UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 12, 2000
CORNERSTONE REALTY INCOME TRUST, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 001-12875 54-1589139
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification Number)
306 EAST MAIN STREET, RICHMOND, VA 23219
(Address of principal executive offices) (Zip Code)
(804) 643-1761
(Registrant's telephone number, including area code)
ITEM 2. Acquisition or Disposition of Assets
Cornerstone Realty Income Trust, Inc. (which is referred to below as
"we", "us" or "our") is filing this report pursuant to Item 2 of Form 8-K to
describe a financing transaction in which certain assets were mortgaged. These
mortgages constitute a "disposition of a significant amount of assets" within
the meaning of the General Instructions to Form 8-K. Certain related matters
also are reported below.
SUMMARY OF FINANCING
On December 12, 2000, we obtained financing, either directly or through
our subsidiaries, from First Union National Bank in the aggregate amount of $191
million. The financing includes long-term secured loans to three of our
newly-formed subsidiaries in the total amount of $141 million. The remainder of
the financing consists of an unsecured credit facility in the total amount of
$50 million to us and one of our direct subsidiaries. The proceeds from the
financing were used to satisfy an existing unsecured credit facility established
with First Union National Bank in July 1999.
NEW SUBSIDIARIES FOR LONG-TERM LOANS
In connection with the long-term loans provided by First Union National
Bank, and at its request, we formed a total of six new subsidiaries that will
operate as "special purpose entities." To qualify as special purpose entities,
the new subsidiaries have organizational documents that impose certain
requirements on them while the loans are outstanding. In particular, the
subsidiaries must maintain separate legal identities and must limit their
activities to dealing with the apartment properties that secure the loans.
Three of our new subsidiaries serve as borrowers for the long-term
loans and have ownership of the apartment properties that secure such loans. To
achieve this ownership, we transferred (or caused our existing subsidiaries to
transfer) a total of 15 apartment properties to our borrowing subsidiaries.
Because one of the borrowing subsidiaries is a limited liability company and
another is a limited partnership, the lender requested that we form three other
special purpose entities to serve as the sole member, general partner and
limited partner, respectively, of these particular borrowers.
OVERVIEW OF LONG-TERM LOANS
The long-term loans are evidenced by a total of 15 promissory notes
from three borrowers. The principal amount of each note is based on, and the
payment of each note is secured by, a separate apartment property owned by the
borrower who executed the note. The following table provides an overview of the
long-term loans:
NAME OF NAME OF APARTMENT LOCATION OF PRINCIPAL
BORROWER PROPERTY OWNED PROPERTY AMOUNT OF NOTE
CRIT-VA, Inc. Arbor Trace Virginia Beach VA $5,000,000
(a Virginia corporation) Ashley Park Richmond VA 9,500,000
Gables Henrico County VA 8,000,000
Mayflower Virginia Beach VA 10,500,000
Trolley Square Richmond VA 9,500,000
Trophy Chase Albermarle County VA 15,000,000
----------
Subtotal for Borrower $57,500,000
CRIT-NC II, LLC Heatherwood Charlotte NC 16,250,000
(a Delaware LLC) Summerwalk Concord NC 6,000,000
---------
Subtotal for Borrower $22,250,000
CAC Limited Partnership Brandywine Park (Cutter's Point) Richardson TX 6,250,000
(a Virginia limited partnership) Eagle Crest Irving TX 15,000,000
Remington Hills Irving TX 14,250,000
Sierra Ridge San Antonio TX 4,750,000
The Arbors on Forest Ridge Bedford TX 6,250,000
Timberglen Dallas TX 9,500,000
Toscana Dallas TX 5,250,000
---------
Subtotal for Borrower $61,250,000
TOTAL $141,000,000
============
DESCRIPTION OF LONG-TERM NOTES
The 15 long-term promissory notes are substantially similar. Each of these
promissory notes provides for the following:
o an annual interest rate of 7.35%
o a maturity date of January 1, 2011
o payment of interest only in monthly installments until maturity
o payment of principal and all other amounts in full at maturity
o acceleration, at the option of the lender, of all amounts due under
the note if any required monthly payment is not made within seven days
of its due date or if there is any other event of default
o a late charge of 5% on any payment that is not made within seven days
of its due date
o an increase of 4% in the applicable interest rate upon any default
o a restriction on voluntary prepayment, which is not permitted without
penalty until the final three months of the note
Additional payments or penalties would apply in other circumstances,
such as acceleration of a long-term promissory note during the first two years,
based upon an event of default. The sum of the additional payments would equal
at least 5% of the remaining debt if acceleration occurs in the first year.
Futhermore, each long-term promissory note contains substantial
limitations on release and substitution of collateral. The apartment property
that serves as collateral under a long-term promissory note cannot be released
from its mortgage during the first two years of the note. After two years, a
release is permitted, but only if substitute collateral is provided in the form
of direct, non-callable obligations of the United States. These substitute
obligations must be structured to pay a series of amounts that match, as closely
as possible, the remainder of the installments required under the promissory
note involved.
CROSS-DEFAULT AMONG LONG-TERM NOTES
The 15 apartment properties that serve as collateral for the long-term
promissory notes are subject to cross-default and cross-collateral provisions
under separate and corresponding deeds of trust and security documents. The
apartment properties have been divided into two groups for this purpose.
In general, any default under one promissory note would constitute a
default under all other promissory notes in the same group and would enable the
lender to exercise its rights against all of the apartment properties that serve
as collateral for that particular group. The two groups themselves, however, are
not connected by cross-default or cross-collateral provisions. The first group
consists of the eight apartment properties owned by CRIT-VA, Inc. and CRIT-NC
II, LLC, respectively. The second group consists of the seven apartment
properties owned by CAC Limited Partnership.
DEEDS OF TRUST AND SECURITY DOCUMENTS
As indicated above, the long-term promissory notes are secured by
mortgages and other encumbrances on a total of 15 apartment properties owned by
three of our new subsidiaries. The other encumbrances include a security
interest in the related personal property and various assignments of leases,
rents and contracts, all in favor of the lender. These encumbrances are created
by multiple agreements and instruments, which will be referred to as "security
documents" for simplicity.
The security documents impose a number of requirements on our three
borrowing subsidiaries, as the owners of the apartment properties, including
obligations to maintain adequate insurance. The security documents prohibit any
further encumbrances or any further assignments of leases or rents with respect
to the apartment properties.
Upon any default that occurs under a long-term promissory note or
related security document, various remedies are available to the lender with
respect to the apartment properties in the same cross-default and
cross-collateral group (discussed above). Those remedies include, for example
(1) declaring the entire principal balance under the promissory notes in the
group, together with all accrued and unpaid interest, to be due and payable
immediately; (2) taking possession of the secured property, including the
apartment properties in the group; and (3) collecting rents from the apartment
properties in the group, or foreclosing on such properties, to satisfy unpaid
amounts under the promissory notes. Our three borrowing subsidiaries, as the
makers of the long-term promissory notes, would be required to pay any costs
that may be incurred in exercising such remedies.
INDEMNITY AND GUARANTY
We are required to indemnify the lender against defaults under the
long-term promissory notes from our three borrowing subsidiaries and to guaranty
the collection of all amounts due under these notes. These requirements appear
in separate Indemnity and Guaranty Agreements executed by us with respect to
each of the 15 apartment properties that secure the long-term loans.
MANAGEMENT OF APARTMENTS
Our three borrowing subsidiaries have engaged us, or another one of our
subsidiaries, to manage the 15 apartment properties that secure the long-term
loans. Such management will occur under separate and substantially similar
property management agreements for each borrower. Each property management
agreement provides for the following:
o an initial term of two years
o automatic renewal for additional terms of two years each,
unless written notice of termination is delivered by either
party at least 60 days before the end of any term
o collection of all rents by the manager
o a property management fee equal to 5% of the monthly gross
revenues from the apartment properties
SHORT-TERM CREDIT FACILITY
In addition to the long-term financing described above, we have
obtained a short-term credit facility from First Union National Bank in the
amount of $50 million. The borrowers under the credit facility include us and
CRIT-NC, LLC, which is one of our direct wholly-owned subsidiaries.
The credit facility is evidenced by a revolving credit note and is
governed by a credit agreement. Under the credit agreement, the borrowed amounts
may be used for working capital and general corporate purposes, including the
acquisition and improvement of apartment properties. The credit facility matures
in December 2002.
At our election, interest will be computed using either a "base rate"
or a "LIBOR rate." The base rate will be the lender's prime rate (or, if higher,
the federal funds rate plus one-half of one percent). The LIBOR rate is
determined by banks in the London interbank market and is subject to an increase
that ranges from 0.9% to 1.6%, depending on the value of a particular financial
ratio defined in the credit agreement. An election of the LIBOR rate also
requires us to elect an interest period of either one, two, three or six months.
Periodic interest payments are required under the credit facility. The
due dates for these payments depend on the method of computing interest. With a
base rate, interest payments are due on the first day of each month. With a
LIBOR rate, interest payments are due at the end of the applicable interest
period (and, regardless of the period, at least every three months).
The credit agreement defines various events of default, which include
any failure to make a required interest payment within five business days of its
due date. During any period of default, the applicable interest rate would
increase by 2%. Upon any default, the lender is entitled to accelerate the
indebtedness under the credit facility and to demand immediate payment in full.
ITEM 7. Financial Statements and Exhibits
c. Exhibits.
10.1 CRIT-VA, Inc. Articles of Incorporation.
10.2 CRIT-VA, Inc. Bylaws.
10.3 Property Management Agreement dated as of December 12, 2000
between CRIT-VA, Inc. as Owner and Cornerstone Realty Income
Trust, Inc. as Manager.
10.4 CRIT Special, Inc. Articles of Incorporation.
10.5 CRIT Special, Inc. Bylaws.
10.6 Operating Agreement of CRIT-NC II, LLC.
10.7 Property Management Agreement dated as of December 12, 2000
between CRIT-NC II, LLC as Owner and Cornerstone Realty Income
Trust, Inc. as Manager.
10.8 CAC Special General, Inc. Articles of Incorporation.
10.9 CAC Special General, Inc. Bylaws.
10.10 CAC Special Limited, Inc. Articles of Incorporation.
10.11 CAC Special Limited, Inc. Bylaws.
10.12 Limited Partnership Agreement of CAC Limited Partnership.
10.13 Property Management Agreement dated as of December 12, 2000
between CAC Limited Partnership as Owner and Apple General,
Inc. as Manager.
10.14 Promissory Note dated December 12, 2000 in the principal
amount of $10,500,000 made payable by CRIT-VA, Inc. to First
Union National Bank, with respect to the Mayflower Apartments
in Virginia Beach, Virginia.
10.15 Indemnity and Guaranty Agreement dated as of December 12, 2000
by Cornerstone Realty Income Trust, Inc. as Indemnitor in
favor of First Union National Bank as Lender, in connection
with a $10,500,000 loan to CRIT-VA, Inc. as Borrower, with
respect to the Mayflower Apartments in Virginia Beach,
Virginia.
10.16 Deed of Trust and Security Agreement dated as of December 12,
2000, from CRIT-VA, Inc., as Grantor, to TRSTE, Inc. as
Trustee for First Union National Bank, the Beneficiary with
respect to the Mayflower Apartments in Virginia Beach,
Virginia.
10.17 Assignment of Warranties and Other Contract Rights dated as of
December 12, 2000 from CRIT-VA, Inc. as Borrower to First
Union National Bank as Lender with respect to the Mayflower
Apartments in Virginia Beach, Virginia.
10.18 Assignment of Leases and Rents dated as of December 12, 2000
by CRIT-VA, Inc. as Assignor in favor of First Union National
Bank as Assignee with respect to the Mayflower Apartments in
Virginia Beach, Virginia.
10.19 Consent and Agreement of Manager dated as of December 12, 2000
by CRIT-VA, Inc. as Borrower in favor of First Union National
Bank as Lender with respect to the Mayflower Apartments in
Virginia Beach, Virginia.
10.20 Environmental Indemnity Agreement dated as of December 12,
2000 by CRIT-VA, Inc. and Cornerstone Realty Income Trust,
Inc., as Indemnitors, in favor of First Union National Bank,
as Lender, with respect to the Mayflower Apartments in
Virginia Beach, Virginia.
10.21 Receipt and Closing Certificate dated December 12, 2000 by
CRIT-VA, Inc. as Borrower and Cornerstone Realty Income Trust,
Inc. as Guarantor in favor of First Union National Bank, as
Lender, with respect to the Mayflower Apartments in Virginia
Beach, Virginia.
10.22 Revolving Credit Note dated December 12, 2000 in the principal
amount of $50,000,000 made payable by Cornerstone Realty
Income Trust, Inc. and CRIT-NC, LLC to the order of First
Union National Bank.
10.23 Credit Agreement dated as of December 12, 2000 among
Cornerstone Realty Income Trust, Inc. and CRIT-NC, LLC as
Borrowers and First Union National Bank as Lender and
Administrative Agent for all lenders.
10.24 Schedule setting forth information on 14 substantially
identical promissory notes (with respect to Exhibit 10.14)
dated December 12, 2000 in various principal amounts made
payable to the order of First Union National Bank.
10.25 Schedule setting forth information on 14 substantially
identical Indemnity and Guaranty Agreements (with respect to
Exhibit 10.15) dated as of December 12 by Cornerstone Realty
Income Trust, Inc. as Indemnitor in favor of First Union
National Bank as Lender.
10.26 Schedule setting forth information on 14 substantially
identical Deeds of Trust (with respect to Exhibit 10.16) dated
as of December 12, 2000 with First Union National Bank as
Beneficiary.
10.27 Schedule setting forth information on 14 substantially
identical Assignments of Warranties and Other Contract Rights
(with respect to Exhibit 10.17) dated as of December 12, 2000
to First Union National Bank as Lender.
10.28 Schedule setting forth information on 14 substantially
identical Assignments of Leases and Rents (with respect to
Exhibit 10.18) dated as of December 12, 2000 to First Union
National Bank as Assignee.
10.29 Schedule setting forth information on 14 substantially
identical Consents and Agreements of Manager (with respect to
Exhibit 10.19) dated as of December 12, 2000 in favor of First
Union National Bank.
10.30 Schedule setting forth information on 14 substantially
identical Environmental Indemnity Agreements (with respect to
Exhibit 10.20) dated as of December 12, 2000 in favor of First
Union National Bank.
10.31 Schedule setting forth information on 14 substantially
identical Receipt and Closing Certificates (with respect to
Exhibit 10.21) dated December 12, 2000 in favor of First Union
National Bank.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Cornerstone Realty Income Trust, Inc.
By: /s/ Glade M. Knight
---------------------------------
Glade M. Knight, President
December 27, 2000