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): March 23, 2001
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
the "Company" or 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 March 23, 2001, we obtained, through our subsidiaries, long-term
financing in the aggregate amount of $75.5 million from First Union National
Bank. We expect to use the proceeds from this financing to fund cash payments
that may be required by us in connection with our tender offer for our Series A
Convertible Preferred Shares. The tender offer commenced on March 12, 2001 and
is scheduled to expire on April 12, 2001, unless extended. To the extent the
loan proceeds are not needed for tender offer payments, such proceeds will be
used for general corporate purposes.
NEW SUBSIDIARIES FOR LOANS
In connection with the 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 loans. These
borrowers also own the apartment properties that secure the loans. To achieve
this ownership, we transferred (or caused our existing subsidiaries to transfer)
a total of seven apartment properties to our borrowing subsidiaries. Because one
of the three 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, respectively, as the sole member, general partner and
limited partner of these particular borrowers.
OVERVIEW OF LOANS
The loans are evidenced by a total of seven promissory notes from our
three borrowers. The collateral for each note consists of a single apartment
property. The lender determined the principal amount of each note by reference
to the property securing that note. The following table provides an overview of
the loans:
NAME OF NAME OF APARTMENT APARTMENT POST OFFICE PRINCIPAL AMOUNT
BORROWER PROPERTY OWNED ADDRESS (CITY, STATE) OF NOTE
CRIT-VA II, Inc. Greenbrier Fredericksburg, VA $12,750,000
(formed in Virginia) Harbour Club Virginia Beach, VA 8,475,000
-----------
SUBTOTAL for Borrower $21,225,000
===========
CRIT-NC III, LLC
(formed in Delaware) Highland Hills Carrboro, NC 14,775,000
===========
CAC II Limited Partnership Canyon Hills Austin, TX 12,675,000
(formed in Virginia) Park Village Bedford, TX 8,500,000
Summer Tree Dallas, TX 7,750,000
The Courts on Pear Ridge Dallas, TX 10,575,000
-----------
SUBTOTAL for Borrower $39,500,000
===========
TOTAL for all Borrowers $75,500,000
===========
DESCRIPTION OF PROMISSORY NOTES
The seven promissory notes are substantially similar. Each promissory
note provides for the following:
o an annual interest rate of 6.99%
o a maturity date of April 1, 2011
o payments consisting of
>> interest only for 12 consecutive months, beginning
May 1, 2001
>> principal and interest in equal monthly installments,
computed over an amortization period of 348 months,
beginning May 1, 2002
o full payment of principal and all other amounts 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
The actual number of amortized monthly installments is significantly
less than the number of periods used in computing the amortization. As a result,
the promissory notes will require balloon payments at maturity in the aggregate
amount of approximately $66,800,000.
Additional payments or penalties would apply in other circumstances,
such as acceleration of a promissory note during the first two years, based upon
an event of default. If acceleration occurs in the first year, the sum of the
additional payments would equal at least 5% of the remaining debt under the
note.
Each promissory note also contains substantial limitations on release
and substitution of collateral. The apartment property that serves as collateral
under a promissory note cannot be released from its mortgage during the first
two years of the note. After two years, the borrower could obtain such a release
by providing the lender with substitute collateral 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 PROVISIONS
The seven apartment properties that serve as collateral for the
promissory notes are subject to cross-default and cross-collateral provisions
under separate and corresponding deeds of trust and related security documents.
In general, any default under one promissory note would constitute a default
under each other promissory note and would enable the lender to exercise its
rights against all seven of the apartment properties.
DEEDS OF TRUST AND SECURITY DOCUMENTS
As indicated above, the loans are secured by mortgages and other
encumbrances on a total of seven 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 promissory note or related
security document, various remedies are available to the lender. Those remedies
include, for example (1) declaring the entire principal balance under the
promissory notes, together with all accrued and unpaid interest, to be due and
payable immediately; (2) taking possession of the collateral, including the
apartment properties; and (3) collecting rents from the apartment properties, or
foreclosing on such properties, to satisfy unpaid amounts under the promissory
notes. Our three borrowing subsidiaries, as the makers of the promissory notes,
would be required to pay any costs that may be incurred by the lender in
exercising such remedies.
INDEMNITY AND GUARANTY AGREEMENTS
The Company is required to indemnify the lender against defaults under
the promissory notes from our three borrowing subsidiaries and to guaranty the
collection of all amounts due under these notes. These requirements are set
forth in separate Indemnity and Guaranty Agreements executed by us with respect
to each of the seven apartment properties securing the loans.
MANAGEMENT OF APARTMENTS
Our three borrowing subsidiaries have engaged us, or another one of our
subsidiaries, to manage the seven apartment properties that secure the 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 from one
party to the other 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
ITEM 7. Financial Statements and Exhibits
(The exhibits listed below are to be filed by amendment as soon as
practicable)
c. Exhibits.
4.1 Promissory Note dated March 23, 2001 in the principal amount of
$12,750,000 made payable by CRIT-VA II, Inc. to First Union National
Bank, with respect to the Greenbrier Apartments in Fredericksburg,
Virginia.
4.2 Indemnity and Guaranty Agreement dated as of March 23, 2001 by
Cornerstone Realty Income Trust, Inc. as Indemnitor in favor of First
Union National Bank as Lender, in connection with a $12,750,000 loan to
CRIT-VA II, Inc. as Borrower, with respect to the Greenbrier Apartments
in Fredericksburg, Virginia.
4.3 Deed of Trust and Security Agreement dated as of March 23, 2001, from
CRIT-VA II, Inc., as Grantor, to TRSTE, Inc. as Trustee for First Union
National Bank, the Beneficiary with respect to the Greenbrier
Apartments in Fredericksburg, Virginia.
4.4 Assignment of Warranties and Other Contract Rights dated as of March
23, 2001 from CRIT-VA II, Inc. as Borrower to First Union National Bank
as Lender with respect to the Greenbrier Apartments in Fredericksburg,
Virginia.
4.5 Assignment of Leases and Rents dated as of March 23, 2001 by CRIT-VA
II, Inc. as Assignor in favor of First Union National Bank as Assignee
with respect to the Greenbrier Apartments in Fredericksburg, Virginia.
4.6 Consent and Agreement of Manager dated as of March 23, 2001 by CRIT-VA
II, Inc. as Borrower in favor of First Union National Bank as Lender
with respect to the Greenbrier Apartments in Fredericksburg, Virginia.
4.7 Environmental Indemnity Agreement dated as of March 23, 2001 by CRIT-VA
II, Inc. and Cornerstone Realty Income Trust, Inc., as Indemnitors, in
favor of First Union National Bank, as Lender, with respect to the
Greenbrier Apartments in Fredericksburg, Virginia.
4.8 Receipt and Closing Certificate dated March 23, 2001 by CRIT-VA II,
Inc. as Borrower and Cornerstone Realty Income Trust, Inc. as Guarantor
in favor of First Union National Bank, as Lender, with respect to the
Greenbrier Apartments in Fredericksburg, Virginia.
4.9 Schedule setting forth information on six substantially identical
promissory notes dated March 23, 2001 in various principal amounts made
payable to the order of First Union National Bank.
4.10 Schedule setting forth information on six substantially identical
Indemnity and Guaranty Agreements dated as of March 23, 2001 by
Cornerstone Realty Income Trust, Inc. as Indemnitor in favor of First
Union National Bank as Lender.
4.11 Schedule setting forth information on six substantially identical Deeds
of Trust dated as of March 23, 2001 with First Union National Bank as
Beneficiary.
4.12 Schedule setting forth information on six substantially identical
Assignments of Warranties and Other Contract Rights dated as of March
23, 2001 to First Union National Bank as Lender.
4.13 Schedule setting forth information on six substantially identical
Assignments of Leases and Rents dated as of March 23, 2001 to First
Union National Bank as Assignee.
4.14 Schedule setting forth information on six substantially identical
Consents and Agreements of Manager dated as of March 23, 2001 in favor
of First Union National Bank.
4.15 Schedule setting forth information on six substantially identical
Environmental Indemnity Agreements dated as of March 23, 2001 in favor
of First Union National Bank.
4.16 Schedule setting forth information on six substantially identical
Receipt and Closing Certificates dated March 23, 2001 in favor of First
Union National Bank.
10.1 CRIT-VA II, Inc. Articles of Incorporation.
10.2 CRIT-VA II, Inc. Bylaws.
10.3 Property Management Agreement dated as of March 23, 2001 between
CRIT-VA II, Inc. as Owner and Cornerstone Realty Income Trust, Inc. as
Manager.
10.4 CRIT Special II, Inc. Articles of Incorporation.
10.5 CRIT Special II, Inc. Bylaws.
10.6 Operating Agreement of CRIT-NC III, LLC.
10.7 Property Management Agreement dated as of March 23, 2001 between
CRIT-NC III, LLC as Owner and Cornerstone Realty Income Trust, Inc. as
Manager.
10.8 CAC II Special General, Inc. Articles of Incorporation.
10.9 CAC II Special General, Inc. Bylaws.
10.10 CAC II Special Limited, Inc. Articles of Incorporation.
10.11 CAC II Special Limited, Inc. Bylaws.
10.12 Limited Partnership Agreement of CAC II Limited Partnership.
10.13 Property Management Agreement dated as of March 23, 2001 between CAC II
Limited Partnership as Owner and Apple General, Inc. as Manager.
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
April 9, 2001