designation is not utilized;
o Policy acquisition costs are deferred and amortized over the lives of the
policies issued rather than being charged to operations as incurred;
o Policy and contract reserves are based on estimates of expected mortality,
morbidity, persistency and interest rather than being based on statutory
mortality, morbidity and interest requirements;
o Investments in wholly-owned subsidiaries are consolidated in the parent's
financial statements rather than being carried at the parent's equity in
the net assets of the subsidiaries;
o Long-term bond investments considered to be "available for sale" are
carried at fair value rather than at amortized cost;
o Deferred tax assets and liabilities are determined based on the differences
between the financial statement amounts and the tax bases of assets and
liabilities rather than being recognized with limitations under NAIC SAP.
The Department does not allow even limited recognition of deferred tax
assets and liabilities;
o For purposes of calculating the postretirement benefit obligation, active
participants not currently eligible would also be included:
o Derivatives are generally valued at fair value rather than being accounted
for in a manner consistent with the hedged item.
Management believes that the effects of these differences would increase TIAA's
total contingency reserves if GAAP were implemented.
RECLASSIFICATIONS: Certain amounts in the 2000 and 1999 financial statements
have been reclassified to conform with the 2001 presentation.
15
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3 - INVESTMENTS
SECURITIES INVESTMENTS: At December 31, 2001 and 2000, the carrying values
(balance sheet amounts) and estimated market values of long-term bond
investments, and the gross unrealized gains and losses with respect to such
market values, are shown below:
GROSS GROSS
CARRYING UNREALIZED UNREALIZED ESTIMATED
VALUE GAINS LOSSES MARKET VALUE
--------------- --------------- --------------- ---------------
DECEMBER 31, 2001
- -----------------
U.S. Government .................. $ 2,184,795,937 $ 22,835,187 $ (40,800,644) $ 2,166,830,480
All Other Governments ............ 731,135,341 52,353,820 (24,314,276) 759,174,885
States, Territories & Possessions 947,180,107 125,792,895 (24,566) 1,072,948,436
Political Subdivisions of States,
Territories & Possessions ....... 18,242,138 3,187,548 -- 21,429,686
Special Rev. & Special Assessment,
Non-Guaranteed Agencies & Govt .. 10,340,720,730 571,518,377 (56,743,917) 10,855,495,190
Public Utilities ................. 5,731,512,555 203,241,476 (81,143,209) 5,853,610,822
Industrial & Miscellaneous ....... 67,059,784,681 2,382,000,485 (1,632,348,267) 67,809,436,899
--------------- --------------- --------------- ---------------
Total .............. $87,013,371,489 $ 3,360,929,788 $(1,835,374,879) $88,538,926,398
=============== =============== =============== ===============
GROSS GROSS
CARRYING UNREALIZED UNREALIZED ESTIMATED
VALUE GAINS LOSSES MARKET VALUE
--------------- --------------- --------------- ---------------
DECEMBER 31, 2000
- -----------------
U.S. Government .................. $ 1,784,914,893 $ 76,054,550 $ (12,458,539) $ 1,848,510,904
All Other Governments ............ 767,715,296 43,123,268 (19,095,574) 791,742,990
States, Territories & Possessions 977,546,944 107,467,250 (133,743) 1,084,880,451
Political Subdivisions of States,
Territories & Possessions ....... 26,714,961 1,729,889 -- 28,444,850
Special Rev. & Special Assessment,
Non-Guaranteed Agencies & Govt .. 9,211,417,553 579,715,440 (12,117,584) 9,779,015,409
Public Utilities ................. 5,764,989,361 120,322,942 (197,497,916) 5,687,814,387
Industrial & Miscellaneous ....... 62,275,852,792 1,450,759,733 (1,691,970,337) 62,034,642,188
--------------- --------------- --------------- ---------------
Total .............. $80,809,151,800 $ 2,379,173,072 $(1,933,273,693) $81,255,051,179
=============== =============== =============== ===============
At December 31, 2001 and 2000, approximately 91.9% and 93.1%, respectively, of
the long-term bond portfolio was comprised of investment grade securities. At
December 31, 2001, outstanding forward commitments for future long-term bond and
equity investments approximated $2,143,627,000. Of this, approximately
$1,196,008,000 is scheduled for disbursement in 2002, $351,806,000 in 2003,
$297,907,000 in 2004 and $297,906,000 in later years. The funding of bond
commitments is contingent upon the continued favorable financial performance of
the potential borrowers. Debt securities amounting to approximately $6,393,000
and $2,594,000 at December 31, 2001 and 2000, respectively, were on deposit with
governmental authorities or trustees, as required by law.
16
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3 - INVESTMENTS - (CONTINUED)
The carrying values and estimated market values of long-term bond investments at
December 31, 2001, by contractual maturity, are shown below:
CARRYING ESTIMATED
VALUE MARKET VALUE
---------------- ----------------
Due in one year or less....................... $ 1,354,989,037 $ 1,398,322,998
Due after one year through five years......... 9,906,151,865 10,367,578,175
Due after five years through ten years........ 14,935,313,538 15,170,229,839
Due after ten years........................... 19,096,709,062 19,437,639,724
---------------- ----------------
Subtotal........................ 45,293,163,502 46,373,770,736
Mortgage-backed securities.................... 22,419,138,036 23,043,058,476
Asset-backed securities....................... 19,301,069,951 19,122,097,186
---------------- ----------------
Total........................... $ 87,013,371,489 $ 88,538,926,398
================ ================
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 prepay
obligations, although prepayment premiums may be applicable.
At December 31, 2001 and 2000, the carrying values of long-term bond investments
were diversified by industry classification as follows:
2001 2000
----- -----
Mortgage-backed securities....................... 25.8% 27.3%
Asset-backed securities.......................... 12.3 12.1
Manufacturing ................................... 11.5 11.7
Commercial mortgage-backed securities............ 9.9 9.5
Finance and financial services................... 9.4 9.4
Public utilities................................. 7.2 7.6
Communications................................... 5.1 4.1
Oil and gas...................................... 3.5 3.4
Government ................................... 3.1 2.9
Retail and wholesale trade....................... 3.0 3.2
Real estate investment trusts.................... 2.2 2.1
Other............................................ 7.0 6.7
----- -----
Total................................... 100.0% 100.0%
===== =====
The approximate carrying values and market values of debt securities loaned, and
the cash collateral received in connection therewith, were as follows:
CARRYING MARKET CASH
VALUE VALUE COLLATERAL
-------------- -------------- --------------
December 31, 2001........ $2,417,634,000 $2,527,176,000 $2,619,761,000
December 31, 2000........ $2,189,502,000 $2,283,079,000 $2,333,054,000
At December 31, 2001 and 2000, TIAA had interest rate swap contracts outstanding
with a total notional value of approximately $565,855,000 and $409,036,000,
respectively.
At December 31, 2001 and 2000, TIAA had foreign currency swap contracts
outstanding with a total notional value of approximately $1,421,613,000 and
$1,020,545,000, respectively. The net change in unrealized gains on foreign
currency swap contracts outstanding were approximately $41,062,000, $57,247,000,
and $25,575,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
17
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3 - INVESTMENTS - (CONTINUED)
At December 31, 2001 and 2000, TIAA had foreign currency forward contracts
outstanding with a total notional value of approximately $234,686,000 and
$203,113,000, respectively, and the unamortized value of the premiums was
approximately $3,432,000 and $4,827,000, respectively. The net change in
unrealized gains on the forward contracts outstanding were approximately
$4,574,000, $5,745,000, and $20,395,000 for the years ended December 31, 2001,
2000, and 1999, respectively.
At December 31, 2001 and 2000, TIAA had swap options outstanding with a total
notional value of $0 and approximately $219,100,000, respectively, and the
unamortized value of the premiums was $0 and approximately $823,000,
respectively. The interest rate swap contracts created from the exercise of the
swap options are reflected in the aggregate totals for the interest rate swap
contracts disclosed in the related paragraph above.
At December 31, 2001 and 2000, TIAA had interest rate cap contracts outstanding
with a total notional value of approximately $75,650,000 and $145,650,000,
respectively, and the unamortized value of the premiums was approximately
$474,000 and $959,000, respectively.
At December 31, 2001, TIAA had credit default swap contracts outstanding with a
total notional value of approximately $130,000,000. These credit default swaps
are used in conjunction with US Treasury securities by TIAA to replicate
investment grade corporate bonds.
MORTGAGE LOAN INVESTMENTS: TIAA makes mortgage loans that are principally
collateralized by commercial real estate. TIAA's mortgage underwriting standards
generally result in first mortgage liens on completed income-producing
properties for which the loan-to-value ratio at the time of closing generally
ranges between 65% and 75%. TIAA employs a system to monitor the effects of
current and expected market conditions and other factors on the collectibility
of mortgage loans. This system is utilized to identify and quantify any
impairments in value. The coupon rates for mortgage loans issued during 2001
ranged from 6% to 11%.
At December 31, 2001 and 2000, the carrying values of mortgage loan investments
were diversified by property type and geographic region as follows:
2001 2000
----- -----
PROPERTY TYPE
Office building.......................................... 42.4% 40.9%
Shopping centers......................................... 25.4 27.6
Industrial buildings..................................... 10.1 9.5
Mixed-use projects....................................... 8.2 9.1
Apartments............................................... 6.6 6.8
Hotel.................................................... 5.0 4.0
Other.................................................... 2.3 2.1
----- -----
Total........................................... 100.0% 100.0%
===== =====
GEOGRAPHIC REGION
Pacific.................................................. 24.7% 24.1%
South Atlantic........................................... 22.3 22.1
North Central............................................ 19.3 19.9
Middle Atlantic.......................................... 10.8 10.2
South Central............................................ 8.2 8.3
Mountain................................................. 7.1 7.7
New England.............................................. 6.8 7.4
Other.................................................... 0.8 0.3
----- -----
Total........................................... 100.0% 100.0%
===== =====
At December 31, 2001 and 2000, approximately 19% of the mortgage portfolio was
invested in California and is included in the Pacific region shown above.
18
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3 - INVESTMENTS - (CONTINUED)
At December 31, 2001, the contractual maturity schedule of mortgage loans is
shown below:
CARRYING VALUE
----------------
Due in one year or less..................................... $ 518,490,627
Due after one year through five years....................... 7,057,905,496
Due after five years through ten years...................... 13,225,512,756
Due after ten years......................................... 2,266,355,231
----------------
Total.............................................. $ 23,068,264,110
================
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, 2001, outstanding forward commitments for future mortgage loan
investments approximated $1,030,340,000. Of this, approximately $821,102,000 is
scheduled for disbursement in 2002 and $209,238,000 in later years. The funding
of mortgage loan commitments is generally contingent upon the underlying
properties meeting specified requirements, including construction, leasing and
occupancy.
At December 31, 2001 and 2000, the aggregate carrying values of mortgages with
restructured or modified terms were approximately $370,922,000 and $663,915,000,
respectively. For the years ended December 31, 2001, 2000 and 1999, the
investment income earned on such mortgages was approximately $29,838,000,
43,972,000 and $88,002,000, respectively, which would have been approximately
$38,158,000, $63,006,000 and $106,137,000, 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.
Approximately $432,085,000 and $47,391,000 of the mortgage total on the balance
sheet at December 31, 2001 and 2000, respectively represent amounts due from
related parties that are collateralized by real estate owned by TIAA investment
subsidiaries and affiliates.
REAL ESTATE INVESTMENTS: TIAA makes investments in commercial real estate
directly, through wholly-owned subsidiaries and through real estate limited
partnerships. TIAA employs a system to monitor the effects of current and
expected market conditions and other factors on the realizability of real estate
investments. This system is utilized to identify and quantify any impairments in
value. At December 31, 2001 and 2000, the carrying values of real estate
investments were diversified by property type and geographic region as follows:
2001 2000
----- -----
PROPERTY TYPE
Office buildings........................................... 72.0% 67.1%
Shopping centers........................................... 5.3 9.4
Mixed-use projects......................................... 3.3 5.3
Income-producing land underlying improved real estate...... 2.8 3.4
Industrial buildings....................................... 2.5 4.0
Land held for future development........................... 2.1 3.3
Apartments................................................. 0.0 0.1
Other...................................................... 12.0 7.4
----- -----
Total........................................ 100.0% 100.0%
===== =====
19
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3 - INVESTMENTS - (CONCLUDED)
GEOGRAPHIC REGION
South Atlantic..................................... 34.7% 27.7%
North Central...................................... 23.9 26.5
Pacific............................................ 13.6 14.5
South Central...................................... 8.3 8.2
Middle Atlantic.................................... 5.7 5.4
Mountain........................................... 3.4 3.2
New England........................................ 1.0 1.0
Other.............................................. 9.4 13.5
----- -----
Total................................ 100.0% 100.0%
===== =====
At December 31, 2001 and 2000, approximately 14% of the real estate portfolio
was invested in Florida and approximately 10% was invested in California.
Florida is included in the South Atlantic region and California is included in
the Pacific region.
At December 31, 2001, outstanding obligations for future real estate investments
approximated $105,315,000. Pursuant to these obligations, it is estimated that
approximately $72,726,000 will be disbursed in 2002 and $32,589,000 in later
years. The funding of real estate investment obligations is contingent upon the
properties meeting specified requirements, including construction, leasing and
occupancy.
Depreciation expense on real estate investments for the years ended December 31,
2001, 2000 and 1999, was approximately $157,515,000, $164,844,000, and
$179,605,000, respectively; the amount of accumulated depreciation at December
31, 2001 and 2000 was approximately $1,139,439,000 and $918,317,000,
respectively.
INVESTMENT SUBSIDIARIES AND AFFILIATES: TIAA's investment subsidiaries and
affiliates, which are created for legal or other business reasons, are primarily
involved in real estate and securities investment activities for TIAA. At
December 31, 2001 and 2000, the carrying values of TIAA's equity interests in
investment subsidiaries and affiliates, were approximately $4,175,391,000 and
$4,544,417,000, respectively. TIAA's share of total assets, liabilities and net
income of investment subsidiaries and affiliates at December 31, 2001 and 2000,
and for the years then ended, were approximately as follows:
2001 2000
-------------- --------------
Assets ................................... $4,924,503,000 $5,312,230,000
Liabilities .............................. 1,155,321,000 1,148,139,000
Non-admitted assets/other adjustments .... 406,209,000 380,326,000
-------------- --------------
Carrying value ........................... $4,175,391,000 $4,544,417,000
============== ==============
Net income ............................... $ 224,246,000 $ 500,063,000
The carrying values shown above are reflected in the Bonds, Mortgages, Real
Estate and Stock captions in the accompanying balance sheets.
As of December 31, 2001 and 2000, the net amount due from investment
subsidiaries and affiliates was $57,148,886 and $24,365,753, respectively.
20
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4 - INVESTMENT INCOME AND CAPITAL GAINS AND LOSSES
NET INVESTMENT INCOME: For the years ended December 31, 2001, 2000 and 1999, the
components of net investment income, were as follows:
2001 2000 1999
--------------- --------------- ---------------
GROSS INVESTMENT INCOME:
Bonds ...................................... $ 6,555,483,726 $ 6,158,290,900 $ 5,775,161,816
Mortgages .................................. 1,792,538,071 1,664,704,684 1,699,019,031
Real estate (net of property expenses, taxes
and depreciation) ....................... 310,745,641 523,965,325 282,344,126
Stocks ..................................... 123,062,635 101,520,278 92,223,815
Other long-term investments ................ 97,335,333 138,413,626 58,021,764
Cash and short-term investments ............ 47,624,804 32,816,610 22,452,106
Other ...................................... 12,686,068 (650,251) 8,703,697
--------------- --------------- ---------------
Total ........................... 8,939,476,278 8,619,061,172 7,937,926,355
Less investment expenses ...................... 185,335,465 215,773,092 170,761,251
--------------- --------------- ---------------
Net investment income before amortization
of net IMR gains ........................... 8,754,140,813 8,403,288,080 7,767,165,104
Plus amortization of net IMR gains ............ 65,438,180 153,248,647 156,399,394
--------------- --------------- ---------------
Net investment income ......................... $ 8,819,578,993 $ 8,556,536,727 $ 7,923,564,498
=============== =============== ===============
During 2001, TIAA changed the estimated maturity dates used in calculating the
amortization of Commercial Mortgage Backed Interest Only ("CMBS I/O")
securities. In prior years, these securities were being amortized to their legal
final maturity dates. During 2001, TIAA began amortizing CMBS I/O securities to
their expected final payment dates. As a result, the CMBS I/Os are being
amortized over a shorter period and approximately $50 million of additional CMBS
I/O amortization was recorded as a reduction in current year's investment
income.
Future rental income expected to be received during the next five years under
existing real estate leases in effect as of December 31, 2001 is approximately
$551,794,000 in 2002, $491,889,000 in 2003, $430,184,000 in 2004, $356,816,000
in 2005 and $263,629,000 in 2006.
The net earned rates of investment income on total invested assets (computed as
net investment income before amortization of net IMR gains divided by mean
invested assets) were 7.70%, 7.91% and 7.82% in 2001, 2000 and 1999,
respectively.
REALIZED CAPITAL GAINS AND LOSSES: For the years ended December 31, 2001, 2000
and 1999, the net realized capital gains (losses) on sales, redemptions and
writedowns of investments were as follows:
2001 2000 1999
------------- ------------- -------------
Bonds ....................................... $(173,652,714) $ 67,168,839 $ 65,207,048
Mortgages ................................... (31,805,973) (18,620,911) (22,897,373)
Real estate ................................. 64,556,779 (14,419,646) 136,719,085
Stocks ...................................... 67,676,528 29,163,435 46,209,893
Other long-term investments ................. 19,686,439 40,797,748 49,549,108
Cash and short-term investments ............. (1,043,480) 859,571 1,471,501
------------- ------------- -------------
Total realized gains before capital gains tax (54,582,421) 104,949,036 276,259,262
Capital gains tax benefit ................... -- -- 5,819,369
------------- ------------- -------------
Total ......................... $ (54,582,421) $ 104,949,036 $ 282,078,631
============= ============= =============
21
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4 - INVESTMENT INCOME AND CAPITAL GAINS AND LOSSES - (CONCLUDED)
Writedowns of investments resulting from impairments which are considered to be
other than temporary and from mortgage foreclosures, reflected in the preceding
table as realized capital losses, were as follows:
2001 2000 1999
------------ ------------ ------------
Other than temporary impairments:
Bonds ........................ $246,640,401 $ -- $ 21,137,423
Mortgages .................... 25,882,099 63,467,331 31,752,909
Real estate .................. -- 50,000,000 --
Other long-term investments .. 19,693,398 -- --
------------ ------------ ------------
Total ............. $292,215,898 $113,467,331 $ 52,890,332
============ ============ ============
Mortgage foreclosures ........... $ -- $ 213,640 $ 14,984,688
============ ============ ============
Proceeds from sales and redemptions of long-term bond investments during 2001,
2000 and 1999 were approximately $15,334,370,000, $10,199,202,000 and
$10,137,343,000 respectively. Gross gains of approximately $234,562,000,
$187,122,000 and $177,537,000 and gross losses, excluding impairments considered
to be other than temporary, of approximately $161,574,000, $119,953,000 and
$91,193,000 were realized on these sales and redemptions during 2001, 2000 and
1999, respectively.
UNREALIZED CAPITAL GAINS AND LOSSES: For the years ended December 31, 2001, 2000
and 1999, the net changes in unrealized capital gains (losses) on investments,
resulting in a net increase (decrease) in the valuation of investments, were as
follows:
2001 2000 1999
------------- ------------- -------------
Bonds ........................ $(229,204,505) $ (54,132,512) $ (69,713,061)
Mortgages .................... 2,102,943 (70,888,318) 6,617,678
Real estate .................. 44,910,043 (2,770,531) (33,864,537)
Stocks ....................... 58,120,898 75,816,698 (118,886,764)
Other long-term investments... (450,195,560) 175,323,484 103,233,602
Other ........................ -- -- --
------------- ------------- -------------
Total .......... $(574,266,181) $(123,348,821) $(112,613,082)
============= ============= =============
NOTE 5 - SECURITIZATIONS
When TIAA sells bonds and mortgage loans in a securitization transaction, it may
retain interest-only strips, one or more subordinated tranches, equity interest,
or servicing rights, all of which are retained interests in the securitized
receivables. TIAA's ownership of the related retained interests in
securitization transactions may be held directly by TIAA or indirectly through
an investment subsidiary. The retained interests are associated with a Special
Purpose Entity/Qualified Special Purpose Entities ("SPE/QSPEs"), which are
trusts or other legal entities that were formed for the sole purpose of
acquiring and owning the underlying receivable assets and issuing the related
debt and equity (i.e., the securitization transaction). The debt and equity
issued by the SPE/QSPEs formed for the securitization transactions described
below are non-recourse to TIAA. Investors in the securitizations have no
recourse to TIAA's other assets if the loans that were securitized fail to pay
when due. Gain or loss on a securitization transaction, net of transaction
costs, is, in part, determined by allocating the previous carrying amount of the
financial assets involved in the transfer between the assets sold and the
retained interests, based on their relative fair values at the date of the
transfer. Quoted market prices are used, if available. However, quotes are
generally not available for retained interests, so TIAA generally estimates fair
value based on the present value of future expected cash flows using
management's best estimates of future credit losses, forward yield curves, and
discount rates that are commensurate with the risks involved.
22
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5 - SECURITIZATIONS - (CONTINUED)
During 2001, TIAA entered into a securitization transaction in which it sold
bonds with a total principal balance of approximately $1.5 billion and
recognized a loss of approximately $5,847,000. TIAA received proceeds of
approximately $601,984,000 and retained subordinated interests with a fair value
of approximately $870,009,000. The fair value of the retained interest at
December 31, 2001 was approximately $883,269,000 and is comprised of
subordinated tranches and residual interests of approximately $882,267,000 and
$1,002,000, respectively. The fair values of the subordinate tranches were
valued by an independent pricing service, using 5, 10 and 30 year Treasuries and
swap curves. The fair value of the residual interest was calculated by
discounting the estimated future cash flows using a discount rate of 6.5%. An
adverse 10% and 20% change in the discount rate would negatively impact the fair
value of the retained interests by approximately $45,811,000 and $50,633,000,
respectively at December 31, 2001. The total cash flows received on interests
retained were approximately $36,316,000 for the year ended December 31, 2001.
TIAA also retained the rights to future cash flows that may arise after
investors in the securitization have received their contracted returns.
During 2000, TIAA entered into two securitization transactions in which it sold
bonds with a total principal balance of approximately $1.4 billion and
recognized a loss of approximately $757,000. TIAA received proceeds of
approximately $1,284,000,000 and retained subordinated interests with a fair
value of approximately $144,653,000. The fair values of the retained interests
were calculated by discounting the estimated future cash flows using discount
rates ranging from 11% to 15%. An adverse 10% and 20% change in the discount
rate would negatively impact the fair value of the retained interests by
approximately $8,688,000 and $17,159,000, respectively at December 31, 2001. The
total cash flows received on interests retained were approximately $26,327,000
for the year ended December 31, 2001. TIAA also retained the rights to future
cash flows that may arise after investors in the securitizations have received
their contracted returns. TIAA retained servicing and asset management
responsibilities in these transactions and received management fees of
approximately $2,797,000 for the year ended December 31, 2001.
During 1999, TIAA entered into a securitization transaction in which it sold
commercial mortgages with a total principal balance of approximately
$893,460,000 and recognized a loss of approximately $1,181,000. TIAA received
proceeds of approximately $480,514,000 and retained subordinated interests with
a fair value of approximately $412,767,000. The fair value of the retained
interest was approximately $433,473,000 at December 31, 2001. The key
assumptions used in measuring the fair value of the retained interests included
an anticipated credit loss of approximately .3% and a discount rate of 6%. An
adverse 10% and 20% change in credit loss assumption would have a negative
impact of approximately $1,052,000 and $2,074,000, respectively, on the fair
value of the retained interests at December 31, 2001. An adverse 10% and 20%
change in the discount factor would negatively impact the fair value of the
retained interest by approximately $7,454,000 and $14,697,000, respectively, at
December 31, 2001. The total cash flows received on interests retained were
approximately $35,222,000 for the year ended December 31, 2001. TIAA also
retained the rights to future cash flows that may arise after investors in the
securitizations have received their contracts returns. TIAA retained
subservicing responsibilities in this transaction and received fees of
approximately $359,000 for the year ended December 31, 2001.
23
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5 - SECURITIZATIONS - (CONCLUDED)
The following table presents quantitative information about principal balances,
delinquencies and net credit losses for total loans owned or managed by TIAA:
PRINCIPAL AMOUNT OF
LOANS
TOTAL PRINCIPAL 60 DAYS OR MORE PAST NET CREDIT LOSS
AMOUNT OF LOANS DUE DURING THE YEAR
--------------------------- --------------------------- ---------------------------
AT DECEMBER 31
(AMOUNTS IN THOUSANDS)
----------------------
TYPE OF LOAN 2001 2000 2001 2000 2001 2000
------------ ------------ ------------ ------------ ------------ ------------
Bonds ................... $ 90,554,720 $ 84,049,926 $ 397,471 $ 202,283 $ 246,640 $ --
Mortgages ............... 23,745,601 22,556,129 12,190 28,384 25,882 63,681
------------ ------------ ------------ ------------ ------------ ------------
TOTAL LOANS MANAGED OR
SECURITIZED ...... 114,300,321 106,606,055 $ 409,661 $ 230,667 $ 272,522 $ 63,681
============ ============ ============ ============
Less:
Loans securitized .... 2,339,714 1,848,780
------------ ------------
LOANS HELD IN PORTFOLIO . $111,960,607 $104,757,275
============ ============
At December 31, 2001 and 2000, the carrying values of TIAA's investments in
subsidiaries that held an interest in these securitizations were approximately
$634,683,000 and $499,854,000, respectively. Total assets and liabilities of
these TIAA subsidiaries were as follows:
2001 2000
-------------- --------------
Assets....................................... $1,144,571,000 $1,002,770,000
Liabilities.................................. 507,955,000 502,916,000
Non-admitted assets/other adjustments........ (1,933,000) --
--------------- --------------
Carrying value............................... $ 634,683,000 $ 499,854,000
============== ==============
NOTE 6 - 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, 2001 and 2000 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.
24
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
NOTIONAL CARRYING ESTIMATED
VALUE VALUE FAIR VALUE
-------------- --------------- ---------------
DECEMBER 31, 2001
Assets
Bonds............................................ $87,013,371,489 $88,538,926,398
Mortgages........................................ 23,068,264,110 24,228,918,121
Common stocks.................................... 1,225,460,658 1,225,460,658
Preferred stocks................................. 979,870,924 922,635,066
Cash and short-term investments.................. 2,892,903,767 2,892,903,767
Policy loans..................................... 507,417,992 507,417,992
Seed money investments........................... 325,569,188 325,569,188
Liabilities
Teachers Personal Annuity-Fixed Account.......... 1,739,230,493 1,739,230,493
Other financial instruments
Foreign currency swap contracts.................. $1,421,613,312 121,373,606 143,112,318
Foreign currency forward contracts............... 234,686,111 8,005,940 10,531,178
Interest rate swap contracts..................... 565,855,000 -- (659,372)
Swap options..................................... -- -- --
Interest rate cap contracts...................... 75,650,000 473,883 70,185
Credit default swap contracts.................... 130,000,000 -- (1,550,144)
NOTIONAL CARRYING ESTIMATED
VALUE VALUE FAIR VALUE
-------------- --------------- ---------------
DECEMBER 31, 2000
Assets
Bonds............................................ $80,809,151,800 $81,255,051,179
Mortgages........................................ 21,952,808,611 22,593,584,589
Common stocks.................................... 767,862,699 767,862,699
Preferred stocks................................. 970,206,730 940,926,347
Cash and short-term investments.................. 244,168,519 244,168,519
Policy loans..................................... 474,681,094 474,681,094
Seed money investments........................... 394,002,467 394,002,467
Liabilities
Teachers Personal Annuity-Fixed Account.......... 1,456,634,670 1,456,634,670
Other financial instruments
Foreign currency swap contracts.................. $1,020,545,319 101,339,491 105,396,376
Foreign currency forward contracts............... 203,112,720 10,572,446 9,250,132
Interest rate swap contracts..................... 409,035,615 -- 12,748,992
Swap options..................................... 219,100,000 (822,873) (4,457,353)
Interest rate cap contracts...................... 145,650,000 959,423 771,354
BONDS: The fair values for publicly traded long-term bond investments are
determined using quoted market prices. For privately placed long-term bond
investments without a readily ascertainable market value, such values are
determined with the assistance of an independent pricing service utilizing a
discounted cash flow methodology based on coupon rates, maturity provisions and
assigned credit ratings.
The aggregate carrying values and estimated fair values of publicly traded and
privately placed bonds at December 31, 2001 and 2000 are as follows:
2001 2000
----------------------------------- -----------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
--------------- --------------- --------------- ---------------
Publicly traded bonds........... $55,673,764,622 $56,904,176,185 $50,734,031,251 $51,315,463,545
Privately placed bonds.......... 31,339,606,867 31,634,750,213 30,075,120,549 29,939,587,634
--------------- --------------- --------------- ---------------
Total............. $87,013,371,489 $88,538,926,398 $80,809,151,800 $81,255,051,179
=============== =============== =============== ===============
25
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
MORTGAGES: The fair values of mortgages are generally determined with the
assistance of an independent pricing service utilizing a discounted cash flow
methodology based on coupon rates, maturity provisions and assigned credit
ratings.
COMMON STOCKS, CASH AND SHORT-TERM INVESTMENTS, POLICY LOANS, AND SEED MONEY
INVESTMENTS: The carrying values are reasonable estimates of their fair values.
PREFERRED STOCKS: The fair values of preferred stocks are determined using
quoted market prices or valuations from the NAIC.
TEACHERS PERSONAL ANNUITY - FIXED ACCOUNT: The carrying values of the
liabilities are reasonable estimates of their fair values.
FOREIGN CURRENCY SWAP CONTRACTS: The fair values of foreign currency swap
contracts, which are used for hedging purposes, are the estimated net gains that
TIAA would record if the foreign currency swaps were liquidated at year-end. The
fair values of foreign currency swap contracts are estimated internally based on
future cash flows and anticipated foreign exchange relationships, and such
values are reviewed for reasonableness with values from TIAA's counterparties.
FOREIGN CURRENCY FORWARD CONTRACTS: The fair values of foreign currency forward
contracts, which are used for hedging purposes, are the estimated net gains that
TIAA would record if the foreign currency forward contracts were liquidated at
year-end. The fair values of the foreign currency forward contracts are
estimated internally based on future cash flows and anticipated foreign exchange
relationships, and such values are reviewed for reasonableness with estimates
from TIAA's counterparties.
INTEREST RATE SWAP CONTRACTS: The fair values of interest rate swap contracts,
which are used for hedging purposes, are the estimated net gains that TIAA would
record if the interest rate swaps were liquidated at year-end. The swap
agreements have no carrying value. The fair values of interest rate swap
contracts are estimated internally based on anticipated interest rates and
estimated future cash flows, and such values are reviewed for reasonableness
with estimates from TIAA's counterparties.
SWAP OPTIONS: The fair values of swap options, which are used for hedging
purposes, are the estimated amounts that TIAA would receive (pay) if the swap
options were liquidated at year-end. The fair values of the swap options are
estimated by external parties, including TIAA's counterparties, and such values
are reviewed internally for reasonableness based on anticipated interest rates
and estimated future cash flows.
INTEREST RATE CAP CONTRACTS: The fair values of interest rate cap contracts,
which are used for hedging purposes, are the estimated amounts that TIAA would
receive if the interest rate cap contracts were liquidated at year-end. The fair
values of the interest rate cap contracts are estimated by external parties,
including TIAA's counterparties, and such values are reviewed internally for
reasonableness based on anticipated interest rates and estimated future cash
flows.
CREDIT DEFAULT SWAP CONTRACTS: The fair values of credit default swap contracts,
which are used for asset replication purposes, are the estimated amounts that
TIAA would receive (pay) if the credit default swap contracts were liquidated at
year-end. The fair values of credit default swap contracts are estimated by
external parties, including TIAA's counterparties, and such values are reviewed
internally for reasonableness based on anticipated interest rates, estimated
future cash flows, and anticipated credit market conditions.
STOCK WARRANTS: The fair values of stock warrants represent the excess, if any,
of the market values of the related stocks over the exercise prices associated
with the stock warrants. The stock warrants have no carrying value.
26
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONCLUDED)
COMMITMENTS TO EXTEND CREDIT OR PURCHASE INVESTMENTS: TIAA generally 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 7 - OPERATING SUBSIDIARIES
TIAA's operating subsidiaries primarily consist of TIAA-CREF Life Insurance
Company, Inc., ("TIAA-CREF Life"), TIAA-CREF Trust Company, FSB, ("Trust
Company"), Tuition Financing, Inc., ("TFI"), Teachers Personal Investors
Services, ("TPIS") and Teachers Advisors, Inc., ("Advisors") which are owned by
TIAA-CREF Enterprises, Inc., ("Enterprises"), a wholly-owned subsidiary of TIAA.
At December 31, 2001 and 2000, the carrying values of TIAA's equity interests in
unconsolidated subsidiaries, were approximately $214,171,000 and $257,050,000,
respectively. Total assets, liabilities and net income/(loss) of operating
subsidiaries at December 31, 2001 and 2000, and for the years then ended, were
approximately as follows:
2001 2000
-------------- ------------
Assets....................................... $1,276,179,000 $765,517,000
Liabilities.................................. 1,074,596,000 509,816,000
Non-admitted assets/other adjustments........ 12,588,000 1,349,000
-------------- ------------
Carrying value............................... $ 214,171,000 $257,050,000
============== ============
Net income/(loss)............................ (74,101,000) (52,546,000)
TIAA had an Adjustable Rate Payment-in-Kind Note Receivable from Enterprises in
the principal amount plus accrued interest, of $148,833,089 and $70,334,039, and
a net amount due from operating subsidiaries of $28,190,737 and $27,315,652, as
of December 31, 2001 and 2000, respectively.
TIAA has a financial support agreement with TIAA-CREF Life. Under this
agreement, TIAA will provide support so that TIAA-CREF Life will have the
greater of capital and surplus of $250 million or the amount of capital and
surplus necessary to maintain TIAA-CREF Life's capital and surplus at a level
not less than 150% of the NAIC Risk Based Capital model or such other amount as
necessary to maintain TIAA-CREF Life's financial strength rating, (from the
various rating agencies) at least the same as TIAA's rating at all times. This
agreement is not an evidence of indebtedness or an obligation or liability of
TIAA and does not provide any creditor of TIAA-CREF Life with recourse to TIAA.
TIAA made a $25,000,000 additional capital contribution to TIAA-CREF Life during
2001 pursuant to this agreement.
In 2001, TIAA entered into a $100 million unsecured credit facility arrangement
with TIAA-CREF Life. As of December 31, 2001, $30 million of this facility was
maintained on a committed basis for which TIAA-CREF Life paid a commitment fee.
There were no drawdowns under this facility during 2001.
NOTE 8 - SEPARATE ACCOUNTS
TIAA currently has two separate accounts. The 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 ("the Commission") effective November 1, 1994
as an open-end, diversified management investment company under the Investment
Company Act of 1940. Currently, VA-1 consists of a single investment portfolio,
the Stock Index Account ("SIA"). SIA was established on October 3, 1994 and
invests in a diversified portfolio of equity securities selected to track the
overall United States stock market.
27
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8 - SEPARATE ACCOUNTS - (CONCLUDED)
TIAA provides mortality and expense guarantees to VA-1, for which it is
compensated. TIAA guarantees that at death, the total death benefit payable from
the fixed and variable accounts will be at least a return of total premiums paid
less any previous withdrawals. TIAA also guarantees that expense charges to VA-1
participants will never rise above the maximum amount stipulated in the
contract.
The TIAA Real Estate Account ("REA") is a segregated investment account and was
organized on February 22, 1995 under the insurance laws of the State of New York
for the purpose of funding variable annuity contracts. REA was registered with
the Commission under the Securities Act of 1933 effective October 2, 1995. REA's
target is to invest between 70% and 95% of its assets directly in real estate or
in real estate-related investments, with the remainder of its assets invested in
publicly traded securities to maintain adequate liquidity.
TIAA provides mortality, expense and liquidity guarantees to REA and is
compensated for these guarantees. TIAA guarantees that once REA participants
begin receiving lifetime annuity income benefits, monthly payment levels will
never be reduced as a result of adverse mortality experience. TIAA also
guarantees that expense charges to REA participants will never rise above the
maximum amount stipulated in the contract. TIAA provides REA with a liquidity
guarantee to ensure it has funds available to meet participant transfer or cash
withdrawal requests. If REA cannot fund participant requests, TIAA's general
account will fund them by purchasing Accumulation Units. TIAA guarantees that
participants will be able to redeem their Accumulation Units at their then
current daily net asset value. TIAA does not own any Accumulation Units at
December 31, 2001.
Other than the guarantees mentioned above, TIAA does not make any guarantees to
policyholders on its separate accounts (including the investment performance of
the separate accounts). Both accounts offer full or partial withdrawal at market
value with no surrender charges. The assets and liabilities of these accounts
(which represent participant account values) are generally carried at market
value (directly held real estate is carried at appraised value).
NOTE 9 - MUTUAL FUNDS
As of December 31, 2001 and 2000, TIAA's investment in the affiliated mutual
funds described below was approximately $325.6 million and $394.0 million,
respectively. This amount is reported in the caption "other long term
investments" in the accompanying balance sheet. Shares of the mutual funds are
distributed by TPIS and investment advisory services are provided by Advisors.
TIAA-CREF Mutual Funds ("the Retail Funds") consist of eleven investment
funds which are offered to the general public. As of December 31, 2001, the
Retail Funds had approximately $3.0 billion in net assets.
TIAA-CREF Institutional Mutual Funds ("the Institutional Funds"), a family
of seven funds, are currently used primarily as investment vehicles for the
TFI tuition finance business and the Trust Company. As of December 31,
2001, the Institutional Funds had approximately $1.5 billion in net assets.
TIAA-CREF Life Funds ("the Life Funds") are utilized by TIAA-CREF Life as
funding vehicles for its variable annuity and variable insurance products.
As of December 31, 2001, the Life Funds had approximately $270.0 million in
net assets.
28
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10 - MANAGEMENT AGREEMENTS
Services necessary for the operation of College Retirement Equities Fund
("CREF") are provided, at cost, by two subsidiaries of TIAA, TIAA-CREF
Investment Management, LLC ("Investment Management") and TIAA-CREF Individual &
Institutional Services, Inc. ("Services"), which provide investment advisory,
administrative and distribution services for CREF. Such services are provided in
accordance with an Investment Management Services Agreement between CREF and
Investment Management, and in accordance with a Principal Underwriting and
Administrative Services Agreement between CREF and Services. Investment
Management is registered with the Commission as an investment adviser; Services
is registered with the Commission as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc. ("NASD"). Investment Management
and Services receive management fee payments from each CREF account on a daily
basis according to formulae established each year with the objective of keeping
the management fees as close as possible to each account's actual expenses. Any
differences between the actual expenses incurred and the management fees
received are adjusted quarterly. Such fees and the equivalent allocated
expenses, which amounted to approximately $555,052,000, $561,396,000, and
$493,399,000 in 2001, 2000, and 1999, respectively, are not included in the
statements of operations and had no effect on TIAA's operations. TIAA also
provides guarantees to the CREF accounts, for which it is compensated, for
certain mortality and expense risks pursuant to an Immediate Annuity Purchase
Rate Guarantee Agreement.
TIAA provides a $1 billion uncommitted line of credit to CREF, TIAA-CREF Mutual
Funds and TIAA-CREF Institutional Mutual Funds ("the Funds"). Loans under this
revolving credit facility have a maximum of 60 days and are made solely at the
discretion of TIAA to fund shareholder redemption requests or other temporary or
emergency needs of the Funds. It is the intent of TIAA and the Funds to use this
facility as a supplemental liquidity facility which would only be used after the
Funds have exhausted the availability of its current $2.25 billion committed
credit facility that it maintains with a group of banks. No draw downs have
taken place under TIAA's uncommitted facility since its inception in November of
1999.
Advisors 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. TPIS distributes contracts for VA-1.
TIAA provides administrative services to the Trust Company, under an
Administrative Services Agreement. Expense charges for administrative services
provided by TIAA to the Trust Company are billed quarterly.
All services necessary for the operation of REA are provided, at cost, by TIAA
and Services. TIAA provides investment management services for REA. Distribution
and administrative services are provided in accordance with a Distribution and
Administrative Services Agreement between REA and Services. TIAA and Services
receive management fee payments from REA on a daily basis according to formulas
established each year with the objective of keeping the management fees as close
as possible to REA's actual expenses. Any differences between actual expenses
and daily charges are adjusted quarterly.
All services necessary for the operation of the New York State College Choice
Tuition Savings Program are provided by TIAA in accordance with a Management
Agreement between TIAA, the Comptroller of the State of New York and the New
York Higher Education Services Corporation. Advisors provides investment
management services for the Tuition Savings Program in accordance with an
Investment Management Agreement between TIAA and Advisors. TPIS distributes
contracts for the Tuition Savings Program in accordance with a Distribution
Agreement between TIAA and TPIS.
TIAA provides investment services for TIAA-CREF Life, in accordance with an
Investment Management Agreement between TIAA and TIAA-CREF Life. Administrative
services for TIAA-CREF Life are provided by TIAA in accordance with an
Administrative Services Agreement between TIAA and TIAA-CREF Life.
29
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11 - FEDERAL INCOME TAXES
TIAA is a nonprofit organization and, through December 31, 1997, was exempt from
federal income taxation under the Internal Revenue Code ("Code"). Any
non-pension related income, however, was subject to federal income taxation as
unrelated business income. Effective January 1, 1998, as a result of federal
legislation, TIAA is no longer exempt from federal income taxation and is taxed
as a stock life insurance company. Beginning with 1998, TIAA files a
consolidated federal income tax return with its subsidiary affiliates. The tax
sharing agreement follows the current reimbursement method, whereby members of
the consolidated group will generally be reimbursed for their losses on a
pro-rata basis by other members of the group to the extent that they have
taxable income, subject to limitations imposed under the Code.
The federal income tax provisions included in the accompanying statements of
operations are based on taxes actually paid or recovered or anticipated to be
paid or recovered. The approximate income tax expense (benefit) of $26,784,000,
$24,048,000 and $(25,213,000) for 2001, 2000 and 1999, respectively, reflected
in the accompanying statements of operations are the amounts that are payable
(receivable) under such tax sharing agreement. TIAA reported a tax loss for 2000
and 1999 and expects to report a tax loss for 2001 as a result of net operating
losses attributable to required increases in policy and contract reserves. These
reserve increases will reverse over time, thereby increasing TIAA's taxable
income in future years. TIAA is subject to the domestic federal statutory rate
of 35%. TIAA's effective federal tax rate is 3% for 2001 and 2% for 2000. The
difference between the statutory rate and TIAA's effective rate is primarily
attributable to the utilization of net OPERATING losses described above.
At December 31, 2001, TIAA had a net operating loss (NOL) carryforward for tax
purposes of approximately $4.1 billion. These net operating losses were
generated in 1998 and 1999. Under the Code, the tax loss carryforwards will
generally expire after fifteen years (in 2013 and 2014). TIAA did not incur
federal taxes in the current or preceding years that are available for
recoupment in the event of future net losses.
NOTE 12 - PENSION PLAN AND POSTRETIREMENT BENEFITS
TIAA maintains a qualified, noncontributory defined contribution pension plan
covering substantially all employees. All employee pension plan liabilities are
fully funded through 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 $30,989,000, $25,484,000, and $23,865,000 in 2001, 2000 and
1999, respectively. This includes supplemental contributions made to
company-owned annuity contracts under a non-qualified deferred compensation
plan.
In addition to the pension plan, TIAA provides certain other postretirement life
and health insurance benefits to eligible retired employees who meet prescribed
age and service requirements. The postretirement benefit obligation for retirees
and fully eligible employees was approximately $37,737,000 at December 31, 2001.
The postretirement benefit obligation for non-vested employees was approximately
$42,418,000 at December 31, 2001. The unrecognized transition obligation was
$8,599,000 and $9,380,000 at December 31, 2001 and 2000, respectively. The cost
of such benefits reflected in the accompanying statements of operations was
approximately $3,283,000, $2,914,000, and $3,180,000 for 2001, 2000 and 1999,
respectively. The discount rate used in determining the postretirement benefit
obligations was 7.5% per year and the medical care cost trend rate was 8% per
year in 2002, decreasing by .50% in each future year, to an ultimate rate of
5.5% per year in 2007. As the plan is not pre-funded, the value of plan assets
is zero. The accrued postretirement benefit liability was $34,986,000 and
$32,325,000 as of December 31, 2001 and 2000, respectively.
30
TEACHERS INSURANCE AND ANNUITY ASSOCIATON OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONTINUED)
NOTE 12 - PENSION PLAN AND POSTRETIREMENT BENEFITS - (CONCLUDED)
The medical care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed medical care cost trend
rates by one percentage point in each year would increase the postretirement
benefit obligation as of December 31, 2001 by approximately $6,146,000 and the
eligibility cost and interest cost components of net periodic postretirement
benefit expense for 2001 by approximately $838,000.
TIAA also maintains a non-qualified deferred compensation plan for non-employee
trustees and members of the TIAA Board of Overseers. The plan provides an award
equal to 50% of the annual stipend that is invested annually in company-owned
annuity contracts. Payout of accumulations is normally made in a lump sum
following the trustee's or member's separation from the Board.
NOTE 13 - POLICY AND CONTRACT RESERVES
At December 31, 2001 and 2000, TIAA's general account annuity reserves are
summarized as follows:
2001 2000
------------------------- -------------------------
AMOUNT PERCENT AMOUNT PERCENT
---------------- ------- ---------------- -------
Subject to discretionary withdrawal:
At book value without adjustment ....... $ 13,914,090,000 13.1% $ 11,594,104,000 11.7%
At market value ........................ -- -- -- --
Not subject to discretionary withdrawal ... 92,243,761,000 86.9 87,199,698,000 88.3
---------------- ----- ---------------- -----
Total annuity reserves .................... 106,157,851,000 100.0% 98,793,802,000 100.0%
================ ===== ================ =====
Reconciliation to total policy and contract
reserves shown on the balance sheet:
Reserves on other life policies and
contracts............................ 445,385,000 427,109,000
Reserves on accident and health
policies............................. 760,231,000 638,320,000
---------------- ---------------
Total policy and contract reserves........... $107,363,467,000 $99,859,231,000
================ ===============
On January 1, 2001, in accordance with codified statutory accounting
requirements, additional reserves in the amount of approximately $22,313,000
were established to cover premium deficiencies in certain group disability
insurance blocks of business. At December 31, 2001, the reserve was
approximately $9,970,000. In addition, at December 31, 2001, additional reserves
amounting to approximately $22,000,000 were established to cover future claims
settlement expenses for the group disability insurance business, and additional
long-term care insurance reserves in the amount of $10,000,000 were established
in accordance with regulatory actuarial asset and reserve adequacy requirements.
On its deferred and payout annuities, TIAA holds reserves greater than the
minimum reserves required by NAIC SAP. For 2001 issues, the amount is
approximately $622,400,000. (Disclosure of this amount is required under NAIC
Emerging Accounting Issues Interpretation Number 01-26.)
NOTE 14 - COMMERCIAL PAPER/LIQUIDITY FACILITY
TIAA began issuing commercial paper in May 1999 under a maximum authorized
program of $2 billion and had no outstanding obligation at December 31, 2001 and
2000, respectively. Interest expense totaled approximately $ 0, $50,462,000 and
$24,585,000 during 2001, 2000 and 1999, respectively. TIAA maintains a
short-term revolving credit liquidity facility of approximately $1 billion to
support the commercial paper program, but this liquidity facility has not been
utilized.
31
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS - (CONCLUDED)
NOTE 15 - 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 16 - SUBSEQUENT EVENTS
On January 30, 2002, TIAA Financial Services, LLC ("TFS"), a direct wholly-owned
subsidiary of TIAA, was capitalized with $5,750,000. TFS contributed $500,000 in
capital to TIAA Advisory Services, LLC ("TAS") in exchange for a membership
certificate in TAS. TAS will provide investment advisory services to third
parties. In addition, on January 30, 2002, TFS contributed $5,000,000 to TIAA
Global Markets, Inc. ("TGM") in exchange for 100 shares of common stock of TGM.
TGM was formed for the purpose of issuing notes and other debt instruments and
investing the proceeds in compliance with the investment guidelines approved by
the Board of Directors of TGM. Other than the investment portfolio, TGM will
have no other significant assets. Other than the notes, and any other debt that
may be incurred by TGM in the future, it is not anticipated that TGM will have
other significant liabilities. TGM is authorized to issue up to $5 billion in
debt. TIAA's Board of Trustees authorized TIAA to guarantee up to $5 billion of
TGM's debt. TGM issued $500 million of senior notes due in 2007 in February
2002. This debt is rated AAA by Standard & Poor's Rating Services, Aaa by
Moody's Investors Services, Inc., and AAA by Fitch Ratings. The notes are
guaranteed by TIAA. The guarantee constitutes an unsecured unsubordinated
obligation of TIAA. Current TGM investment guidelines include limits on
industry, issuer, ratings and asset type. It is anticipated that all of TGM's
assets at the time of purchase will be rated investment grade by at least one
nationally recognized rating agency and that the portfolio will generally match
the coupon structure and currency of the debt instruments issued including the
notes. In the event TGM issues additional debt instruments, it intends to employ
a segmented approach to the asset/liability management of its portfolio, which
is intended to provide a dedicated pool of assets earmarked for the liabilities.
TGM will perform functions relating to the investment process by utilizing
personnel and facilities of TIAA, as needed, at cost. TIAA does not anticipate
having to perform under the guarantee.
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 26th day of April, 2002.
TIAA REAL ESTATE ACCOUNT
By: TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA
By: /s/ LISA SNOW
-------------------------------
Lisa Snow
Vice President and
Chief Counsel, Corporate Law
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, President and Chief 4/26/02
- ------------------------------------ Executive Officer (Principal Executive
John H. Biggs Officer) and Trustee
/s/ MARTIN L. LEIBOWITZ Vice Chairman, Chief Investment Officer 4/26/02
- ------------------------------------ and Trustee
Martin L. Leibowitz
/s/ RICHARD L. GIBBS Executive Vice President (Principal 4/26/02
- ------------------------------------ Financial and Accounting Officer)
Richard L. Gibbs
SIGNATURE OF TRUSTEE DATE SIGNATURE OF TRUSTEE DATE
- -------------------- ---- -------------------- ----
/s/ DAVID ALEXANDER 4/26/02 /s/ ROCHELLE B. LAZARUS 4/26/02
- ------------------------------- -------------------------------
David Alexander Rochelle B. Lazarus
/s/ MARCUS ALEXIS 4/26/02 /s/ ROBERT M. O'NEIL 4/26/02
- ------------------------------- -------------------------------
Marcus Alexis Robert M. O'Neil
/s/ WILLARD T. CARLETON 4/26/02 /s/ LEONARD S. SIMON 4/26/02
- ------------------------------- -------------------------------
Willard T. Carleton Leonard S. Simon
/s/ ROBERT C. CLARK 4/26/02 /s/ RONALD L. THOMPSON 4/26/02
- ------------------------------- -------------------------------
Robert C. Clark Ronald L. Thompson
/s/ ESTELLE A. FISHBEIN 4/26/02 /s/ PAUL R. TREGURTHA 4/26/02
- ------------------------------- -------------------------------
Estelle A. Fishbein Paul R. Tregurtha
/s/ FREDERICK R. FORD 4/26/02 /s/ WILLIAM H. WALTRIP 4/26/02
- ------------------------------- -------------------------------
Fredeerick R. Ford William H. Waltrip
/s/ RUTH SIMMS HAMILTON 4/26/02 /s/ ROSALIE J. WOLF 4/26/02
- ------------------------------- -------------------------------
Ruth Simms Hamilton Rosalie J. Wolf
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, 2001 and 2000, and for each of the three years in
the period ended December 31, 2001 and have issued our report thereon dated
February 1, 2002 included elsewhere in this Registration Statement. Our audits
also included the financial statement schedule listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of TIAA's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
New York, New York
February 1, 2002
S-1
TIAA REAL ESTATE ACCOUNT
SCHEDULE III - REAL ESTATE OWNED
DECEMBER 31, 2001
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) 2001 COMPLETED ACQUIRED
- ---------------------------------- ------- -------------- ----------------- -------------- ------------ --------
River Road Distribution Center $-0- $ 4,174,182 ($ 42,611) $ 4,131,571 1995 11/22/95
Industrial Building
Fridley, Minnesota
The Greens At Metrowest -0- 12,522,047 1,577,953 14,100,000 1990 12/15/95
Apartments
Orlando, Florida
Butterfield Industrial Park -0- 4,456,125 243,875 4,700,000 1981 12/22/95
Industrial Building
El Paso, Texas (1)
Plantation Grove Shopping Center -0- 7,350,129 349,871 7,700,000 1995 12/28/95
Shopping Center
Ocoee, Florida
Southbank Business Park -0- 10,069,898 3,495,320 13,565,218 1995 02/27/96
Office Building
Phoenix, Arizona
Millbrook Collection -0- 6,774,711 425,289 7,200,000 1988 03/29/96
Shopping Center
Raleigh, North Carolina
Lynnwood Collection -0- 6,708,120 1,191,880 7,900,000 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) 2001 COMPLETED ACQUIRED
- ---------------------------------- ------- -------------- ----------------- -------------- ------------ --------
Monte Vista Apartments $-0- $ 17,663,849 $ 4,136,151 $ 21,800,000 1995 06/21/96
Apartments
Littleton, Colorado
Arapahoe Park East -0- 9,933,485 3,166,515 13,100,000 1982 10/31/96
Industrial Building
Boulder, Colorado
Royal St. George Apartments -0- 16,072,612 327,388 16,400,000 1995 12/20/96
Apartments
West Palm Beach, Florida
Interstate Crossing -0- 6,454,888 49,851 6,504,739 1995 12/31/96
Industrial Building
Eagan, Minnesota
West Creek Apartments -0- 13,488,279 4,411,721 17,900,000 1988 01/02/97
Apartments
Westlake Village, California
Westinghouse Facility -0- 6,089,473 (789,473) 5,300,000 1997 02/05/97
Industrial Building
Coral Springs, Florida
Rolling Meadows -0- 12,930,463 (540,463) 12,390,000 1957 05/28/97
Shopping Center
Rolling Meadows, Illinois
Eastgate Distribution Center -0- 11,952,402 2,547,598 14,500,000 1996 05/29/97
Industrial Building
San Diego, California
S-3
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) 2001 COMPLETED ACQUIRED
- ---------------------------------- ------- -------------- ----------------- -------------- ------------ --------
Five Centerpointe $-0- $ 15,656,341 $ 2,345,158 $ 18,001,499 1988 04/21/97
Office Building
Lake Oswego, Oregon
Longview Executive Park -0- 23,628,567 4,572,233 28,200,800 1988 04/21/97
Office Building
Longview, Maryland
Northmark Business Center III -0- 8,812,644 3,387,356 12,200,000 1985 04/21/97
Office Building
Blue Ash, Ohio
Fairgate at Ballston -0- 26,977,436 3,322,564 30,300,000 1988 04/21/97
Office Building
Arlington, Virginia
Parkview Plaza -0- 49,412,494 1,087,506 50,500,000 1990 04/29/97
Office Building
Oakbrook Terrace, Illinois
Lincoln Woods Apartments -0- 21,464,483 3,335,517 24,800,000 1991 10/20/97
Apartments
Lafayette Hill, Pennsylvania
371 Hoes Lane -0- 15,499,306 (799,306) 14,700,000 1986 12/15/97
Office Building
Piscataway, New Jersey
Columbia Centre III -0- 38,580,069 (1,080,069) 37,500,000 1989 12/23/97
Office Building
Rosemont, Illinois
S-4
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) 2001 COMPLETED ACQUIRED
- ---------------------------------- ------- -------------- ----------------- -------------- ------------ --------
The Lodge at Willow Creek $-0- $ 27,562,882 $ 4,437,118 $ 32,000,000 1997 12/24/97
Apartments
Douglas County, Colorado
The Legends at Chase Oaks -0- 29,701,668 (3,701,668) 26,000,000 1997 03/31/98
Apartments
Plano, Texas
Chicago Industrial Portfolio -0- 41,953,686 637,500 42,591,186 1997 06/30/98
Industrial Building
Joliet, Illinois
Golfview Apartments -0- 28,066,591 (1,016,591) 27,050,000 1998 07/31/98
Apartments
Lake Mary, Florida
Indian Creek Apartments -0- 17,002,932 (202,932) 16,800,000 1988 10/08/98
Apartments
Farmington Hills, Michigan
Bent Tree Apartments -0- 14,420,590 79,410 14,500,000 1987 10/22/98
Apartments
Columbus, Ohio
UPS Distribution Center -0- 10,989,393 110,607 11,100,000 1998 11/13/98
Industrial Building
Fernly, Nevada
Ontario Industrial Properties -0- 105,364,400 2,635,600 108,000,000 1997 12/17/98
Industrial Building
Ontario, California
S-5
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) 2001 COMPLETED ACQUIRED
- ---------------------------------- ------- -------------- ----------------- -------------- ------------ --------
IDI Kentucky Portfolio $-0- $ 53,083,000 $ 517,000 $ 53,600,000 1998 12/17/98
Industrial Building
Hebron, Kentucky
Fedex Distribution Center -0- 7,828,025 (228,025) 7,600,000 1998 12/18/98
Industrial Building
Crofton, Maryland
Biltmore Commerce Center -0- 37,323,058 (5,028,000) 32,295,058 1985 02/23/99
Office Building
Phoenix, Arizona
The Colorado -0- 52,687,840 7,812,160 60,500,000 1987 04/14/99
Apartments
New York, New York
Sawgrass Portfolio -0- 52,963,368 (2,163,368) 50,800,000 1998 05/11/99
Office Building
Sunrise, Florida
780 Third Avenue -0- 161,511,019 15,988,981 177,500,000 1984 07/08/99
Office Building
New York, New York
Monument Place -0- 34,597,698 802,302 35,400,000 1990 07/15/99
Office Building
Fairfax, Virginia
88 Kearny Street -0- 65,795,171 16,321,531 82,116,702 1986 07/22/99
Office Building
San Francisco, California
S-6
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) 2001 COMPLETED ACQUIRED
- ---------------------------------- ------- -------------- ----------------- -------------- ------------ --------
10 Waterview Boulevard $-0- $ 31,063,636 ($ 663,636) $ 30,400,000 1984 07/27/99
Office Building
Parsippany, New Jersey
Larkspur Courts -0- 53,038,988 161,012 53,200,000 1991 08/17/99
Apartments
Larkspur, California
Columbus Portfolio -0- 30,238,233 (1,838,233) 28,400,000 1997 11/30/99
Office Building
Columbus, Ohio
Konica Photo Imaging Headquarters -0- 17,049,875 650,125 17,700,000 1999 12/21/99
Industrial Building
Mahwah, New Jersey
Atlanta Industrial Portfolio -0- 39,855,509 603,536 40,459,045 1999 04/04/00
Industrial Building
Atlanta, Georgia
1801 K Street -0- 140,719,040 9,620,806 150,339,846 1971 05/15/00
Office Building
Washington, DC
Northpoint Commerce Center -0- 38,818,013 (1,361,864) 37,456,149 1994 06/15/00
Industrial Building
Fullerton, California
Morris Corporate Center III -0- 103,119,739 3,094,856 106,214,595 1990 07/12/00
Office Building
Parsippany, New Jersey
S-7
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) 2001 COMPLETED ACQUIRED
- ---------------------------------- ------- -------------- ----------------- -------------- ------------ --------
Ashford Meadows Apartments $-0- $ 64,171,626 $ 23,874 $ 64,195,500 1998 09/28/00
Apartments
Herndon, Virginia
Landmark at Salt Lake City -0- 14,434,653 (834,653) 13,600,000 2000 11/03/00
Industrial Building
Salt Lake City, Utah
Cabot Industrial Portfolio -0- 32,155,307 2,208,445 34,363,752 2000 11/17/00
Industrial Building
Rancho Cucamonga, California
Maitland Promenade One -0- 36,520,162 2,479,838 39,000,000 1999 12/14/00
Office Building
Maitland, Florida
Dallas Industrial Portfolio -0- 96,904,758 341,092 97,245,850 1997 12/19/00
Industrial Building
Coppell, Texas
Bisys Fund Service Building -0- 19,070,377 1,329,623 20,400,000 2001 11/30/99
Office Building
Columbus, Ohio
Batterymarch Park 11 -0- 17,816,460 174,393 17,990,853 1986 05/31/01
Office Building
Quincy, Massachusetts
South River Road Industrial -0- 33,700,429 (1,011,864) 32,688,565 1999 06/25/01
Industrial Building
Cranbury, New Jersey
S-8
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) 2001 COMPLETED ACQUIRED
- ---------------------------------- ------- -------------- ----------------- -------------- ------------ --------
Needham Corporate Center $-0- $ 28,150,986 $ 143,540 $ 28,294,526 1987 07/30/01
Office Building
Needham, Massachusetts
South Florida Apt Portfolio -0- 44,114,457 2,585,543 46,700,000 1986 08/24/01
Apartments
Boca Raton, Florida
Carolina Apartments -0- 17,286,931 313,069 17,600,000 1993 08/24/01
Apartments
Margate, Florida
Quiet Waters Apartments -0- 19,094,415 (2,994,415) 16,100,000 1995 08/24/01
Apartments
Deerfield Beach, Florida
9 Hutton Centre -0- 20,448,764 0 20,448,764 1981 10/30/01
Office Building
Santa Ana, California
Doral Pointe Apartments -0- 45,341,796 0 45,341,796 1990 11/06/01
Apartments
Miami, Florida
1015 15th Street -0- 48,736,575 0 48,736,575 1978 11/09/01
Office Building
Washington D.C.
Kenwood Mews Apartments -0- 22,686,216 0 22,686,216 1991 11/30/01
Apartments
Burbank, California
S-9
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) 2001 COMPLETED ACQUIRED
- ---------------------------------- ------- -------------- ----------------- -------------- ------------ --------
Ten & Twenty Westport Road $-0- $ 140,105,661 $ 0 $ 140,105,661 2001 12/28/01
Office Building
Wilton, Connecticut ----- -------------- ----------- --------------
$ -0- $2,242,165,930 $88,748,536 $2,330,914,466
===== ============== =========== ==============
(1) Leasehold interest only
Reconciliation of investment
property owned:
Balance at beginning of period $1,899,254,344
Acquisitions 538,396,767
Dispositions (94,797,368)
(Initial Cost $95,125,231,
costs capitalized ($327,863))
Capital improvements and carrying
costs (including unrealized
gains and losses) (11,939,277)
--------------
Balance at end of period $2,330,914,466
==============
S-10
EXHIBIT INDEX
-------------
(5) Opinion and Consent of Charles H. Stamm, Esquire
(23) (B) Consent of Sutherland Asbill & Brennan LLP
(C) Consent of Ernst & Young LLP
(D) Consent of Friedman, Alpren & Green LLP